No.- ITA No.2082/Kol/2010, ITA No.1489Kol/2011

Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM

For The Appellant : Shri S.K.Agarwal, FCA
For The Respondent : Shri G.Mallikarjuna, CIT (DR)

ORDER

Shri N.V.Vasudevan, JM-ITA No.2082/Kol/2010

This is an appeal by the Assessee against the order dated 21.9.2010 of the DDIT(IT)-1(1), Kolkata, passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (Act) relating to AY 2007-08.

2. The Assessee is a foreign company incorporated in United Kingdom. It is engaged in the business of providing consultancy services for execution of projects. Garden Research Shipbuilders and Engineers Ltd.,(GRSE) is a Government Company. GRSE was desirous of carrying out modernisation of its existing shipyard and approached the Assessee to provide consultancy services for modernisation of GRSE’s Garden Research Shipyard. The terms of the Agreement between the Assessee and GRSE is contained in an agreement dated 29.4.2004 which later was amended by memorandum of Amendment to original Agreement on different occasions. The nature of services to be performed by the Assessee is set out in Appendix 1.1 to the Agreement. Appendix 1.1 of the Agreement refers to Section-III of bid document which contains “Terms of Reference”. The terms of reference provides for performing various services. The same can be classified as follows: (1) Preparation of concept papers, (2) Preliminary project report (PPR); (3) Detailed project report (DPR); (4) Engineering services; (5) Project management services; and (6) Post - construction service. The consideration payable by GRSE for the services to be rendered by the Assessee is set out in Clause 5.3 of the Agreement. Clause 5.3 of the Agreement refers to Appendix-1.5 to the Agreement. Appendix 1.5 refers to three stages of work to be performed by the Assessee viz., Stage-1 Draft Project Report(DPR); Stage-2 (Design Stage); Stage-3 Construction Supervision Stage. The mode of payment for each stage of work is also given in Appendix 1.5. The relevant portion of Appendix 1.5 is as follows:

“APPENDIX 1.5
FEES FOR CONSULTANCY SERVICES:

(Total US Dollar Thirteen Lakhs Sixty Nine Thousand Six Hundred and Fifty Seven only)

(Total Rupees One Crore Eighty Five Lakhs thirteen thousand four hundred sixty seven only)
The Contract will be a Lump-sum type of Contract with stage-wise payments. ………”

Clause 1.8 of the Agreement provides for the place in which the services are to be rendered and the same reads as follows:

“1.8. LOCATION
The services shall be performed at the premises of Garden Reach Shipyard, Kolkata and, where the location of a particular task is not so specified, at such locations, as GRSE may approve.”
The mode of payment of consideration and the taxes if any, payable by GRSE to the Assessee have been set out in Clause 1.10 of the Agreement, which reads thus:
“1.10. Taxes and Duties

The foreign currency portion of the fees will be remitted directly to the bank nominated by the Consultant net of taxes. The local currency payments made to the Consultants will be subject to the deduction of appropriate taxes, levies and other impositions under the Indian Law, as applicable. If foreign personnel are liable for taxes for their earnings in India, the Consultant will be responsible to ensure that they meet such liability.”

The payment of consideration by GRSE to the Assessee is net of taxes, i.e., tax liability, if any, of the Assessee had to be borne by GRSE. The AO/Assessee as well as the Dispute Resolution Panel (DRP) have proceeded on the basis that the tax liability of the Assessee, if any, on income that accrues to the Assessee in India was to be borne by GRSE.

3. The provisions of Income Tax Act, 1961 (Act), in brief, with regard to taxation of income of a non-resident company need to be set out. A body corporate incorporated by or under the laws of a country outside India, is also a company under the Act. There is no dispute that the status under the Act for the purpose of assessment of income is “Non-Resident Company”. Section 4(1) of the Act provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person. Sec.5(2) of the Act (2) the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year. Sec.9 of the Act provides when income accrues or arises or is deemed accrue or arise in India to a non-resident. Income deemed to accrue or arise in India has different categories of Incomes within its ambit. They are as follows:

1) Any income accruing or arising to an assessee in any place outside India whether directly or indirectly
(a) through or from any business connection in India,
(b) through or from any property in India,
(c) through or from any asset or source of income in India
(d) through the transfer of any capital asset in India.
2) Income which falls under the head “Salaries”; if it is earned in India.
3) Income from “Salaries” which is payable by Government to a citizen of India for services rendered outside India.
4) Dividend by an Indian Company outside India
5) Interest
6) Royalty
7) Fees for technical Services

If income of a non-resident is taxable in India as per provisions of the Sec.5(2) of the Act read with Sec.9(1) of the Act, thereafter one has to see if there is any agreement between the Government of India and the Government of the country of which the non-resident sought to be taxed in India is a resident in that country, for avoidance of double taxation. If such an agreement exists then the provisions of the Act will apply to the extent they are more beneficial to the Assessee. In other words the taxability as well the quantum of income and rate at which they have to be taxed have all to be ascertained by reading such agreement. Under Sec.90 (2) of the Act it is provided that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) of Sec.90 for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

4. It is not in dispute in the present case that there exists an agreement for avoidance of double taxation of Income (DTAA) between India and United Kingdom (India-UK DTAA) and that the Assessee is a tax resident of UK entitled to the benefits as provided for by the said DTAA.

5. With this background, we will proceed to examine the issues that arise for consideration in the present appeal. Gifford & Partner Ltd. ('Gifford' or 'the Assessee') had entered into a contract with Garden Reach Shipbuilding Engineers ('GRSE') in India for rendering the following services with regard to modernisation of the existing shipyard of GRSE:-

Preparation of concept papers,
Preliminary project report (PPR);
Detailed project report (DPR);
Engineering services;
Project management services; and
Post - construction service

• The said services were to be performed both from India as well as from the United Kingdom ('UK'). The local services were rendered through independent Indian subcontractors and the foreign services were rendered partly by an independent foreign sub-contractor i.e. Appledore and partly by the Assessee, from its head office in the UK.

• Fees for the said services were payable in two parts i.e. foreign currency payment in USD and local currency payments in INR.

• The work on the said contract was started in April 2004 and the Assessee has since been filing tax returns in India for incomes earned from the said contract.

6. During the previous year relevant to AY 07-08, the Assessee received a sum of Rs. 2,86,61,214/- from GRSE which sum was credited in profit and loss account. The corresponding expenditure in connection with execution of work in India of Rs. 1,06,81,827/- was debited as an expenditure in the profit and loss account. In the return of income filed for AY 2007-08 the Assessee (filed on 8 November 2007) offered a profit of Rs. 1,57,39,112 to tax, after setting off brought forward losses of Rs. 2,240,274. The Assessee also claimed credit of TDS of Rs. 44,04,830. The said return was filed by the Assessee, on the basis that, its entire profits from execution of contract with GRSE, were attributable to its PE in India. As such, the entire profits after setting-off loss of earlier years were offered to tax at the rate of 41.82%, the then prevailing tax rate for foreign companies. Notice under section 143(2) of the Act, for initiating the assessment proceedings was issued by the Id. AO on 24 July 2008. Notice under section 142(1) of the Act seeking information/clarification from the Assessee, was also issued on 3 August 2009.

7. The following issues were raised by the AO during the course of the assessment proceedings:-

I. Issue of disallowance under section 40(a)(ia) of the Act, of payments made to the Indian sub consultants, for delay in deposit of TDS effected on such payments, under section 194J of the Act.

As we have already seen, the Assessee made payments to persons resident in India under the Act who acted as sub-consultants. The amounts paid to the sub-consultants were claimed as deduction/expenditure in arriving at the income declared in the return of income. According to the AO, the payments made to sub-consultants were in the nature of Fees for professional/Technical Services and tax at source ought to have been deducted at source on such payments in terms of Secc.194J of the Act. The Assessee had not deducted tax at source on such payments. As a consequence, the AO was of the view that the expenditure claimed as deduction cannot be allowed as a deduction in view of the provisions of Sec.40(a)(ia) of the Act which reads thus:

“40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession’-.
…..
(ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under subsection (1) of section 200 :

2. Issue of disallowance under section 40(a)(i) of the Act, of the payment made to Appledore, on account of non deduction of tax at source, under section 195 of the Act.

As we have already seen, the Assessee made payments to non-residents in India under the Act M/S.Appledore, U.K., who acted as sub-consultants. The Assessee entered in a contract with GRSE for rendering consultancy services for modernisation of their shipyard project. The scope of work envisaged-

Preparation of concept plan, preliminary project report (PPR) and detailed project report (DPR).
Design, detailed engineering, drawing and tender documents for works contract.
Project management and construction supervision services.

According to the Asssessee, the scope of consultancy services was to be rendered partly from the UK and partly from India. For the purpose of rendering services from the UK, the Assessee had obtained certain services from M/S.Appledore, an independent sub-consultant. The services in India were rendered by local independent sub-consultants, appointed by the Assessee. M/S.Appledore was required to render services towards preparation of concept plan, preliminary project report and detailed project report, and render evaluation. The terms of the Agreeement between the Assessee and M/S.Appledore are contained in an agreement dated 20.5.2004 (copy of the same is at pages 128 to 133 of the paper book). Schedule-1 to this agreement details the following as the services to be rendered by M/S.Appledore, viz., Conceptual and outline Design, Technical Specifications for Plant and Equipment, Review and comment on Prequalification documents, Review and comment on Bidders proposal tender documents, Review and Comment on Quality Manuals and Method statements of contractors. All these services were rendered by Appledore in the UK and the consideration of Rs.l0,637,462 for rendering such services was paid by the head office of the Assessee from their Sterling account, maintained in the UK. No part of the Appledore's fees was paid in India. No taxes were deducted by the Assessee on the remittances made to Appledore. In course of the assessment proceedings, the ld. AO requested the Assessee to explain as to why the payment, made by the head office of Gifford, without deduction of tax, should not be disallowed u/s 40(a)(i) of the Act. In reply, the Assessee submitted that:-

• Payments made by the Assessee to Appledore was not taxable in India in terms of section 9(1)(vii)(c) of the Act;
• Without prejudice to the above, payments made by the Assessee to Appledore was not FTS in terms of Article 13(4)( c) of the DT AA and accordingly was not taxable;

• As such, tax under section 195 of the Act was not required to be deducted by the Assessee, on payments made to Appledore.

According to the Assessee tax is deductible under section 195 of the Act when any sum chargeable to tax under the provisions of the Act, is paid to a nonresident, not being a company, or to a foreign company. According to the Assessee payment was made by Gifford who is a resident in the UK to Appledore who is also a resident in the UK. Such payments were made for and services rendered in the UK. The Assessee submitted that Appledore, being a non-resident in terms of section 5(2) of the Act, would be chargeable to tax in India only in the event of income accrues or arises in India or is deemed to accrue or arise in India or income is received or is deemed to be received in India and not otherwise. Explanation I to section 5(2) provides that income accruing or arising outside India shall not be deemed to be arising in India, within the meaning of this section, by reason only of the fact that it has been taken into account in a Balance sheet prepared in India. Therefore, only by reasons of the fact that the payment was made to Appledore by the head office of Gifford in the UK and that such payment is taken into account in the balance sheet of PE in India, it shall not be automatically considered that such income of Appledore is income received in India.

The amounts paid to the sub-consultants were claimed as deduction/expenditure in arriving at the income declared in the return of income. According to the AO, the payments made to sub-consultants were payments made to non-residents and therefore in terms of Sec.195 of the Act, the Assessee ought to have deducted at source on such payments in terms of Secc.194J of the Act. The Assessee had not deducted tax at source on such payments. As a consequence, the AO was of the view that the expenditure claimed as deduction cannot be allowed as a deduction in view of the provisions of Sec.40(a)(i) of the Act which reads thus:

“40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-

(a) in the case of any assessee-
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,-

(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company,

on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200:”

3. Issue of grossing up of the USD component of the receipts of the Assessee as the tax on the same was being borne by GRSE at the rate of 15% by way of TDS.

As we have already seen the payments to be made by GRSE are net of taxes on income if any payable in India. In other words such taxes have to be borne by GRSE. Sec.195A of the provides that in a case, where under an agreement or other arrangement, the tax chargeable on any income referred to in Chapter XVII B of the Act, then for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. The AO therefore proposed to increase the income or receipts of the Assessee as provided u/s.195A of the Act.

8. During the course of the assessment proceedings the Assessee filed its submission on 18th December 2009, wherein the following contentions were made by the Assessee:-

1. The Assessee does not have a Permanent Establishment ( PE) in India;
2. The contract between the Assesssee and GRSE has two limbs
i) Offshore services,
ii) On shore services
3. The payments made by GRSE in USD are for Off-shore services and those made in Indian Rupee (INR) are for On-shore services
4. The Assessee also contended that the entire receipts of the Assessee in USD are meant for Off-shore services rendered from the UK and are not taxable in India on account of the following three factors:
i) No profits from these services are attributable to the PE in India
ii) Services have to be rendered in India, for taxability in India, as per the ratio of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd.

iii) The services cannot be taxed under FTS owing to the 'make-available' clause contained in Article 13 of the DTAA

9. With respect to the submission filed on 18 December 2009 as stated above, the Assessee also filed an application under section 144A of the Act, to the Addl. DIT(IT)-I, Kolkata ('ADIT') requesting the ADIT for issuing necessary directions to the AO in this regard. Under Section 144A of the Act, a Joint Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and such directions shall be binding on the Assessing Officer. The ADIT vide letter dated 23 December 2009 gave the following finding/direction to the AO:-

1. The ADIT held that the Assessee’s claim that there was no accrual of income in India and therefore the sums received from GRSE cannot be brought to tax in India, is contrary it’s own return of income wherein the Assessee had offered the sum in question to tax. He also held that such a claim cannot be made without filing a revised return of income. In this regard the AO referred to the decision of the Hon’ble Supreme Court in the case of Goetz India Ltd. 157 Taxmann 1 (SC) wherein it was held that the AO has not power to entertain any claim by an Assessee which is not supported by a revised return of income. The contention of the Assessee regarding the non taxability of the amount received in USD, was rejected. In coming to the above conclusion, the ADIT held that the contract between the parties did not provide rendering of two types of services viz., (1) to be rendered from UK and (2) Services to be rendered in India. According to ADIT, the contract refers to a single, consolidated contract for rendering of services and there is no split of the services into onshore and offshore services as referred to by the Assessee.

2. Without prejudice to the rejection of the claim of the Assessee, a finding was given that there was a 'live link' between the services stated to have been rendered in the UK and 'the services rendered by the Assessee, as well as it's associates Appledore's professional and supporting staff, in India.

3. Also, without prejudice to the rejection of the claim of the Assessee, the ADIT directed the AO to examine the contentions of the Assessee with respect to:

i) The existence of PE in India and
ii) The taxability of the receipts in USD, for services claimed to be rendered, from the UK.

10. The ld. AO in line with the directions of the ADIT rejected the contentions of the Assessee on point (1) and (2) referred to above. With regard to point No.(3) on the existence of PE of the Assessee in India and taxability of receipts in USD, for services rendered from UK, the AO first made a reference to the various terms of the contract between the Assessee and GRSE and came to the following conclusions:

1. The AO referred to a letter dated 14.9.2009 by the Assessee’s representative to the AO wherein they had admitted that it had a PE in India and all income arising or accruing to it is accounted for and taxes are paid. The AO referred to the return of income filed by the Assessee wherein income was offered to tax. The AO also referred to the profit and loss account of the Assessee wherein the entire receipts of the Assessee from GRSE whether in USD or INR is duly credited. Thus the Assessee cannot now go back on his stand that income in question is not taxable in India.

2. According to the AO the contract between the Assessee and GRSE provided for completion of project in three stages. According to the AO the scope of work as per the contract was such as to require continuous involvement of the Assessee and its sub-consultants/associates with GRSE at the project site of GRSE. Even in respect of reports prepared at UK, the necessary technical details had to be collected and scrutinized by the Assessee and its subconsultants/ associates.

3. According to the AO, Appendix 1.3 of the contract between the Assessee and GRSE contained details of foreign staff and consultants of the Assessee as well as its associates, M/S.Appledore International and their involvement in the various stages of work inside GRSE premises at Kolkata. The AO also held that according to the contract document between the Assessee and GRSE it is nowhere mentioned that there are two parts of the contract, i.e. offshore services and onshore services. The Id. AO was of the view that from a reading of the contract, it was clear that the contract was only for rendering of consultancy services and that the whole scope of work has to be completed in three stages. It is a single contract and is not a divisible one. According to the AO, Appendix 1.5 of the contract, contains only a bifurcation of the total consideration to be paid to the Assessee, in USD and in INR, without any mention of the services being 'Offshore' or 'Onshore'. The AO also referred to Appendix 1.4 of the contract which provided that GRSE will be required to make available to the consultant, air-conditioned office space inside the GRSE shipyard premises, for the 3 stages of the project. The AO also referred to the visit of Inspector of Income Tax to the project site and the enquiry made by him at the project site. The inspector had reported that one Mr.Subrata Mitra, was the resident engineer of the Assesssee as per his visiting card. The Assessee’s name “Gifford” was found on the visiting card. The visiting card also contained the following description “Consultant’s Kolkata Office, 43/46, Garden Reach Road, Kolkata-700 024.”

11. For the above reasons, the AO in his draft assessment order under section 143(3), read with section 144C of the Act, dated 30 December 2009, came to the conclusion that the Assessee had a PE in India within the meaning of Article 5 (1) as well as Article 5 (2) of the India-UK DTAA and that the consultancy services to be rendered are effectively connected with the PE in India and also that the whole of the income arising out of the said consultancy services, are attributable to the PE in India. The AO further held that it is because of the belief/ presumption of the existence of "effective connection" that the Assessee opted for taxation under Article 7 of the DTAA. Also, the tax liability borne by GRSE is an admission of the fact that the entire receipts are liable to be taxed in India. Now, suddenly a change in stand is not acceptable. 'Principle of consistency' is an important principle of accountancy which should be followed. The final conclusion of the AO was:

“f)…there exists a PE in the case of the Assessee in India within the meaning of Article 5 of the Indo-UK DTAA. The consideration for consultancy services provided by the Assessee to GRSE is in the nature of “Fees for Technical Services”(FTS) within the meaning of Article 13 of Indo-UK DTAA. Since the FTS is arising in India and the Assessee is carrying on business in India through a PE situated in India and also since these services are “effectively connected” with the PE in India, therefore the consideration for these services are liable to tax in India under Article 7 of the Indo-UK DTAA by virtue of the provisions of Article 13(6) of the Indo-UK DTAA.”

12. The AO thereafter disallowed consultancy charges paid to sub-consultants in India u/s.40(a)(ia) of the Act and payments made to Appledore, UK u/s.40(a)(i) of the Act. The AO also disallowed expenditure to the extent of Rs. 30,09,179 on the ground that the same relates to period prior to the previous year relevant to AY 2007-08. The AO also held that since taxes of the Assessee were to be borne by GRSE, the receipts of the Assessee from GRSE have to be grossed up. The AO ultimately determined the total income of the Assesssee as follows:

“8. Subject to the above, the total income of the Assessee is computed as under:

13. Aggrieved by the proposal as contained in the draft assessment order, the Assessee filed objections to the proposed assessment as contained in the draft assessment order before the Disputes Resolution Panel (DRP) in accordance with the provisions of Sec.144C of the Act. The following issues were raised by the Assessee before the DRP.

14. Issue with regard to existence of PE in India.
The Assessee drew attention of the DRP to the scope of work of the Assessee with GRSE, as follows:

Phase -1
Preparation of a macro level concept plan for the modernization of the entire ship building yard including the installation of a Ship Lift, considering a new Modular shop and improvements to the module building, module handling and transporting, pre-outfitting, material planning and control and all other practices in order to achieve the level and quality of production, desired by GRSE.

Phase - II
Preparation of detailed designs and construction drawings for the facilities finalized and approved by GRSE during the Phase - I;

Study and Review all necessary data made available by GRSE during Phase - I to ensure best possible configuration/ solution to the Ship Lift system; Preparation of detailed Block Cost estimates for the entire Project and the detailed item wise cost estimate for the different packages envisaged for the modernization;

Detailed requirements of Services/ Facilities, estimates of power requirements, provision of Sub- station, Compressed Air etc;
Preparation of draft tender documents for the various packages; and Obtaining timely approvals from various statutory bodies.

During the previous year relevant to AY 2007-08, the Assessee was involved in the activities pertaining to this phase.

Phase - III

Issuance of the detailed working drawings to the Contractors (separate from the Assessee), as independently selected by GRSE, for the necessary execution of the work, as required, for the construction.

It was submitted that the above being the scope of work to be carried out by the Assessee for GRSE, it can be said that the Contract between the Assessee and GRSE was a composite contract, with different severable parts - services that were rendered Offshore, in the UK, by the Assessee concerned and services that were rendered Onshore, by the independent Indian sub-consultants, appointed by the Assessee.

15. It was pointed out that the Contract Value was payable partly in USD and partly in INR. This was to ensure that, whilst the fees payable to the Assessee for the services (which was rendered from the UK office of the Assessee) would be in USD, the INR part was to accommodate the payments to be made to the Indian subconsultants, by the Assessee. It was pointed out that during the relevant previous year, the Assessee had to visit India, for the purposes of the collection of data and information, which formed the basis of the reports generated in the UK. It was submitted that a look at the activities required to be performed by the Assessee in terms of Phases - I and II of the Contract (as detailed above) would clearly reveal the said requirement of collection of information in India. It was pointed out that even the requirement of data collection has been agreed by the Ld. AO in his impugned order at Page 18. It was submitted that the information once collected, was sent to the head office of the Assessee, for necessary analysis and subsequent churning of the Concept Plan and Drawings etc. It was reiterated that for Phase - I and Il, no service had been rendered in India and the limited number of visits that was made by the Assessee to the GRSE site, was only for the collection of information, which was necessary for the purposes of the reports and the drawings, which were prepared and serviced from the UK. It was contended by the Assessee that the mere collection of the information in India, can, by no stretch of imagination be called as rendering of services vis-a-vis the scope of the work that the Assessee needed to perform, under the Contract.

16. The Assessee further contended that in the light of the above facts it cannot be said that the Assessee had a PE in India, as defined in Article 5 of the DTAA. The Assessee drew attention of the DRP to the provisions of Article 5(3)( d) of the DTAA, which reads as follows:

"3. The term "permanent establishment" shall not be deemed to include:

(a)……………………….
(b) . ………………………
(c) . ……………………..
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise;
(e) ……………….."
It was argued that the Assessee’s insignificant presence in India during the previous year was merely for the purpose of collection of information by the Assessee for execution of the GRSE contract and doing so would not constitute a PE in India.

17. It was further submitted that that Explanation I to Section 5(2) of the Act, provides that income accruing or arising outside India shall not be deemed to be arising in India within the meaning of this section by reason only of the fact that it has taken into account in the balance sheet prepared in India. Moreover, treatment of item under the taxation regime is independent of its accounting treatment. In this regard attention was drawn to the decision of the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg Co Ltd vs CIT (Central) Calcutta 82 ITR 363 (1971) (SC) wherein it was held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. It was argued that preparation of accounts in India incorporating the invoices raised from UK does not have any material effect on taxability of such income in India.

18. In was thus submitted that there was no PE in India in terms of Article 5 of the DTAA and hence no part of income earned by the Assessee during the year ended 31 March 2007, from execution of the contract of GRSE, can be taxed in India.

19. Issue of taxability of payments received in USD

The Assessee submitted that it had rendered services and raised invoices on GRSE separately, for services rendered outside India and services rendered in India. The local services had been rendered only through its independent Indian, sub-contractors and foreign services were rendered partly by its independent foreign sub-contractor i.e. Appledore and partly by the Assessee, from its head office in the UK. The Assessee further contended that the contract envisages a divisible contract having two parts - one for rendering services from India and the other for offshore services to be rendered from the UK. The Assessee contended that the offshore service rendered from outside India, is not liable to tax in India. It was further submitted before the Id. AO that when there is a tax treaty between India and the country of the non-resident, there is no question of invoking section 9 of the Act. Article 13 of the DTAA deals with incomes under the head 'Royalties and Fees for Technical Services'. Even in relation to income of Gifford, a resident of the UK, Article 13 of the DTAA would not help the revenue authorities to bring it in the tax net, as services rendered outside India would have nothing to do with the PE in India. It was argued that thus, if any services have been rendered by the head office of Gifford, such services cannot be brought to tax in India only because the head office is connected with its PE. If income arises without any activity of the PE, even under the DTAA, the taxation liability in respect of the said overseas services would not arise in India. This is because of the two reasons: 1) offshore services are rendered outside India where PE would have no role to play in respect thereto and in earning the said income and 2) the entire services having been rendered outside India, the income arising there from cannot be attributable to the PE so as to bring it within the charge of tax. The distinction between existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. It was pointed out that in the present case, the PE's non-involvement, in this transaction, excludes it from being a part of the cause of income and thus, there is no business connection. The Assessee relied on the following decisions wherein the contentions referred to above have been accepted:

• Ishikawajima Harima Heavy Industries Ltd. vs. CIT 288 ITR 408 (SC)
• CIT vs. Siemens Aktiongesellschaft (2009) 310 ITR 320 BOM)
• Mahindra vs. DCIT (2009-TIOL-255-ITAT-MUM-SB)
• Reymonds Ltd. vs. DCIT (2003) 86ITD 791, ITAT BOM
• Intertek Testing Services India Pvt. Ltd. (2008) 307 ITR 418AAR

It was again reiterated that during the relevant AY, the Assessee was involved in Phase-II of the contract with GRSE involving the preparation of the engineering drawings and report. The said services were performed and carried out entirely from the UK with some support obtained from the independent Indian sub-consultants who were paid in INR from Rupee component of the contact value.

20. Without prejudice to the above contention, it was contended that even if the Assessee is deemed to have constituted a PE in India, then the taxability thereof, would be governed by Article 7(1) of the DTAA, which reads as under:-

"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 enter price may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment.”

The Assessee in this regard drew attention of the DRP to the commentary of Klaus Vogel on Double Taxation Conventions, wherein it has been stated as under:

"As regards the profits made by the enterprise in the State of the permanent establishment, a distinction must always be made between those profits which result from the permanent establishment's activities and those made, without any interposition of the permanent establishment, by the head office or any other part of the enterprise ."

It was submitted that the profits of the Assessee may be taxed in India, only to the extent of so much of the profit as is directly or indirectly attributable to the PE in India.

21. Further, without prejudice to the aforesaid argument, reliance was also placed on the decision of Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd. vs. CIT (Supra) wherein the Hon’ble Supreme Court held that in a composite contract performed in different places, the principle of apportionment has to be applied to determine the respective right to taxation of different countries. The following observations of the Hon’ble Supreme Court in this regard were brought to the notice of the DRP.

"In cases such as this, where different severable parts of the composite contract is performed in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction, can tax that particular part of the transaction

That, in relation to offshore services, section 9(I)(vii)(c) required two conditions to be met: to be taxable in India the services which were the source of the income sought to be taxed had to be rendered in India as well as utilised in India. In this case, both these conditions were not satisfied simultaneously, thereby excluding the income from the ambit of taxation in India. Thus, for a non-resident to be taxed on income for services, such a service had to be rendered in India, and had to be part of a business or profession carried on by such person in India. The appellants had provided services to persons resident in India, and through they had been used here, they had not been rendered in India .

..... However, even in relation to such income, the provisions of Article 7 of the DTAA would be applicable, as services rendered outside India would have nothing to do with permanent establishment in India. Thus if any services have been rendered by the head office of Appellant outside India, only because they were connected with permanent establishment. even in relation thereto, principle of apportionment shall apply.”

Reliance was also placed on the decision in the case of Clifford Chance vs. DCIT (2008) 318 ITR 237 (Bom.) wherein the transaction entered into by the assessee partly took place in one territory and partly in another. The Hon'ble High Court of Bombay referred to the decision in the case of Ishikawajma Harima (supra). The relevant extract is stated as under:

"In the above judgement, Apex Court observed that "Section 9(J)(vii) of the Act must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income. According to Apex Court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DT A. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance of 90 days rule. "

22. It was contended that in view of the above judicial pronouncement, it can be said that in case any part of the services are being rendered outside India then income should be apportioned so that the income from the services rendered outside India is not taxed in India. It was pointed out that the decision of the Hon’ble Bombay High Court in the case of Clifford Chance (supra) was rendered post the amendment of section 9(1)(vii)(c) by the Finance Act, 2010 w..e.f. 1-6-1976, whereby the following explanation was added to Sec.9 of the Act.

“Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,-

(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.”

It was argued that the Hon'ble Bombay High Court observed that whatever is payable by a resident to a non- resident by way of fees for services would not always come within the purview of section 9(1 )(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. It also laid down that section 9(1)(vii)(c) envisages the fulfilment of two conditions: services which are source of income sought to be taxed in India must be (a) utilised in India, and (b) rendered in India. Attention was also drawn to the decision in the case of Jindal Thermal Power Co. Ltd. vs. (2009) 225 CTR 220 (Kar) wherein the Hon'ble Karnataka High Court relying on the decision in the case of Ishikawajma Harima (supra) held that the Explanation incorporated in Section 9 (By Finance Act, 2010) suggests that criterion of residence, place of business or business connection in India has been done away with for fastening the tax liability, but the criteria of rendering service in India and the utilisation of the service in India, as laid down by the Supreme Court, remains untouched and unaffected.

23. It was submitted that in the case of the Assessee it would be evident from the contract of the Assessee with GRSE, that services rendered by the Assessee from UK have nothing to do with the local activities which are separately performed and accounted for. Such offshore services rendered from outside India are independent and not connected with the activities carried on in India. It was thus submitted that consideration received in USD in respect of the offshore services, is not liable to tax in India:

(i) as the said service has not been rendered in India; and
(ii) rendering of the said services is not attributable to a PE, even if one such, is alleged to exist in India;
24. Applicability of the provisions of section 115A

Without prejudice to the above objections, the Assessee submitted that the tax liability of the Assessee cannot exceed the amount of tax chargeable under section 115A of the Act on gross receipts by way of 'Fees for technical services' ('FTS') as provisions of section 44DA are not applicable from the facts and circumstances of the case. In this regard, the relevant provisions of section 115A of the Act, needs to be looked into. The same reads as under:-

"115A(I) Where the total income of-

(a) ..........
(b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DAJ received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31 st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (lA) and (2), the income-tax payable shall be the aggregate of,-

(A) ............
(AA) .........

(B) The amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of thirty per cent if such fees for technical services are received in pursuance of an agreement made on or before the 31 st day of May, 1997 and twenty per cent where such fees for technical services are received in pursuance of an agreement made after the 31st day of May, 1997 but before the 1st day of June, 2005 ; and ... "

The submission of the Assessee in this regard was that from perusal of the above provisions it can be seen that income by way of FTS received by a non- resident would be taxed at 20% on gross basis only if all the following conditions are satisfied:-

i) the income is received from Government or an Indian concern in pursuance of an agreement;
ii) Such agreement was made after 31st day of May, 1997 but before the 1st day of June, 2005; and
iii) such income does not fall within the purview of sub-section (1) of section 44DA of the Act.

25. It was claimed by the Assessee that in the instant case, there is no doubt that the Assessee fulfills condition (i) and condition (ii) as mentioned above. As regards condition no. (iii), the provisions of sub-section (1) of section 44DA of the Act needs to be analysed in light of the facts of the Assessee. The said provision is reproduced as below:-

"44DA(1) - The income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31 st day of March, 2003, where such non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession, as the casemay be, shall be computed under the head "Profits and gains of business or profession" in accordance with the provisions of this Act :"

FTS would fall within the purview of section 44DA(1) of the Act, only if it is actively connected to the PE of the non-resident in India. PE for the purpose of this section has been defined in section 92F(iiia) of the Act which reads as under:-

"(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;"

It was claimed that in view of the above provisions it would be safe to conclude that if it is established that the Assessee does not have a PE in India in terms of section 92F(iiia) of the Act, the payments received from GRSE would not fall within the purview of section 44DA of the Act. As such, the Assessee would be entitled to the benefit of the provisions of section 115A of the Act and be taxed at 20% of the Gross receipts.

26. It was contended that the definition of PE under the Act has a much narrower meaning as compared to that in the DTAA. As such, an instance of PE being established under the provisions of the DTAA may not necessarily result in a PE under the Act. It was submitted that a PE actually postulates the existence of a substantial element of an enduring and permanent nature of a foreign enterprise in another country which can be attributed to fixed place in that country from where the business operations of the foreign enterprise can continue. A PE needs to be such a nature that it would amount to a virtual projection of a foreign enterprise of a country into the soil of another. The fixed place of business is constituted only where there is a physical location at the disposal of foreign enterprise. Disposal would imply right to use the premises at any point of time and for whatever purposes. If no right is created in favour of the employees of the foreign company to enter the office of the Indian company as they pleased for the purpose of carrying out whatever activities of the foreign company, then the office of the Indian company could not be viewed as a projection of the foreign company's activities in India. It was further submitted that in the instant casethe Assessee did not have a fixed place of business in India through which the business of the Assessee was carried out. The GRSE project site cannot be termed as a place of business of the Assessee as the same is only a facility provided by its client with regard to execution of a particular contract. The space of GRSE was not available to the Assessee for carrying out other business operations not related to GRSE's contract.

27. In view of the above, it was contended that the Assessee did not haveg a PE in India in terms of section 92F(iiia) of the Act and accordingly tax ought to have been levied at 20% on the Gross receipt of the Assessee under the provisions of section 115A of the Act. This contention of the Assessee was however, without prejudice to the contention that the Assessee does not have a PE in India in terms of the DTAA and its entire income is not chargeable to tax.

28. Issue of claims made by the Assessee without revising the return

On the above issue, the Assessee submitted that the action of the AO in not accepting the claim of the Assessee that receipts from GRSE was chargeable to tax in India for the reason that the said claim was made without filing a revised return of income and contrary to Assessee’s own claim in the return of income already filed that the receipts in question are chargeable to tax, was not proper. In coming to the above conclusion the AO had placed reliance on the decision of the Hon’ble Supreme Court in the case of Goetz (India) Ltd. (supra) wherein it was held that claim made in the course of assessment proceedings without filing a revised return of income, cannot be entertained by the AO. In this regard, the Assessee placed reliance on the decision in the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del). The Delhi ITAT, in the context of allow ability of new claims during the assessment proceedings without having recourse to a revised return, has, placing reliance on principle embedded in Article 265 of Indian constitution (No tax can be collected except by the authority of law), CBDT Circular No. 14 dated 11 April 1955 and explaining the ratio of the Goetz (india) Ltd. (supra) ruling, categorically held that assessee has the right to make new claims during assessment proceedings without recourse to a revised return. The Tribunal dealt with the decision of the Hon’ble Supreme Court in the case of Goetz (India) Ltd., (supra) in the following manner:

“….As far as the decision of the Hon'ble Apex Court in the case of Goetze (India) Ltd. (supra) is concerned, there is no dispute that the same is binding on everybody concerned. In the said decision, the Hon'ble Apex Court has also ruled that Appellate Tribunal may adjudicate the issue if a claim is made by any party subject to satisfaction of prescribed rules, hence, even the Hon'ble Apex Court has not barred the assessee raise it's legal claim before Appellate Authorities. However, such process would result into undue hardships, delay and multiplicity of proceedings. The Hon'ble Apex Court, on numerous occasions has laid the proposition that the Assessing Authorities are bound to compute the correct income only and collect only legitimate tax, hence, merely for a procedural lapse or technicalities, in our opinion, the assessee should not be compelled to pay more tax than what is due from him. Therefore, this situation has necessarily to be looked upon from the angle of duties of Assessing Authorities as stated earlier, CEDT is the Apex body for tax administration and it can also issue directions which are for the benefit of the assessee's though such directions may not be inconsonance with the provisions of law, hence, if a circular is now issued directing the assessing authorities to grant reliefs/refunds while completing the assessment proceedings, even though such circular may be at variance with the law, as pronounced by the Hon'ble Supreme Court, but the same would be binding on the subordinate income-tax authorities. In our opinion, therefore, circulars of same nature which have been already issued would not become irrelevant or can be ignored. Admittedly, the circular issued in 1995 has not been withdrawn, hence, it has got binding force on the subordinate authorities even as on date. Accordingly, we hold that the Assessing Officer is bound to assess the correct income and for this purpose, the Assessing Officer may grant reliefs/ refunds suo motu or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file the revised return ..... "

Further, reliance was also placed on the decision in the case CIT vs Ramco International 221 CTR 491 (2008) HC (P&H) wherein the Punjab and Haryana High Court, distinguished the judgement of Goetze allowed the claim of the Assessee which was made in course of the assessment proceedings and not by filing revised return.

29. In view of the above judicial pronouncements, it was submitted that the action of the ld. AO of not allowing the claim of the Assessee due to failure to file the revised return, is bad in law.

30. Issue with regard to disallowance of payments made to M/S.Appledore, UK for non deduction of tax at source by invoking the provisions of Sec.40(a)(i) of the Act:

The Assessee submitted before the DRP that it had entered in a contract with GRSE for rendering consultancy services for modernisation of their shipyard project. The scope of work envisaged

-Preparation of concept plan, preliminary project report (PPR) and detailed project report (DPR).
-Design, detailed engineering, drawing and tender documents for works contract.

-Project management and construction supervision services.

The scope of consultancy services was to be rendered partly from the UK. and partly from India. For the purpose of rendering services from the UK, the Assessee had obtained certain services from Appledore, an independent sub-consultant, which is also based out of UK. The services in India were rendered by local independent subconsultants, appointed by the Assessee. Appledore was required to render services towards preparation of concept plan, preliminary project report and detailed project report, and render evaluation. All these services were rendered by Appledore in the UK and the consideration of Rs.l0,637,462 for rendering such services was paid by the head office of the Assessee from their Sterling account, maintained in the UK. No part of the Appledore's fees were paid in India. No taxes were deducted by the Assessee on the remittances made to Appledore. In course of the assessment proceedings, the ld. AO requested the Assessee to explain as to why the payment, made by the head office of Gifford, without deduction of tax, should not be disallowed u/s 40(a)(i) of the Act. In reply, the Assessee in course of the hearing placed the following arguments:-

• Payments made by the Assessee to Appledore was not taxable in India in terms of section 9(1)(vii)(c) of the Act;

• Without prejudice to the above, payments made by the Assessee to Appledore was not FTS in terms of Article 13(4)( c) of the DT AA and accordingly was not taxable;

• As such, tax under section 195 of the Act was not required to be deducted by the Assessee, on payments made to Appledore.

31. It was submitted that tax is deductible under section 195 of the Act when any sum chargeable to tax under the provisions of the Act, is paid to a non-resident, not being a company, or to a foreign company. Payment was made by Gifford who is a resident in the UK to Appledore who is also a resident in the UK. Such payments were made for and services rendered in the UK. The Assessee also pointed out that it would be erroneous to assume as if services rendered by the head office are rendered by PE and thereby the distinction between Indian and foreign operations and the apportionment of income of the operation shall stand obliterated. Appledore, being a non-resident in terms of section 5(2) of the Act, would be chargeable to tax in India only in the event of income accrues or arises in India or is deemed to accrue or arise in India or income is received or is deemed to be received in India and not otherwise. Explanation I to section 5(2) provides that income accruing or arising outside India, shall not be deemed arising in India, within the meaning of this section, by reason only of the fact that it has been taken into account in a Balance sheet prepared in India. Therefore, only by reasons of the fact that the payment was made to Appledore by the head office of Gifford in the UK and that such payment is taken into account in the balance sheet of PE in India, it shall not be automatically considered that such income of Appledore is income received in India. Although the PE is required to carry out certain activities in India, the consideration for offshore services rendered by Appledore in the UK, which is not attributable to the work of the PE, should not be considered as income deemed to accrue or arise in India by virtue of section 9(l)(vii)(c) of the Act.

32. Again reliance was placed on the decision of the Hon’ble Supreme Court, in the case of Ishikawajima Harima Heavy Industries Ltd. vs. CIT (2007) (288 ITR 408, SC), wherein it was held

"That, in relation to offshore services, section 9(I)(vii)(c) required two conditions to be met: to be taxable in India the services which were the source of the income sought to be taxed had to be rendered in India as well as utilised in India. In this case, both these conditions were not satisfied simultaneously, thereby excluding the income from the ambit of taxation in India. Thus, for a non-resident to be taxed on income for services, such a service had to be rendered within India, and had to be part of a business or profession carried on by such person in India. The appellants had provided services to persons resident in India, and though they had been used here, they had not been rendered in India. "

It was submitted that Section 9(l)(vii) must be read in conjunction with section 5 thereof which takes within its purview the territorial nexus on the basis whereof tax is required to be levied. Whatever is payable to a non- resident by way of FTS would not always come within the purview of section 9(1)(vii)(c) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilised in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India. It must have a direct live link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the tax treaty. A distinction may be made between rendition of services and utilisation thereof. Section 9(1 )(vii)( c) clearly states " .....". where the fees are payable in respect of services utilised in a business or provision carried on by such person in India ......." It is evident that section 9(1)( vii) read in its plain, requires the fulfilment of two conditions: services, which are source of income sought to be taxed in India must be (1) utilised in India and (2) rendered in India. In the present case, both these conditions have not been satisfied simultaneously.

33. It was submitted that it is true that the Finance Act 2007 has amended section 9 of the Act, with retrospective effect from 1.6.1976, by insertion of an explanation after sub-section (2) providing that interest, royalty, technical fees, will be taxable in India "whether or not the non-resident has a residence or place of business or business connection in India". Since the amendment is to the domestic law, the decision in Ishikawajima Harima Heavy Industries Ltd.'s case rendered in the context of DTAA between India and Japan cannot be taken to be overruled. The place of accrual of income may be required to be determined with reference to DTAA. It was pointed out that even after introduction of an explanation to Section 9 of the Act, through Finance Act 2007, the Bombay High Court has considered the issue in a recent case in the matter of Cl'I' vs. Siemens Aktiongesellschaft (2009) 310 ITR 320 BOM). The issue was whether the Double Taxation Avoidance Agreement between India and Germany overrides the domestic law, which treats the royalty to be taxable as Indian income. Double Taxation Avoidance Agreement between India and Germany provides that in respect of Royalty and Technical Fees, where it is paid as a part of business agreement, the element of Royalty and Technical Fees cannot be separately considered in view of Article III(1) of the Indo-German Agreement providing for tax liability in Germany where it is part of commercial profits. It was pointed out that where such amount is part of commercial profits it is only the home state which will have the jurisdiction to assess the same following the decision in the case of Ishikawajima Harima Heavy Industries Ltd. It was finally decided that in view of the special provision under the Indo-German Agreement the amendment under the domestic law can have no effect. Therefore, the decision of the Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. is still a valid law and the said decision is squarely applicable to the subject case.

34. It was submitted that Article 13(4) defines FTS to mean payments of any kind, to any person, in consideration for the rendering of any technical or consultancy services (including the provision of services of technical services or other personnel) which:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received: or

(c) make available technical knowledge, experience, skill, know-how or processes, or consist of development and transfer of a technical plan or technical design.

The definition of FTS has two parts. The first part deals with rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of the right to use property for which payment is received as "Royalty" as defined in paragraph 3(a) & 3(b) of Article 13 of the DT AA. The contract with GRSE envisaged only for rendering consultancy services for modernisation of the shipyard project and did not involve transfer of any right to use property for which royalties are payable. Hence, there is no application of the first part of the definition in the subject case. The second part of the definition relates to the fees for rendering any technical or consultancy services which are made available to the Assessee. 35. As far as applicability of Clause ( c ) of Article 13(4) of the Indo-UK DTAA is concerned, the Assessee submitted that the said clause contemplates that fees paid should be for making available of the technical knowledge, experience, skill, etc. In other words, the technical knowledge, experience, skill, etc. must be made available to the Assessee, so as to be covered within its scope, and mere providing of such services, without making them available to the Assessee, shall not serve the purpose and hence, will be outside the ambit of the Article. "Rendering of any technical or consultancy service" is followed by "which made available technical knowledge, experience, skill and know-how". In this context it becomes imperative to understand the meaning of the expression "make available" as used in this article. It was submitted that the meaning of the expression "make available" has been aptly considered in the case of Intertek Testing Services India P. Ltd. [(2008) 307 ITR 418 (AAR) as under:-

"Now, we shall proceed to analyse further clause (c) of article 13(4). Rendering of service and making use of service go together. They are two sides of the same coin. But clause (c) of article 13 (4) does not stop at that. 1t carves out a qualification thereto by employing the words "which make available technical experience, skill, know-how or processes". Rendering technical or consultancy service is followed by a relative pronoun "which" and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that "make available" to the recipient technical knowledge, know-how and the like. The service should be aimed at end result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skill or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. 1n other words, to fit into the terminology "make available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to all within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider. Taking some examples, the training given to a commercial aircraft pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in clause (c). Supposing a prescription and advice is given by the doctor after examining the patient and going through the clinical reports. The service rendered by the doctor cannot be said to have made available to the patient, the knowledge and expertise possessed by the doctor. On the other hand, if the same doctor teaches or trains students on the aspects of diagnosis or techniques of surgery. that will amount to making available the technical knowledge and experience of the doctor. “

It was pointed out that similar view has been taken in the case of Mahindra & Mahindra vs. DCIT (2009-TIOL-255- ITAT-MUM-SR) and Reymonds Ltd. vs. DCIT (2003) 86ITD 791, ITAT BOM, wherein it was held that mere rendering of service is not enough as it requires that such rendering of service should make available technical knowledge, skill, etc. to the receiver of service, who can use such knowledge in future for the business without the aid of service provider and thus, there should be some permanence of the service provided.

36. It was submitted that in the case of the Assessee, GRSE has not gained any technical knowledge, skill, etc. as a result of service provided to it, which can be subsequently utilized by it. Thus, payments made by it, for services provided do not fall within the scope of FTS, as laid out in Article l3( 4)( c) of DT AA and, as such, the payments made by the Assessee were not taxable in India and the Assessee was not under obligation to deduct tax. It was thus submitted that Article 13 of the DTAA does not apply to the instant case. Payment made by head office of Gifford to Appledore for rendering services in the nature of preparation of concept papers, preliminary project report ('DPR') and detailed project report ('DPR') without making available the expertise and technical knowledge, etc. for carrying out such technical work , cannot be taxed in India.

37. Issue with regard to disallowance of Rs. 30,09,179/-:

During the FY 2006-07 the Assessee has debited total expenses of Rs. 10,681,827 to the profit and loss account. Out of the same, an expenditure of Rs. 9,684,307 was been booked as 'Consultancy charges'. The invoices relating to the same were submitted to the AO. The Id. AO, in the impugned order, was of the view that the following invoices, pertained to work done during the period prior to the relevant previous year relating to AY 2008-09. He therefore disallowed the claim of the Assessee for deduction of the following expenses as prior period expenses:

38. The Assessee submitted before the DRP that the AO in the impugned order has not raised any doubt about the genuineness of the consultancy charges amounting to Rs. 30,09,179. As such, the said expenses without doubt were incurred by the Assessee in course of its ordinary business activities and therefore the Assessee is eligible for the benefit of deduction of such expenses in computation of its total income. The only area of doubt is the period for which such deduction is to be claimed. The Id. AO in the impugned order has not allowed the deduction for the said expenses during the year under review, however, the Id. AO did not comment on the period in which the deduction should be allowed. The limited prayer of the Assessee before the DRP was to give credit for such consultancy charges amounting to Rs. 30,09,179, either in computation of total income for AY 2006-07 i.e. the period for which the work was done, or AY 2008-09 i.e. the period for which the invoices relate to.

39. Issue with regard to grossing up:

As per the contract between the Assessee and GRSE, the consideration that was being paid to the Assessee by GRSE in USD, was to be paid net of taxes. Accordingly GRSE was grossing up the amount of consideration in USD and deducting tax on the same at the rate of 15%, which was borne by GRSE. During the year ended 31 March 2007, the net consideration (net of TDS borne by GRSE) received in USD (converted into INR) amounted to Rs. 24.393,589. It was submitted to the Id. AO that the 'grossing up' was done as per the provisions of section 195A of the Act, for the purpose of computation of TDS liability and that there is no need to recognize such notional income as there is no provision either in section 2(24) or in section 28 of the Act for deeming the same as income/profits and gains from business. The Id. AO, in his impugned order, expressed the view that the Assessee was deriving benefit within the meaning of section 28(iv) of the Act by way of crediting the net consideration in the audited accounts and claiming the credit of TDS on the 'grossed up' amount. The certificates of GRSE totalled to Rs. 28,126,740 whereas the Assessee has accounted for only Rs. 24,393,588 in the audited profit and loss accounts. Therefore the difference of Rs. 37,33,151 was added back to the total income of the Assessee. The limited prayer of the Assessee before DRP was to direct the Id. AO be directed to give consequential relief to the Assessee with regard to grossing up of the income, once the first grounds of objection is decided in favour of the Assessee.
40. Besides the above objections, the Assessee also raised issues with regard to the action of the AO in not granting credit for taxes deducted at source as claimed by the Assessee. The levy of interest u/s.234-B & 234-C of the Act was also questioned by the Assessee before the DRP. It was submitted that the person making payment to the Assessee was duty bound to deduct tax at source u/s.195 of the Act on payment made to the Assessee, as the Assessee was a non-resident. It was submitted that in estimating the advance tax payable the Assessee was bound to take note (give credit to) of tax deductible at source (whether actually deducted or not). If such credit is given then there would be no liability to pay advance tax of the Assessee would be less than Rs. 5000 and therefore no interest u/s.234B of the Act could be levied. The Assessee in this regard placed reliance on the decision of the ITAT Delhi in the case of Sedco Forex International Drilling Vs. DCIT 72 ITD 415 (Del).

41. The DRP dealt with the issues raised by the Assessee as follows:
“5. Ground No. 1 - Permanent Establishment of the Assessee in India:

(a) On perusal of the Contract of Consultancy Services for Modernization of Garden Reach Shipyard between Gifford and GRSE, given at pages 50-77 of paper book - I, (herein after referred to as "the Contract"), it is noticed that :- The Contract came into force w.e.f. 12.04.2004. The works Contract was to be completed in three stages. There was a single Contract for modernization of Garden Reach Shipyard and all the three stages are so interconnected that unless all the three stages are completed, the Works Contract cannot be considered completed for the beneficial use by GRSE. The consultancy fee for the whole Contract was agreed upon to be paid as a lump sum amount in USD and lNR as per the convenience of the assessee. There is no mention in the Contract of the name of the foreign sub-consultant for payment in the foreign currency and the nature of consultancy services to be rendered by the foreign sub-consultant. GRSE was to make payment or remit the consideration amount on the basis of bills to be raised by the assessee as consultant in the bank account to be specified by the consultant. The consultant was responsible for technical soundness of the services rendered to GRSE and in the event of any deficiency in the services, the consultant was required to re-do such services for which GRSE was not required to pay any additional compensation. In Appendix-1.3, the personnel employed by the consultant in all the three stages included foreign staff of Gifford and its associate enterprise - 'Appledore', In Appendix-1.4, it is mentioned that GRSE would provide to the consultant i.e. the assessee air-conditioned office space of about 50 sq. mt. inside the Garden Reach Shipyard with a telephone and fax facility for the duration of the Contract and the consultant had to bear the charges for local, STD & ISD calls, faxes & e-mail for all the three stages of the project. These facts as per the Contract clearly indicate that the assessee maintained permanent office in India for rendering consultancy services to GRSE. Article-5 of DTAA between India & the UK defines the term 'permanent establishment' to include 'an office'. The assessee has maintained office at the place of GRSE in India, therefore, the assessee had permanent establishment in India in the year under consideration for rendering consultancy for all the stages. The direct enquiry made by the AO revealed that one Shri Mitra is Resident Engineer of Gifford and address printed on his visiting card is - "Consultant's Kolkata Office, 43/46, Garden Reach Road, Kolkata- 700024". Moreover, the assessee filed its returns for the year under consideration as well as for earlier years as PE in India and accounted for the entire consultancy fees received from GRSE both in foreign currency as well as in rupees and also claimed deduction of all the expenses. The assessee has not disputed the taxability of consultancy fees received in rupees as PE in India and disputed the taxability of consultancy fees received in USD only on the ground that there was no PE in India. The entire GRSE project was / is one and the same and the mutually agreed lump sum amount of consideration related to the said project. Therefore, the assessee was not entitled to take two different stands as regards the existence of PE in India, one for receipt in USD and another for receipt in INR. In view of the aforesaid facts and circumstances of the case, the Panel is of the considered view that the AO was justified in holding that the assessee had PE in India for the entire amount of consultancy fees received from GRSE.

b) In view of the discussions at (a) above, the Panel is of the considered view that the AO was justified in holding that the income earned by the assessee in USD for execution of the Contract was attributable to its PE in India and hence taxable in India.

c) In view of the Panel's view as expressed above that the assessee had PE in India for the entire amount of consultancy fee received from GRSE and on the facts and circumstances of the assessee's case; it is concluded by the Panel that the provisions of Section 44DA are applicable to the assessee. As such, the gross receipt by way of fees for technical services was inc1udible in the computation of business income / profits of the PE in India.

d) The Panel has already expressed its view that the assessee had PE in India for the entire amount of consultancy fee received from GRSE and the income earned by it in USD was connected with its PE in India. The assessee filed the return of income as PE in India and disclosed the entire income received in USD & in INR. In course of the assessment proceedings, the assessee made a fresh claim that it did not have any PE in India, and without prejudice to this claim, the income earned by it in USD was not connected to the PE in India. The AO besides dealing with the assessee's fresh claims on merits held that the assessee's fresh claims without filing a revised return could not be entertained in view of the decision of the Apex Court in the case of Goetze (I) Ltd. vs. CIT, 284 ITR 323. The assessee contested the AO's findings relying on the decisions in the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del) and in the case of CIT vs. Ramco International 221 CTR 491 (2008) HC (P & H). The ITAT Delhi in the above mentioned decision considered the decision of the Apex Court (supra) and held that the revised claim u/s.80HH & 801 should be allowed in view of the CBDT's Circular F. No. 81/27/65-ITCB), dated 18th May, 1965. The facts of the cited case law were that the assessee made claim for deductions u/s.80HH & 801 in the original return and later filed a revised return in which the claim of deductions u/s.80HH & 801 was not revised; however, the assessee made revised claim of said deductions by filing a revised working during the assessment proceedings. It is evident that the claim of deductions u/s.80HH & 801 was not a fresh claim. The above mentioned Board's Circular permits the AO to allow any deduction, although not claimed in the return, if the same is allowable being a patent mistake of fact or law. This Circular does not permit the AO to allow any fresh or new claim made by the assessee during the assessment proceeding, if such claim is debatable, contrary to the facts on record and assessee's own treatment given in earlier years and there being two possible views on the issue involved in the claim. In the assessee's case, the fresh claims as above were contrary to . the assessee's stand in the earlier years and were not in the nature of any deduction which could be allowable being a patent and undisputed mistake in the computation of income. In fact, the assessee disputed the taxability of income / receipt in USD under charging Sections of the Act and also the basic issue of its status as PE. Therefore, the decision cited by the assessee has no relevance to the facts of the assessee's case. The ratio of the decision of the Apex Court in the case of Goetze (l) Ltd. vs. CIT, 284 ITR 323 squarely applied to the assessee. In another cited decision, the Punjab & Haryana High Court directed to allow deduction u/s.80IB stating that it was not a fresh claim based on the documents and form No. lOCCB filed by the assessee in course of the assessment proceedings. The facts of this caseindicate that the assessee's claim was a patent and undisputed claim allowable as per law. The ratio of this decision also does not support the assessee's contention. In view of the above discussions, the Panel is of the considered view that the AO rightly held that the fresh claims made by the assessee without filing a revised return could not be entertained in the light of the decision of Apex Court in the case of Goetze (I) Ltd. vs. CIT, 284 ITR 323.

6. Ground No. 2 - Payments made to Appledore:
a) As per the Contract, the assessee as a consultant was required to render consultancy services for GRSE project directly and / or through sub-consultants appointed by it. Further, as per the Contract the assessee had to receive the consultancy fee from GRSE. The appointment of M/s. Appledore International Ltd. ('Appledore') by the assessee was its choice and not the choice of GRSE as per the Contract. GRSE made payment directly to the consultant and not to Appledore. The head office of Gifford in UK made payment to Appledore at UK for the services provided by it to Gifford in connection with GRSE project located in India. The entire amount of consultancy fee was included in the accounts of PE and expenses by way of payment to Appledore were claimed in the accounts of PE. The place of services rendered by Appledore and also the place of payment made to Appledore were immaterial as long as the source of income was in India and the expenses were claimed against the receipts arising from the said source of income. Section 9 of the LT. Act, 1961 was amended by the Finance Act, 2010 w.e.f. 01.06.1976 by substituting the Explanation occurring after sub-Section 2 as under:

"Explanation. - For the removal of doubts, it is hereby declared that for the purpose of this Section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-Section (1) and shall be included in the total income of the nonresident, whether or not, -

(i) the non-resident has residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India."

In view of the above stated amendment, the income by way of fees for technical services payable by a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India, was deemed to accrue or arise in India, whether or not the non- resident had PE in India and whether or not the non-resident rendered services in India. Therefore, the AO was justified in holding that the payment made by the assessee to Appledore was deemed to have accrued or arisen in India.

b) The aforesaid amendment to Section 9 of the LT. Act, 1961 by the Finance Act, 2010 has overcome the effect of the decision of the Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd. vs. CIT, 288 ITR 408 as well as the decision of the Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (2009) 310 ITR 320. Therefore, the AO was justified in law by holding that the principles laid down in the above mentioned decisions did not apply to the assessee.

c) The 'sub-consultancy' agreement of the assessee with Appledore was for 'Design Consultancy Services'. The items of 'sub-consultancy' services as listed in Schedule - 1 of the said agreement included Scope of Sub-Consultancy Services for Shipyard Modernization, Conceptual and Outline Design, Technical Specifications for Plant and Equipment, Review and Comment on Prequalification Documents, Review and Comment on Bidders Proposal Tender Documents, Review and Comment on Quality Manuals and Method Statements of Contractors. Considering the nature of the GRSE project one; say that the entire consultancy services for the project was in the nature of technical services involving technical knowledge, experience and skills. It is well known fact that the architecture is a branch of Engineering and preparation and submission of 'drawings' or 'design' by the Architect is in the nature of technical services. Therefore, the Appledore had also provided technical services by providing the design or review report as per the items of subconsultancy services specified in the 'sub-consultancy agreement'. Therefore, the AO was justified in bolding that the payment made by the assessee to Appledore was for transfer of technical plan or technical design falling within the purview of FTS in terms of the second limb to clause (c) of Article 13(4) of the DTAA.

d) In view of the discussions at item (c) above, the payment made by the assessee to Appledore was covered by Article 13(4)(c) of the DTAA because the services rendered by Appledore were to 'make available' of technical knowledge, skill or expertise by Appledore. The ratio of the decision in the case of Intertek Testing Services India P. Ltd. (2008) 307 ITR 418 (AAR) supports the finding of the AO because the technical report and design prepared and submitted by Appledore were for the specific GRSE project and the same was to be utilized only by GRSE and no one else for the entire period until the completion of the said. project and even afterwards for diagnosing and correcting any fault in the project, if noticed at a later date. As such, the technical knowledge, design and experience of Appledore were made available to the assessee who in turn made the same available to GRSE for permanent use in its project. Therefore, the AO was justified in holding that that payment made to Appledore was falling within the purview of Article 13(4)(c) of the DTAA, as there was 'make available' of technical knowledge, skill or expertise by Appledore.

e) In view of the aforesaid amendment to Section 9 of the LT. Act, 1961 by the Finance Act, 2010, the payment made by the assessee to Appledore was chargeable to tax under the provisions of LT. Act, 1961 and accordingly the assessee was required to deduct tax at source u/s. 195 of the Act. If the assessee had a view that the said payment was not chargeable to tax under the Act, then it would have made an application under sub-Section - 2 of Section 195 of the Act to the Assessing Officer seeking an order to that effect. The assessee did not do so and took the plea of non taxability of the payment to Appledore only when the AO required the assessee to explain why the said payment claimed as expenditure should not be disallowed within the meaning of Section 40(a)(i) of the Act. Therefore, on the facts of the case and in law, the AO was justified in disallowing the payment made by the assessee to Appledore u/s.40(a)(i) of the Act on the ground of the assessee's failure to withhold the tax u/s. 195 of the Act.

7. Ground No .. 3 - Payment of consultancy charges:

The consultancy charges amounting to Rs. 30,09,179 pertained for the work done during the period prior to the previous year relevant A.y. 2007-08. The said expenses did not crystallize during the previous year relevant A.Y. 2007- 08 because the invoices were raised in the previous year relevant to A.Y. 2008- 09. The AO was, therefore, justified in disallowing the above expenses. However, the assessee's request for allowing the deduction of the above expenses in A.Y. 2008-09 may be considered by the AO as per law.

8. Ground No. 4 - Grossing up:
The assessee's contention that the 'grossing up' was done as per the provisions of Section 195A of the Act for the purpose of computation of TDS liability only and that there was no need to recognize such notional income either u]«. 2(24) or u/s. 28 of the Act has no merits. The AO was also not correct in stating that the assessee derived benefit within the meaning of Section 28(iv) of the Act by way of crediting the net consideration in the audited accounts and claiming the credit of TDS on the 'grossed up' amount, although the addition made by him was otherwise correct in law. The amount of tax deducted at source is deemed income of the payee (i.e. the assessee) as per the provisions of Section 198 of the Act. The payer (i.e. GRSE) of the income treated the amount of TDS as part of outgoing for the purpose of claiming deduction in its computation of total income. Section 199 states that the credit for TDS can be granted to the payee only when the income on which the tax at source has been deducted is included in the computation of total income of the payee. The assessee (i.e. the payee) claimed credit of TDS on the payment made by GRSE (i.e. the payer) but did not include the full amount of receipt from GRSE. The treatment given by the assessee in its accounts as well as in computation of its total income was contrary to the provisions of Section 198 & 199 of the Act. In view of this legal position, the difference amount of Rs. 37,33,151 was correctly added by the AO to the total income of the assessee.”

42. The AO passed the fair order of assessment dated 21.9.2010 giving effect to the directions of the DRP. Aggrieved by the order of the AO dated 21.9.2010, the Assessee is in appeal before the Tribunal. The grounds of appeal raised by the Assessee reads thus:

“I. For that the Assessing Officer and Dispute Resolution Panel (hereinafter collectively referred to as the 'authorities below') erred in holding that that the Appellant is having a Permanent Establishment ('PE') in India in terms of Double Taxation Avoidance Agreement between India and United Kingdom of Great Britain and Northern Ireland ('DTAA');

II. Without prejudice to the Ground No.l, the Appellant states and submits that the authorities below erred in holding that, the entire amount received by the Appellant, including those in United States Dollar ('USD'), was attributable to its alleged PE in India and taxable under section 44DA of the Income-tax Act, 196 I ('the Act');

III. For that the authorities below erred in holding that any income not attributable to the activities performed in India cart be charged to tax in India as or for any reason alleged or at all;

IV. For that the authorities below erred in holding that the Appellant's claims that it did not have any PE in India or that the income earned in respect of the activities outside India in USD was not assessable in India, could not be entertained without filing a revised return:

V. For that the authorities below erred in disallowing Rs. 3,136,682 paid to M/s Appledore International Ltd. for works carried out by them in the United Kingdom on the ground that the same was taxable in India and tax was required to be deducted thereon under section 195 of the Act. The reasons given for such disallowance are not sustainable on facts and in law;

VI. For that the authorities below erred in disallowing consultancy charges of Rs. 3,009,179 paid by the Appellant and the reasons and ground given therefore are erroneous and unsustainable on facts and in law;

VII. For that the authorities below erred in disallowing a sum of Rs. 2,858,996 on the ground of delayed deposit of tax deducted at source; VIII. For that the authorities below erred in holding that a sum of Rs. 3,733, 151 was to be added to the income on account of grossing up; IX. For that the authorities below erred in holding that any interest could be charged under section 234B and/ or 234C of the Act. The Appellant craves leave to add, alter, substitute or modify the grounds taken herein.”

43. We have heard the rival submissions. The submissions made by the learned counsel for the Assessee was identical to the submissions as were made before the DRP. The submissions made by the learned DR were identical to the reasons given by the DRP for its conclusions on the various issues.

44. We have given a very careful consideration to the rival submissions. As we have already seen, the Assessee is a foreign company incorporated in United Kingdom. It is engaged in the business of providing consultancy services for execution of projects. Garden Research Shipbuilders and Engineers Ltd.,(GRSE) is a Government Company. GRSE was desirous of carrying out modernisation of its existing shipyard and approached the Assessee to provide conlsultancy service for modernisation of GRSE’s Garden Research Shipyard. The terms of the Agreement between the Assessee and GRSE is contained in an agreement dated 29.4.2004 which later was amended by memorandum of Amendment to original Agreement on different occasions.

45. The nature of services to be performed by the Assessee are set out in Appendix 1.1 to the Agreement. Appendix 1.1 of the Agreement refers to Section-III of bid document which contains “Terms of Reference”. Clause 1.8 of the Agreement provides as follows:
“1.8. LOCATION

The services shall be performed at the premises of Garden Reach Shipyard, Kolkata and, where the location of a particular task is not so specified, at such locations, as GRSE may approve.”

46. The scope of work to be carried out by the Assessee for GRSE as per the agreement can be divided into three phases:
Phase -1

Preparation of a macro level concept plan for the modernization of the entire ship building yard including the installation of a Ship Lift, considering a new Modular shop and improvements to the module building, module handling and transporting, pre-outfitting, material planning and control and all other practices in order to achieve the level and quality of production, desired by GRSE.
Phase - II

Preparation of detailed designs and construction drawings for the facilities finalized and approved by GRSE during the Phase - I;

Study and Review all necessary data made available by GRSE during Phase - I to ensure best possible configuration/ solution to the Ship Lift system;

Preparation of detailed Block Cost estimates for the entire Project and the detailed item wise cost estimate for the different packages envisaged for the modernization;

Detailed requirements of Services/ Facilities, estimates of power requirements, provision of Sub- station, Compressed Air etc;

Preparation of draft tender documents for the various packages; and Obtaining timely approvals from various statutory bodies.

During the previous year relevant to AY 2007-08, the Assessee was involved in the activities pertaining to this phase.

Phase - III

Issuance of the detailed working drawings to the Contractors (separate from the Assessee), as independently selected by GRSE, for the necessary execution of the work, as required, for construction. Supervision of the actual implementation of the suggestions as given in the project report of the Assessee. Post construction the Assessee has to submit “As-built” drawings to authorities like KMC/KPT/Inspector of factories and obtain completion certificate/occupancy certificate.

47. During the previous year, the Assessee was involved in activities pertaining to phase-II of the project set out above. Clause 3.10 of the Agreement provides as follows:

“3.10. DOCUMENTS PREPARED BY THE CONSULTANT TO BE THE PROPERTY OF GRSE

All plans, drawings, specifications, designs, reports and other documents prepared by the Consultant in performing the Services shall become and remain the exclusive property of GRSE, and the Consultant shall =, not later than upon termination or expiration of this Contract, deliver all such documents to GRSE, together with a detailed inventory thereof. The Consultant shall not use the said documents for purposes unrelated to this Contract in any manner whatsoever.”
48. The Contract between the Assessee and GRSE gives the general nature of services for which the Assessee was being engaged as follows:

“WHEREAS GRSE intends to and/or is desirous of carrying out Modernisation of its existing shipyard (hereinafter referred to as the Project) and the Consultant, having represented themselves as technically capable of and/or possessing professional qualification, skill, personnel infrastructure and all other technical resources, have submitted their offer to provide all required technical and ancillary services for providing Consultancy Services for Modernisation of Garden Reach Shipyard and whereas GRSE have accepted the said offer of the Consultant under the terms and conditions as mentioned hereunder.”

49. The manner in which the services are rendered by the Assessee under the Agreement necessarily involves visit by the Assessee’s representative to the existing shipyard of GRSE, carry out study of the existing design, plan and facilities and scope for modernisation. The data so collected was sent to UK and the experts of the Assessee at UK drew the project report with inputs from M/S.Appledore, UK, which would contain plans, design, structural design, cost for actual implementation, manner of implementation etc. As we have already seen, during the previous year Stage-II of the Agreement was being carried out by the Assessee (which was only drawing of project report, plans etc.), which does not require much of presence of the representatives of the Assessee in India. The details of the man hours spent in India and in UK for rendering services to GRSE have been given at page-106 of the paper book and it shows that only 234 man hours were spent in India and 6,360 man hours were spent in UK. The claim of the Assessee in this regard has not been disbelieved by the revenue authorities. The sub-consultant of the Assessee in UK, M/S.Appledore, was rendering services from UK, in connection with the work to be carried out by the Assessee for GRSE in India. Some of the sub-consultants employed by the Assessee were tax resident in India and had contributed to carrying out of the work by the Assessee. The services rendered by these consultants were from India. The description of the work as contained in the invoices raised carried out by the Assessee during the previous year both by the sub-consultants in India, by the Assessee from UK and sub-consultants from UK is given at pages 107 & 108 of the paper book. The same is also given as an annexure to this order for better appreciation of facts. The billing in USD are services claimed to have been rendered from UK and the billing in India rupee are for services rendered in India.

50. From the nature of the services to be rendered by the Assessee there can be no doubt that the payment in question falls within the definition of Fees for Technical Services as given in Sec.9(1)(vii) (b) read with Explanation 2 to the Act and that the same is deemed to accrue or arise in India. The services rendered by the Assessee were in the nature of technical or consultancy services.

Sec.9(1) The following incomes shall be deemed to accrue or arise in India :-
(vii) income by way of fees for technical services payable by-
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India

Explanation [ 2].-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction , assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

51. Section 9 of the Act, was amended by the Finance Act, 2010 w.r.e.f. 01.06.1976 by substituting the Explanation occurring after sub-Section 2 as under:

"Explanation. - For the removal of doubts, it is hereby declared that for the purpose of this Section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-Section (1) and shall be included in the total income of the nonresident, whether or not, -

(i) the non-resident has residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India."

In view of the above stated amendment, the income by way of fees for technical services payable by a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India, was deemed to accrue or arise in India, whether or not the non- resident had PE in India and whether or not the non-resident rendered services in India. In view of the aforesaid amendment to Section 9 of the Act, by the Finance Act, 2010 the decision of the Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd. vs. CIT, 288 ITR 408 as well as the decision of the Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (2009) 310 ITR 320, rendered in the context of the law that prevailed prior to the aforesaid statutory amendment will not be of any help to the plea of the Assessee. As far as the decision of the Hon’ble Special Bench ITAT in the case of Clifford Chance ITA Nos. 5034/Mum/2004, 5035/Mum/2004, 7095/Mum/2004, 3021/Mum/2005 AND 2060-61/Mum/2008) (Mumbai Special Bench) dated 14.5.2013, is concerned, it was a case where the non resident had a PE in India and therefore the provisions for consideration in that case was applicability of Sec.9(1)(i) of the Act regarding existence of business connection. The Special Bench noticed that the view taken by the Tribunal and the High Court in Clifford Chance (Supra) was that if Article 15 of the India-UK Treaty is not applicable because the stay of the partner exceeded 90 days, then the taxability of the income would be determined by s. 9(1)(i) of the Act. It was held that for determination of income u/s 9(1)(i), the territorial nexus doctrine plays an important part and if the income arises out of operations in more than one jurisdiction, it would not be correct to contend that the entire income accrues or arises in each of the jurisdictions. The High Court applied the law laid down by the Supreme Court in the context of s. 9(1)(i) that if all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to the operations carried out in the taxable territories. The applicability of the Amendment referred to above viz., insertion of explanation to Sec.9(2) of the Act in the context of Sec.9(1)(vii), was not considered at all by the Tribunal.

52. Having held that the income in question accrues and arises in India and therefore taxable in India, we will now proceed to examine the taxability of the income in question under the DTAA between India and UK. Article 13 of the DTAA provides for taxation of income in the form of Fees for Technical Services between the source country (India) and the resident country (UK). The relevant clauses of the DTAA provides as follows:

ARTICLE 13
ROYALTIES AND FEES FOR TECHNICAL SERVICES

1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other 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 law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed :

(a) In the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4 (a) and (c) of this Article –

(i) During the first five years for which this Convention has effect ;
(aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first mentioned Contracting State or a political sub-division of that State, and

(bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and
(ii) During subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and

(b) In the case of royalties within paragraph 3 (b) of this Article and fees for technical services defined in paragraph 4( b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services.

4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which :

6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply.

7. Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to make payments was incurred and the payments are borne by that permanent establishment or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

52. The nature of services rendered by the Asseessee under the Agreement with GRSE was of the nature of technical or consultancy service and would be providing Technical services within the meaning of the DTAA also. In terms of Article 13(7) of the DTAA the income in the form of fees for technical services shall be deemed to arise in India because the person making payment of such fee is a resident of India.

53. Article 13(4) defines FTS to mean payments of any kind, to any person, in consideration for the rendering of any technical or consultancy services (including the provision of services of technical services or other personnel) which:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received: or

(c) make available technical knowledge, experience, skill, know-how or processes, or consist of development and transfer of a technical plan or technical design.

The definition of FTS has two parts. The first part deals with rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of the right to use property for which payment is received as "Royalty" as defined in paragraph 3(a) & 3(b) of Article 13 of the DT AA. It has been the contention of the Assessee that the contract with GRSE envisaged only for rendering consultancy services for modernisation of the shipyard project and did not involve transfer of any right to use property for which royalties are payable. Hence, there is no application of the first part of the definition in the subject case. The second part of the definition relates to the fees for rendering any technical or consultancy services which are made available to the Assessee.

54. As far as applicability of Clause (c) of Article 13(4) of the Indo-UK DTAA is concerned, it has been the contention of the Assessee that the said clause contemplates that fees paid should be for making available of the technical knowledge, experience, skill, etc. In other words, the technical knowledge, experience, skill, etc. must be made available to the Assessee, so as to be covered within its scope, and mere providing of such services, without making them available to the Assessee, shall not serve the purpose and hence, will be outside the ambit of the Article. "Rendering of any technical or consultancy service" is followed by "which made available technical knowledge, experience, skill and know-how". The contention of the Assessee is that the meaning of the expression "make available" has been considered in several judicial pronouncements and the essence of those decisions was that , the technical or consultancy service rendered should be of such a nature that "make available" to the recipient technical knowledge, know-how and the like. The service should be aimed at end result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skill or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. 1n other words, to fit into the terminology "make available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it.

55. We have already seen clause 3.10 of the Agreement between the Assessee and GRSE (see para-47 of this order) which provides that all plans, drawings, specifications, designs, reports and other documents prepared by the Consultant in performing the Services shall become and remain the exclusive property of GRSE. We are therefore of the view that the requirements of clause (c) of Article 13(4) of the DTAA are also satisfied in the present case and therefore the source country (India) has a right to tax the fee in question in accordance with Article 13(2) of the DTAA but subject to the limitation of rate of tax as laid down in Article 13(2). The provisions of the Act in this regard are contained in Sec.115A of the Act. We will first deal with Article 13(6) of the DTAA before dealing with Sec.115A of the Act.

56. As can be seen from a reading of Article 13(6) of the DTAA, Fees for technical services shall not be taxed under Article 13(2) if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply.

57. The question therefore is as to whether Fees for Technical Services (FTS) should be taxed under Article 13(2) or Article 7 of the DTAA. That would depend on the question whether the Assessee had a permanent establishment in India. In all Double Taxation Avoidance Agreement the basic concept is that an enterprise should be liable for tax on profits earned in a country that is not the country of residence of the enterprise, unless the enterprise has a real and significant or substantial economic nexus with the country in which the profits accrue. An enterprise will only have such a real and significant or substantial nexus if it carries on business in the other country through a permanent establishment in that country. Article 5 of the DTAA lays down rules with regard to determination of the question as to when an enterprise can be considered as having a PE in the source country (i.e., the country from which income accrues or arises to the enterprise).

ARTICLE 5
PERMANENT ESTABLISHMENT

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.
2. The term "permanent establishment" shall include especially :

3. . The term "permanent establishment" shall not be deemed to include:

4. A person acting in a Contracting State for or on behalf of an enterprise of the other contracting State - other than an agent of an independent status to whom paragraph (5) of this Article applies, shall be deemed to be a permanent establishment of that enterprise in the first mentioned State if:

5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph.

6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

7. For the purposes of this Article the term "control", in relation to a company, means the ability to exercise control over the company's affairs by means of the direct or indirect holding of the greater part of the issued share capital or voting power in the company.

58. As per Article 5(1), the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5(1) stipulates three criteria viz., (a) Place of business i.e., some physical presence e.g., some premises or equipment, which are used in business; (b) Place of business should be fixed in the sense that it is a distinct place which exhibits some degree of permanence. The fact that an enterprise has a certain amount of space at its disposal, which is used for business activity is sufficient to constitute a place of business. No formal legal right to use that place is therefore the requirement. (c) The enterprise should not only have a fixed place of business but also wholly or partly business should be carried on thought that fixed place. Carrying on of business involves the carrying on in a country of virtually any activity related to the business of the enterprise. Article 5(1) contains what is referred to as basic-rule PE. Article 5(2)(a) to (k) contains examples (positive definitions) of rule contained in Article 5(1) and Article 5(3) are exceptions to PE (negative definition).

59. It has been the contention of the Assessee that for a place or an office to be treated as PE. it must be at the disposal of the enterprise i.e. the assesssee must be able to occupy the premises in its own right and use the same for the purpose of carrying its business in India. It has been the stand of the Assessee that it does not have any office branch or fixed place of business in India. It was maintaining its books of accounts relating to the GRSE project and complying with taxation matters in India through its consultant, L.B.Jha & Co., Chartered Accountants. The technical analysis for the purpose of review report etc. was carried out by the Assessee only in the UK, based on such information received from India. As such in terms of Article 5(3)(d) of the DTAA. maintenance of a fixed place of business merely for collection of information, will not constitute a PE in India. It has also been the contention of the Assessee that the said office space provided to the Assessee, by GRSE at the project site, does not satisfy the 'Fixed place of business test' as the said premises was not used by the Assessee for its own business, but rather it was used only for the limited purposes of executing the contract undertaken for the customer, i.e. GRSE wherein in the contract between GRSE and the Assessee it has been mentioned that the employees of the Assessee at the GRSE premises would have to observe the rules and regulations of GRSE.

60. In this regard it is worthwhile to mention that as per Para 5.2 of the contract, GRSE was required to make available to the consultant's personnel (Assessee’s personnel) for the purposes of services office space inside the Garden Reach Shipyard. It was the stand of the Assessee that the Office space provided by GRSE is for restrictive and exclusive purpose of providing services under the contract for modernisation of shipyard and not for any other purposes. Therefore, office premises provided by GRSE cannot be available for carrying out the business in India by Assessee. The Office place provided by GRSE therefore cannot be occupied by Assessee or their personnel as a right for carrying out their business in India. It has been the further stand of the Assessee that the use of such premises is further restricted as Appendix 1.3 of the contract specifically provides that the consultant when working inside the premises of GRSE, shall observe GRSE's rules and regulations and special permissions shall be obtained when it is necessary to work beyond normal working hours as per the requirement of project work.

61. Reliance in this regard is placed on the explanation given in the Philip Baker's commentary on Treaties which states as under.- (Relevant extracts of Philips baker PB Page 348 to 350).

"A requirement of the fixed place of business. which is implicit in Article 5(1). is that the place of business must be at the disposal of the enterprise. The Commentary at paragraph -4 makes it clear that the premises need not be owned or even rented by the enterprise, provided they are at the disposal of the enterprise .... This has given rise to some difficulties where premises are made available to a foreign enterprise for the purposes of carrying out particular work on behalf of the owner of the premises in that situation, the space provided is not lit the disposal of the enterprise since it has no right to occupy the premises but is merely given access for the purposes of the project.

“...... the fixed place of business need not be owned or leased by the foreign enterprise provided that it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises."

62. Reference was made to the OECD guidelines which states as follows:

"Whilst no formal legal right to use a particular place is required for that place to constitute a permanent establishment, the mere presence of an enterprise at a particular location does not necessarily mean that that location is at the disposal of that enterprise. "

63. Attention was also drawn to the decision of the Special Bench ITAT in the case of Motorola Inc. 95 ITD 269 (Delhi-SB) wherein while dealing with the issue of 'Disposal Test' the Special Bench has held as under:

“Disposal would imply right to use the premises at any point of time for whatever purposes. In other words, there should be nothing to indicate that whenever any employee of assessee visited India, he could straightway walk into the office of Indian company and occupy a space or table. Merely because the Indian company allowed the visiting employees to use certain facilities occasionally, it cannot be said that the assessee had at its disposal, as a matter of right certain space which could be categorized as a fixed place of business. It was only the facility offered to the employees of Ericsson gratis that they could enter the office of ECI for the work of Ericsson. That did not create any right in the favour of the employees of Ericsson to enter the office of ECI as they pleased for the purpose of carrying out the activities of Ericsson. Nor did it create any impression in the minds of the business customers of Ericsson in India that the office of ECI could be viewed as a projection of Ericsson 's activities in India".

64. Reliance was also placed on the decision of ITAT in case of Airlines Rotables Ltd vs. JDIT (2010) 131 TTJ 385 (Mum.) wherein it has been held that:

“..... The physical test. i.e., place of business test, requires that there should be a physical location at which the business is carried out. However. mere existence of a physical location is not enough. This location should also be at the disposal of the foreign enterprise and it must be used for the business of foreign enterprise as well. A place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities. This place has to be owned, rented or otherwise at the disposal of the assessee, and a mere occasional factual use of place does not suffice.

.... 13. It is thus necessary that, in order to give a positive finding about existence of the PE, not only that there should be a physical location through which the business enterprise is carried out, but also such a place should be at the disposal of the foreign enterprise in the sense that foreign enterprise should have some sort of a right to use the said physical location for its own business.

.. As far as the consideration for use or right to use the replacement equipments are concerned, the location of such equipments so given for use or right to use cannot be viewed as a place of carrying on its business, which, as we understand. is limited to. qua that consignment. the consignment so having been given for use or right to use. The business with regard to that consignment is over when that consignment is given for standby purposes to the airline. It is thus clear that not only that the assessee did not have any right to use the location of consignment stock, such a location was also not used for the purposes of assessee's business. There is also no projection of the assessee at this physical location in the sense that the business of the assessee is not carried out, or sought to be carried out or even projected, from these locations. When the physical locations at which consignment stock is kept do not project the assessee, it cannot be said that these locations constitute PE of the assessee. "

65. In conclusion it was submitted that :-

- Office premises provided by GRSE is only for the purposes of discharging services under the contract with GRSE.

- It cannot be used for any other purposes or for carrying out any other business of the Assessee in India

- The Assessee cannot occupy such office premises in its own right and it does not satisfy the disposal test so as to make it a PE.

- Even the use of the premises for providing services under the contract is restricted as the Assessee and its personnel had to observe GRSE's Rules and Regulations and require special permission to use such office premises beyond normal working hours.

66. The learned DR relied on the following circumstances to substantiate the conclusion of the Revenue authorities that there existed a PE of the Assessee in India viz.,

a) Article- 5 of the India-UK DTAA defines the term 'permanent establishment' to include 'an office' and in the instant case, the assessee has in fact maintained an office inside the Garden Reach Shipyard. In Appendix 1.4 of the Contract Document, it is mentioned that GRSE would provide to the assessee air-conditioned office space of about 50 sq.mt. inside the Garden Reach Shipyard with telephone and fax facility for the duration of the contract and the assessee had to bear the charges for local, STD & ISD calls, faxes & e-mails for all the three stages of the project.

b) It the course of assessment proceedings, the A.O. sent his Inspector to the Garden Reach Shipyard to conduct enquiry and the enquiry revealed that one Shri Subrata Mitra was available there as Resident Engineer of "Gifford" and the address printed on his visiting card was - "Consultant's Kolkata Office, 43/46, Garden Reach Road, Kolkata- 700 024.

c) According to Appendix 1.3 of the Contract between the Asssessee and GRSE, 'Terms of Reference' , the assessee shall post at site competent and qualified engineers designated as Resident/Assistant Resident Engineer and other Site Engineers ( minimum Civil Engineering Graduates) who have minimum 15 and 10 years experience respectively.

67. It was submitted that in the light of the above facts and circumstances, it has to be concluded that there was a PE in existence in India. It was further submitted that the services rendered by the assessee to GRSE were of technical nature in terms of provisions of section 9(1)(vii) of the Income- tax Act, 1961 read with Article 13 of the India-UK DTAA and the contract as a whole in respect of which the fees for technical services arose and that such payment was effectively connected with the PE in India. Therefore, Article 13(6) would apply and the gross receipts by way of fees for technical services (received by the assessee both in foreign currency and Indian currency) are includible in the computation of business income/ profits of the PE in India, for which the provisions of section 44DA would apply. He also relied on the orders of the revenue authorities and the fact that in the return of income originally filed, the assessee did not deny the fact that there existed a PE of the Assessee in India and accounted for the entire fees received from GRSE both in foreign currency and in Indian rupees and claimed deduction of expenses in the computation of business profits of the PE. In all other respects, the DR relied on the order of the AO/DRP.

68. We have given a very careful consideration to the rival submissions. Clause 5.2 of the Agreement for rendering of consultancy and technical services between the Assessee and GRSE reads thus:

“5.2. SERVICES, FACILITIES AND PROPERTY OF GRSE

GRSE shall make available to the Consultant’s Personnel for the purpose of the Services, facilities and property described in Appendix-1.4.”

APPENDIX-1.4 of the Contract reads thus:
“FACILITIES TO BE PROVIDED BY GRSE

GRSE will, if required, make available to the Consultant, air-condtioned office space of about 50 Sq.mtrs., inside the Garden Reach Shipyard with a telephone and fax facility for the duration of the Contract. The charges for local, STD and OSD calls, faxes and e-mail for the three stages of the Project shall be borne by the Consultant. All other requirements of the Consultant should be arranged by the Consultant themselves.”

Appendix 1.3 of the Contract specifically provides that the Consultants, when working inside GRSE premises shall observe GRSE’s rules and regulation and a special permission shall be obtained when it is necessary to work beyond normal working hours as per the requirement of Project work.

69. The presence of the Assessee in India during the previous year was only in connection with the Agreement for modernisation of shipyard of GRSE. The Assessee had not carried on any other business in India. The provision of office space inside the Garden Reach Shipyard cannot therefore be said to be a fixed place of business through which the business of the Assessee is carried on in India. As we have already seen Article 5(1) of the DTAA contemplates a fixed place of business through which the business of an enterprise is wholly or partly carried on. It can be said that there was some physical presence of the Assessee in India though it was restricted to rendering of services under the Agreement with GRSE. It is not enough that the Assessee has a fixed place of business in India but the Assessee should carry on business in India through that fixed place of business. This requirement of Article 5(1) of the DTAA is not satisfied in the present case. Carrying on of business involves the carrying on in a country of virtually any activity related to the business of the enterprise. As we have already seen the availability of office space for use by the Assessee at the premises of GRSE was for the limited purpose of rendering of services agreed between the Assessee and GRSE. The commentaries of Philip Baker on Treaties and OECD guidelines and decisions referred to by the learned counsel for the Assessee support the plea of the Assessee that it had no PE in India. The Revenue came to the conclusion that the Assessee had a PE in India mainly on the basis of existence of an office at GRSE’s shipyard. That alone was not sufficient to come to such a conclusion. The fact that the Assessee filed a return of income including all receipts from the contract with GRSE cannot be the basis to come to a conclusion that there was an admission by the Assessee that it had a PE in India. Existence of PE in India has to be established on the basis of evidence and by application of the requirements as contemplated in DTAA.

70. On the question whether the Assessee having filed a return of income admitting income on the basis that it had a PE in India can thereafter make a claim that there was no PE of the Assessee in India without filing a revised return of income, we find that the AO in coming to the above conclusion, had placed reliance on the decision of the Hon’ble Supreme Court in the case of Goetz (India) Ltd. (supra) wherein it was held that claim made in the course of assessment proceedings without filing a revised return of income, cannot be entertained by the AO. In this regard, the Assessee placed reliance on the decision in the case of Chicago Pneumatic India Ltd.(supra) and the decision in the case CIT vs Ramco International (supra). In the cited decisions, the tribunal and the Hon’ble High Court has taken a view that a claim made without filing a revised return of income can be entertained. In the case of Ramco International (supra) the Hon’ble Punjab and Haryana High Court, distinguished the judgement of Goetze allowed the claim of the Assessee which was made in course of the assessment proceedings and not by filing revised return. In view of the above judicial pronouncements, we are of the view that the action of the ld. AO of not allowing the claim of the Assessee due to failure to file the revised return, is bad in law.

71. We therefore agree with the contention of the Assessee that there was no PE in India during the previous year. This conclusion will hold good even for AY 2005-06.

72. Having come to the conclusion that there was no PE of the Assessee in India during the relevant previous year, the question that would now require consideration is with regard to taxability of the FTS under Article 13(2) of the treaty. A reading of Article 13(2) of the DTAA (reproduced in the earlier part of this order) would show that taxation has to be in according with the Act. The provisions contained in the Act in this regard are Sec.115A of the Act. In this regard, the relevant provisions of section 115A of the Act, needs to be looked into. We have already reproduced the provisions of Sec.115A of the Act and Sec.44AD of the Act in the earlier part of this order. U/S.115A of the Act, Income by way of FTS received by a non- resident would be taxed at 20% on gross basis only if all the following conditions are satisfied:-

i) the income is received from Government or an Indian concern in pursuance of an agreement;
ii) Such agreement was made after 31st day of May, 1997 but before the 1st day of June, 2005; and
iii) such income does not fall within the purview of sub-section (1) of section 44DA of the Act.

73. We have already seen that the Assessee in the present case instant case, there is no doubt that the Assessee fulfills condition (i) and condition (ii) as mentioned above. As regards condition no. (iii), the provisions of sub-section (1) of section 44DA of the Act, FTS would fall within the purview of section 44DA(1) of the Act, only if it is actively connected to the PE of the non-resident in India. PE for the purpose of this section has been defined in section 92F(iiia) of the Act which reads as under:-

"(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;"

We have in the earlier paragraphs already held that there was no PE in Indi in the form of fixed place of business through which the business of the Assessee was wholly or partly carried on in India. As such, the Assessee would be entitled to the benefit of the provisions of section 115A of the Act and be taxed at 20% of the Gross receipts. We also hold that tax liability borne by GRSE will also need to be grossed up for arriving at Gross receipts of the Assessee and after such grossing up such receipts have to be taxed at 20%. We hold accordingly.

74. In view of the above conclusion, the issue with regard to disallowance of prior period expenses, disallowance u/s.40(a)(i) & 40(a)(ia) of the Act, do not require any consideration as those disallowances will not be relevant when income is taxed u/s.115A of the Act.

75. The next aspect that needs to be considered is the levy of interest u/s.234-B & 234-C of the Act. It was submitted that the person making payment to the Assessee was duty bound to deduct tax at source u/s.195 of the Act on payment made to the Assessee, as the Assessee was a non-resident. It was submitted that in estimating the advance tax payable, the Assessee was bound to take note (give credit to) of tax deductible at source (whether actually deducted or not). If such credit is given then there would be no liability to pay advance tax of the Assessee would be less than Rs. 5000 and therefore no interest u/s.234B & 2234-C of the Act could be levied. The Assessee in this regard placed reliance on the decision of the ITAT Delhi in the case of Sedco Forex International Drilling Vs. DCIT 72 ITD 415 (Del). In this regard reliance was also placed on the decision in the case of Motorola Inc. and others v. DCIT (supra), wherein the Hon'ble Tribunal has held that no interest is payable by a taxpayer if his entire tax was deductible at source, and this is true even if the tax was not actually deducted. The relevant extracts of the said decision is produced below:-

"All the payments made to the assessee are tax deductible at source (even assuming that they are taxable) as rightly held by the CIT(A) and also contended before us. In that case, having regard to the provisions of section 201(1) & 201(1A) to which our attention was drawn on behalf of the assessees. the assessees cannot be held to have committed default in paying the advancetax. They are entitled to take into account the tax which is deductible by the payer. though not actually deducted. Consequently, there is no liability to pay interest. The decision of the CIT(A) to cancel the interest U/S 234B is upheld on merits. "

The issue was confirmed by the Delhi HC in the case of DIT vs. Ericsson AB [2011] 16 taxmann.com 371 (Delhi). Reliance was also placed on the decision in the case of DIT vs. Jacobs Civil Incorporated [2010] 194 Taxman 495 (Delhi) (Page 726 to 742), wherein the Hon'ble Delhi High Court has held as under:

"No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments. the non - resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. This would be clear from the reading of Section 191 of the Act along with Section 209 (1) (d) of the Act. For this reason. it would not be permissible for the Revenue to charge any interest under Section 234B of the Act. .

Reliance was also be placed on following decisions laying down identical proposition as set out above. DIT(lnternational Taxation) v Maersk Co. Ltd. 2011) 198 Taxman 518 (Uttarakhand) (FB). Sedco Forex International Drilling v Dy ClIT [2000] 72 ITD 415 (Del); Rheinbraun Engg. & Wasser Gmbh v DCIT 1. T. A 0.1915/ Born / 96 dated 3 October 1997 (Bom); M.M. Ratnam v ITO [1997] 62 ITD 21 (Bom);Asia Satellite Telecommunications Co. Ltd v DCIT [2003] 78 TTJ 489 (Del); DIT v NGC Network Asia LLC [2009] 313 ITR 187 (Bom); CIT v Tide Water Marine International Inc. [2009] 309 ITR 85 (Uttaranchal); and Commissioner of Income-tax and Others v Ranchi Club Ltd (2001) 247 ITR 209. Therefore, it was submitted that the provisions of section 234B & 234C are not applicable to the Assessee.

76. We have considered the rival submissions. Under Section 209(1)(a)to (d) lays down four situations under which advance tax payable by the assessee is to be computed. In the present case we are not concerned with clauses (a) to (c). Clause (d) of sub-Section (1) of Sec.209 is relevant for the present case and it reads thus:-

"(d) The income-tax calculated under clause (a) or clause (b) or clause (c) shall, in each case, be reduced by the amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income (as computed before allowing any deductions admissible under this Act) which has been taken into account in computing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reduced shall be the advance tax payable."

A reading of the above clause shows that the clause categorically uses the expression "deductable or collectable at source". Under Sec.195 of the Act, there is an obligation on the payer, i.e. any person responsible for paying to a non-resident, to deduct income tax at source at the rates in force from such payments excluding those incomes which are chargeable under the head 'Salaries'. Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payee to the nonresident. Sec.201 of the Act lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non-resident but also penalties etc. Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remedy-less and therefore can take action against the payer under the provisions of Sec.201 of the Income Tax Act and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non- resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. The provisions of Sec.209(1)(d) have been amended by the Finance Act, 2012 but those amendments are not relevant for the present case which relates to AY 2007-08. We therefore hold that the assessee was not liable to pay any interest under sec.234-B of the Act following the judgments referred to earlier.

77. ITA No.1489/Kol/11: This is an appeal by the Assessee against the against the order dated 21.9.2010 of the DDIT(IT)-1(1), Kolkata, passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (Act) relating to AY 2005-06. The Assessment for this Assessment year was reopened u/s.147 of the Act consequent to the stand taken by the Revenue in the assessment for AY 2007-08. Income originally declared by the Assessee, as was done in AY 2007-08, was on the premise that it had a PE in India. The AO made order of reassessment on the same lines and reasoning as was done in AY 2007-08. The DRP followed it’s own directions given in AY 2007- 08. The grounds of appeal raised by the Assessee are similar to the one’s raised by the Assessee in AY 2007-08. The issues that arise for consideration in this appeal are also identical to the issues that arose for consideration in AY 2007-08 and on identical facts and circumstances. For the reasons given while deciding the appeal of the Assessee for AY 2007-08, we partly allow appeal of the Assessee for AY 2005-06 as well. The issues and decision on the various issues that were considered in AY 2007- 08 will equally apply for the assessment for AY 2005-06 also.

78. In the result ITA No.1489/Kol/11 is partly allowed.

79. In the result, appeals by the Assessee are partly allowed.