RENOIR CONSULTING LTD, MUMBAI v. DDIT (IT) 2(1), MUMBAI

ITA 4323/MUM/2011 | 1999-2000
Pronouncement Date: 11-04-2014 | Result: Partly Allowed

Appeal Details

RSA Number 432319914 RSA 2011
Assessee PAN AAACR4920K
Bench Mumbai
Appeal Number ITA 4323/MUM/2011
Duration Of Justice 2 year(s) 10 month(s) 15 day(s)
Appellant RENOIR CONSULTING LTD, MUMBAI
Respondent DDIT (IT) 2(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 11-04-2014
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted L
Tribunal Order Date 11-04-2014
Date Of Final Hearing 21-08-2013
Next Hearing Date 21-08-2013
Assessment Year 1999-2000
Appeal Filed On 27-05-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH MUM BAI BEFORE SHRI SANJAY ARORA AM AND SHRI AMIT SHUKLA JM ./ I.T.A. NO. 4323/MUM/2011 ( / ASSESSMENT YEAR: 1999-2000) RENOIR CONSULTING LTD. C/O. HARIBHAKTI & CO. CHARTERED ACCOUNTANTS 42 FREE PRESS HOUSE 215 NARIMAN POINT MUMBAI-400 021 / VS. DY. DIT (INTERNATIONAL-TAXATION) 2(1) 1 ST FLOOR ROOM NO. 120 SCINDIA HOUSE N. M. ROAD BALLARD ESTATE MUMBAI-400 038 ' ./# ./PAN/GIR NO. AAACR 4920 K ( $% &' /ASSESSEE ) : ( ( / REVENUE ) ./ I.T.A. NO. 4125/MUM/2011 ( / ASSESSMENT YEAR: 1999-2000) DY. DIT (INTERNATIONAL-TAXATION) 2(1) 1 ST FLOOR ROOM NO. 120 SCINDIA HOUSE N. M. ROAD BALLARD ESTATE MUMBAI-400 038 / VS. RENOIR CONSULTING LTD. C/O. HARIBHAKTI & CO. CHARTERED ACCOUNTANTS 42 FREE PRESS HOUSE 215 NARIMAN POINT MUMBAI-400 021 ' ./# ./PAN/GIR NO. AAACR 4920 K ( ( / REVENUE ) : ( $% &' /ASSESSEE ) ./ I.T.A. NO. 5298/MUM/2009 ( / ASSESSMENT YEAR: 1997-1998) RENOIR CONSULTING LTD. C/O. HARIBHAKTI & CO. CHARTERED ACCOUNTANTS 42 FREE PRESS HOUSE 215 NARIMAN POINT MUMBAI-400 021 / VS. DY. DIT (INTERNATIONAL-TAXATION) 2(1) 1 ST FLOOR ROOM NO. 120 SCINDIA HOUSE N. M. ROAD BALLARD ESTATE MUMBAI-400 038 ' ./# ./PAN/GIR NO. AAACR 4920 K ( $% &' /ASSESSEE ) : ( ( / REVENUE ) 2 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. ') * + / ASSESSEE BY : SHRI R. MURLIDHAR SHRI SUNIL MANDLAI & SHRI VINAY DESHMANE -') * + / REVENUE BY : MS. NEERAJA PRADHAN $( . * / / DATE OF HEARING : 15.01.2014 012 * / / DATE OF PRONOUNCEMENT : 11.04.2014 / O R D E R PER SANJAY ARORA A. M.: THIS IS A SET OF THREE APPEALS I.E. THE APPEAL BY THE ASSESSEE FOR THE ASSESSMENT YEAR (A.Y.) 1997-98 AND CROSS APPEALS FOR A.Y. 1999 -2000 ARISING OUT OF THE SEPARATE ORDERS BY THE FIRST APPELLATE AUTHORITY FOR THE REL EVANT YEARS DISPOSING THE ASSESSEES APPEALS CONTESTING ITS ASSESSMENTS U/S. 143(3) OF T HE INCOME TAX ACT 1961 (THE ACT HEREINAFTER) FOR THE RELEVANT YEARS. THE APPEALS RA ISING COMMON ISSUES WERE POSTED FOR AND ACCORDINGLY HEARD TOGETHER AND ARE BEING DIS POSED OF VIDE A COMMON CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE PRINCIPAL ISSUE ARISING IN THE INSTANT APPEA LS IS WHETHER THE ASSESSEE A NON- RESIDENT COMPANY REGISTERED IN MAURITIUS HAD A PER MANENT ESTABLISHMENTS (PE) IN INDIA IN TERMS OF ARTICLE 5 OF THE INDIA-MAURITIUS TAX TR EATY DURING THE RELEVANT YEARS. 3.1 IT WOULD BE RELEVANT TO RECOUNT THE BACKGROUND FACTS OF THE CASE AND TOWARD WHICH WE SHALL FOR THE SAKE OF CONTEXT ADVERT TO THE FA CTS AND FIGURES FOR A.Y. 1997-98 I.E. THE FIRST YEAR UNDER REFERENCE. THE ASSESSMENT FOR THE YEAR WAS INITIALLY MADE ON 29.03.2000 AT AN INCOME OF RS.514.27 LACS INCLUDING INCOME OF RS.208.21 LACS (GBP 3 58 875) RECEIVED FROM M/S. GODFREY PHILIPS INDIA LTD. (GPI) A INDIAN COMPANY ON CONTRACT/S EXECUTED IN INDIA AS BUSINESS INCOME. THE TAXABILI TY OF THIS INCOME WAS CONTESTED BY THE ASSESSEE; THE MATTER TRAVELLING UPTO THE APPELLATE TRIBUNAL. THE BONE OF CONTENTION 3 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. BETWEEN THE PARTIES WAS THE EXISTENCE OR OTHERWISE OF A PE IN INDIA; THE ASSESSEE CLAIMING ITS ABSENCE SO THAT THE INCOME QUA THE SAID BUSINESS WITH GPI THOUGH ADMITTEDLY CARRI ED ON BY IT COULD NOT BE BROUGHT TO TAX IN INDIA. THE TRIBUNAL VIDE ITS ORDER DATED 18.10.2002 (IN ITA NO. 4679/MUM/2001) DISCUSSED THE ISSUE AND FINDING IT AS INDETERMINATE RESTORED THE MATTER ALONG WITH THE ANCILLARY ISSUE OF THE EXPENDITURE ALLOWABLE IN RELATION THERETO BACK TO THE FILE OF THE ASSESSING OFFICER (A.O.) ALSO DILATING ON THE ASPECTS DEEMED RELEVANT BY IT AND ON WHICH THEREFORE IN ITS VIEW ENQUIRY WOULD BE REQUIRED TO BE MADE; THE RELEVANT PART OF ITS ORDER READING AS UNDER: 7. THE TERM PERMANENT ESTABLISHMENT IS DEFINED U NDER ARTICLE 5 OF THE CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBL IC OF INDIA AND THE GOVERNMENT OF MAURITIUS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS. IT IS STIPULATED THAT 1. FOR THE PURPOSE OF THIS CONVENTION THE TERM PERMANENT ESTABLISHMENT MEANS A FIXED PLACE OF BU SINESS THROUGH WHICH THE BUSINESS OF THE ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. 2. THE TERM PERMANENT ESTABLISHMENT SHALL INCLUDE: (A) A PLAC E OF MANAGEMENT; 8. IN ORDER TO ASCERTAIN THE FACT THAT WHETHER THE ASSESSEE HAD PERMANENT ESTABLISHMENT IN INDIA OR NOT IT IS NECESSARY TO S EE THE MODUS OPERANDI OF THE ASSESSEES BUSINESS. HOW THE ASSESSEE CONDUCTED BUSINESS IN INDIA? ADMITTEDLY FOR 30 WEEKS THE STAFF OF THE ASSESSEE REMAINED IN INDIA. WHERE THEY STAYED? HOW THE PLACE OF STAY WAS ACQUIRED? HO W THEY COMMUNICATED WITH THE MAURITIUS OFFICE? WHAT WAS THEIR INDIAN AD DRESS? DEPENDING ON THE CIRCUMSTANCES HOTEL ROOM COULD ALSO BE TERMED AS FIXED PLACE OF BUSINESS. THERE WAS NO ENQUIRY ON THAT ASPECT. BESI DES IT IS ALSO TO BE SEEN HOW THE MANAGERIAL SERVICES WERE RENDERED AND WHAT WAS THE PLACE OF MANAGEMENT. WHETHER THE STAFF POSTED IN INDIA WAS G ETTING ALL THE COMMANDS FROM MAURITIUS OR THEY WERE TAKING THEIR D ECISIONS IN INDIA? HOW THE ASSESSEE WAS INTER-ACTING WITH ITS CLIENTS IN THE CONTEXT OF RENDERING MANAGERIAL SERVICES QUA THE SALES PROMOTI ON ETC.? HOW THE MEETINGS WERE ORGANIZED? HOW THE SEMINARS WERE PLAN NED? NORMALLY THIS ALL REQUIRES PROPER CO-ORDINATION AND TEAM EFFORTS. DE HORS A FIXED PLACE OF BUSINESS IT IS DIFFICULT TO IMPLEMENT THE TASK. TH E MATTER WAS NOT VIEWED FROM THAT ANGLE. 9. THE ASSESSEE INCURRED SOME EXPENDITURE IN INDIA. THE CONTEXTUAL ENQUIRY MAY THROW SOME LIGHT ON THE BUSINESS OPERAT IONS OF THE ASSESSEE. BOTH THE PARTIES AGREED THAT THE MATTER NEEDS TO BE EXAMINED AFRESH. WE THEREFORE IN THE INTEREST OF JUSTICE SET ASIDE TH E IMPUGNED ORDER ON THIS 4 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. COUNT AND RESTORE THE MATTER TO THE FILE OF A.O. W ITH DIRECTION TO DECIDE IT AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING ADE QUATE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. 3.2 IN THE SET ASIDE PROCEEDINGS THE A.O. AS WELL AS THE FIRST APPELLATE AUTHORITY WERE OF THE VIEW THAT THERE WAS A PE IN EXISTENCE IN IND IA WITHIN THE MEANING OF INDIA- MAURITIUS DOUBLE TAX AVOIDANCE AGREEMENT (DTAA) AND ACCORDINGLY THE BUSINESS INCOME OF GBP 2 08 20 596 WAS TAXABLE IN INDIA. WIT H REGARD TO THE EXPENDITURE THE ASSESSEE HAD CLAIMED BOTH DIRECT AS WELL AS INDIREC T EXPENDITURE AGGREGATING TO GBP 2 87 055 INCLUDING QUA DIRECT EXPENDITURE AT GBP 1 02 335. THE SAME OTHER THAN ON SALARY (GBP 51 302) BEING NOT FULLY VOUCHED 15% TH EREOF (GBP 51 033) I.E. GBP 7654.95 WAS DISALLOWED. THE FIRST APPELLATE AUTHORI TY FOUND THAT THE A.O. HAD NOT VERIFIED THE ASSESSEES CLAIM OF INDIRECT EXPENDITURE CLAIM ED AT GBP 1 84 720 AT ALL MERELY ACCEPTING THE CERTIFICATE ISSUED FROM THE AUDITORS (KPMG) FILED IN ITS RESPECT. THE ASSESSEE WAS ACCORDINGLY ASKED TO PROVE THE GENUINE NESS OF ITS CLAIM QUA BOTH DIRECT AND INDIRECT EXPENDITURE. THE ASSESSEE WAS UNABLE TO PR ODUCE EVIDENCES CLAIMING THAT THE MATTER BEING OLD IT WAS NOT POSSIBLE TO PRODUCE TH E VOUCHERS. IT HOWEVER SOUGHT TO EMPHASIZE THE REASONABLENESS OF ITS CLAIM WITH REFE RENCE TO THE PROFIT DISCLOSED BY IT VIS- -VIS THE OPERATING MARGIN OF OTHER FIRMS IN THE SA ME BUSINESS I.E. DISCLOSING CONSULTANCY INCOME. ON THE BASIS OF THE VOUCHERS AS SUPPLIED AS WELL AS THE CASE FOUND COMPARABLE BY HIM DCM INTERNATIONAL LTD. THE FIR ST APPELLATE AUTHORITY ENHANCED THE DISALLOWANCE TO 50% OF THE CLAIM FOR DIRECT EXPENDI TURE OTHER THAN ON SALARIES (I.E. GBP 51 033) I.E. AS AGAINST 15% THEREOF BY THE A.O. S IMILARLY 50% OF THE ASSESSEES CLAIM FOR INDIRECT EXPENDITURE SAVE ON SALARIES (GBP 1 1 3 942) I.E. GBP 70777.38 WAS ALSO DISALLOWED BY HIM TO THE EXTENT OF 15% THEREBY ENH ANCING THE TOTAL DISALLOWANCE TO GBP 60905.19. 3.3 FOR A.Y. 1999-2000 THE ASSESSEE CLAIMED TOTAL EXPENDITURE AT RS.95 22 523/- (GBP 139852) ON A TOTAL BUSINESS RECEIPT OF RS.1 31 75 235/-. THE SAME INCLUDED DIRECT EXPENDITURE AT GBP 66 701 OF WHICH THAT ON SALARIE S WAS AT GBP 38307. THE EXPENDITURE 5 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. ON SALARY COULD NOT BE ALLOWED IN VIEW OF THE NON-D EDUCTION OF TAX AT SOURCE AND CONSEQUENTLY APPLICABILITY OF SECTION 40(A)(III) O F THE ACT. FURTHER OF THE INDIRECT EXPENDITURE OF GBP 73 151 THE SAME BEING ONLY IN T HE NATURE OF HEAD OFFICE (HO) EXPENSES WERE TO BE IN TERMS OF SECTION 44C OF TH E ACT RESTRICTED TO 5% OF THE ADJUSTED PROFIT OR THE ACTUAL EXPENDITURE WHICHEVER IS LESS . THE SAME WAS ACCORDINGLY RESTRICTED TO RS.5 62 094/- I.E. AS AGAINST THE CLAIM FOR RS.49 80 852/-. IN APPEAL THE FIRST APPELLATE AUTHORITY HELD THAT THE RESTRICTION OF SECTIONS 40( A)(III) AND 44C WOULD NOT APPLY AND THE BENEFICIAL PROVISION OF DTA SHALL HOLD IN DETERMINI NG THE ASSESSEES INCOME. IN FACT THIS ASPECT HAD ALREADY BEEN CONSIDERED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR A.Y. 1997-98 WHEREAT VIDE ITS ORDER DATED 18.10.2002 IT HAD BEEN HELD BY THE TRIBUNAL THAT IF THE ASSESSEE IS FOUND TO HAVE A PERMANENT ESTABLISH MENT IN INDIA I.E. ON THE BASIS OF THE ENQUIRY SUGGESTED BY IT THE ASSESSEE SHALL BE ENTI TLED TO DEDUCTION IN RESPECT OF THE BUSINESS EXPENDITURE IN TERMS OF THE DTA WHICH WOUL D WHERE BENEFICIAL PREVAIL OVER THE STATUTE. AGGRIEVED BOTH THE ASSESSEE AND THE R EVENUE ARE IN APPEAL. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD. 4.1 WE SHALL BEGIN BY DELINEATING THE RESPECTIVE CA SES OF BOTH THE SIDES QUA THE PRINCIPAL ISSUE ARISING IN APPEAL AS FOLLOWS: THE ASSESSEES CASE A) THE APPELLANTS EMPLOYEES DEPUTED FOR THE GPI PR OJECT WERE MAINLY INVOLVED IN PLANNING THE IMPROVED WORK METHODS FOR THE SALE FOR CE OF THE GPI AND SUPERVISING /REVIEWING THE RESULTS OBTAINED BY ADOPTING THE SUG GESTED IMPROVED WORK METHODS; B) THE APPELLANT COMPANY WAS MANAGED BY THE BOARD O F DIRECTORS LOCATED AT MAURITIUS WHICH GAVE DIRECTIONS TO THE PRINCIPAL CONSULTANTS AND WHO IN TURN LOOKED AFTER THE ASSIGNMENTS IN INDIA FURTHER DIRECTING T HE CONSULTANTS DEPUTED ON THE PROJECT. THE COMMUNICATION BETWEEN THE DIRECTORS AND THE PRI NCIPAL CONSULTANTS WAS MAINLY OVER PHONE OR THROUGH ELECTRONIC MEDIA. THE MARKETING AN D THE CLIENT CONTACTS TAKES STAND INITIATED THROUGH TELEMARKETING FROM OVERSEAS FOLLO WED BY PERSONAL MEETINGS WITH POTENTIAL CLIENTS BY THE APPELLANTS REPRESENTATIVE S AND WHO IN TURN REPORT TO THE PRINCIPAL CONSULTANTS. BASED ON THESE DISCUSSIONS AND DIRECTI ONS FROM THE BOARD THE CONTRACTS/AGREEMENTS WITH THE CLIENTS ARE FINALIZED . THE PLACE OF THE MANAGEMENT OF THE ASSESSEE APPELLANT WAS THUS SITUATED IN MAURITIUS W HEREAT THE ENTIRE DECISION MAKING 6 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. POWERS WERE LOCATED. THE CONTRACTS THOUGH EXECUTED IN INDIA DID NOT ENTAIL RENDERING OF ANY MANAGERIAL SERVICES SO THAT THERE WAS NO PLACE OF MANAGEMENT IN INDIA. IN THIS REGARD IT IS CLARIFIED THAT THE HOTEL ROOMS/ACCOMM ODATIONS USED BY THE EMPLOYEES IN INDIA WERE ONLY FOR THE STAY I.E. FOR RESIDENCE AND NOT USED AS AN OFFICE. C) THE EMPLOYEES DEPUTED ON THE DIFFERENT PROJECTS ARE ROTATED BOTH FOR DIFFERENT PROJECTS IN INDIA AS WELL AS THAT ABROAD FROM TIME TO TIME I.E. DEPENDING ON THE REQUIREMENT OF EACH PROJECT SO THAT THE EMPLOYEES AT GPI DID NOT REMAIN CONSTANT. FURTHER AS A MATTER OF BUSINESS STRATEGY THE APPE LLANT ENSURE THAT THERE WAS NO DISCONTINUANCE OF THE PEOPLE ON THE PROJECT; D) AS REGARDS THE MEETINGS ORGANIZED BY THE TASK FO RCE (COMPRISING OF THE EMPLOYEES OF THE APPELLANT AND GPI) FOR THE PURPOSE OF DISCUS SING THE PROGRESS/PERFORMANCE/IMPLEMENTATION OF THE PROJECT THE SAME WERE NORMALLY CONDUCTED AT THE PREMISES OF THE GPI I.E. WHERE THE MANAGEM ENT/STAFF OF THE GPI WAS LOCATED. THESE MEETINGS WERE HELD MAINLY FOR REVIVING THE PR OJECT. THE SEMINARS WERE ALSO ORGANIZED BY THE TASK FORCE WHICH WERE FOR THE PUR POSE OF DISSEMINATING INFORMATION AND TO DISCUSS THE FIELD EXPERIENCE WITH THE SALES PERS ONNEL OF GPI. AS THE PROJECT WORK WAS PRIMARILY FOR IMPROVEMENT OF SALES MEETINGS WERE H ELD AT DIFFERENT VENUES. THE DISCUSSION/TRAINING SESSIONS FOR THE WHOLESALE AND RETAIL DEALERS OF GPI WERE CONDUCTED BY THE TASK FORCE AT THE DEPOT PREMISES AND WHILE O N FIELD ROUNDS. AS SUCH THERE WAS NO FIXED PLACE OF BUSINESS AT ITS DISPOSAL IN INDIA. E) THE COMMUNICATION BETWEEN THE CONSULTANTS INTER SE ; THE CONSULTANTS AND PRINCIPAL CONSULTANTS AS WELL AS BETWEEN THE PRINCIPAL CONSU LTANTS AND THE BOARD (TOP MANAGEMENT) WAS NOT FROM ANY FIXED PLACE BUT VARIO USLY THROUGH DIFFERENT MEDIUMS SUCH AS TELEPHONE FAX EMAIL ETC. USING THE FACIL ITIES NORMALLY AVAILABLE IN CLOSE PROXIMITY OF THE PLACE OF STAY. THERE WAS UNDER THE CIRCUMSTANCES NO COMMON OR FIXED ESTABLISHMENT IN INDIA. RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF CIT VS. VISAKHAPATNAM PORT TRUST [1983] 144 ITR 146 (AP); AND AIRLINES ROTABLES LTD. VS. JT. DIT(IT) [2011] 44 SOT 368 (MUM) BESIDES THE TAX TREATY ITSELF EVEN THOU GH A NUMBER OF DECISIONS FIND PLACE IN THE COMPILATION OF CASE LAW FILED BY THE ASSESSEE. THE REVENUES CASE A) AS APPARENT FROM THE CONTRACTS DATED 17.05.1996 AND 26.08.1997 THE SAME IS FOR THE APPLICATION OF ITS PERFORMANCE INDEX PROGRAMME (PIP) FOR ENHANCING THE MARKET. TEAMS WERE DEPUTED FOR THE PURPOSE WHICH WERE REQU IRED TO RENDER SERVICES IN RELATION TO THE IMPLEMENTATION OF PIP WHICH REQUIRED CONTINUOU S INPUTS FROM THE CLIENTS FOR ITS 7 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. EFFECTIVE IMPLEMENTATION. THE INPUTS ARE GENERATED FROM THE CONTINUOUS INTERACTION BETWEEN THE EMPLOYEES OF THE GPI AND THE APPELLANT AND FURTHER SUBJECT TO - REVIEW AND ANALYSIS FOR FURTHER COURSE OF ACTION. THE RENDERIN G OF THE MANAGERIAL SERVICES TO GPI IS THUS MANIFEST IN THE VERY EXECUTION OF THE CONTRACT /S SHARES OF THE GPRS PRODUCT/S. THERE WAS THUS A PLACE OF MANAGEMENT POWER OF WHICH VEST ED IN THE TEAMS DEPUTED FOR THE PURPOSE; B) THE IMPLEMENTATION PROGRAMME WAS TO BE CARRIED O VER THREE PHASES AGGREGATING TO 80 WEEKS. A PLACE OF BUSINESS AS DEFINED IN THE MODEL CONVENTION OF KLAUS VOGEL (3 RD EDITION) WOULD COVER ANY PREMISES FACILITIES INST ALLATIONS USED FOR CARRYING ON THE BUSINESS OF THE ENTERPRISES WHETHER OR NOT THEY ARE USED EXCLUSIVELY FOR THAT PURPOSE. A PLACE OF BUSINESS MAY ALSO EXIST WHERE NO PREMISES ARE AVAILABLE OR REQUIRED FOR CARRYING ON THE BUSINESS OF THE ENTERPRISES AND IT MAY SIMP LY AMOUNT TO SPACE AT ITS DISPOSAL. ALL IT THUS MEANS IS SOME TANGIBLE ASSETS USED FOR CARRYIN G ON THE BUSINESS AND IN MARGINAL CASES EVEN ONE TANGIBLE ASSET MAY BE SUFFICIENT. IN OTHER WORDS THERE ARE NO QUANTITATIVE RESTRICTIONS THERETO AND A LIVING ACCOMMODATION OF A TRAVELLING SALESMAN FOR INSTANCE MAY WELL CONSTITUTE A PE. FURTHER IT IS IMMATERIAL WHETHER THE PREMISES IS OWNED OR RENTED OR MADE AVAILABLE TO THE ENTERPRISE IN ANY O THER MANNER. AS APPARENT ALL THE ACTIVITIES RELATING TO THE WORK OF THE APPELLANT IN RELATION TO THE CONTRACT WORK WERE CARRIED OUT IN INDIA. THIS CAN ALSO BE INFERRED FRO M THE HUGE CLAIM OF RS.1.69 CR. IN RESPECT OF EXPENSES INCURRED IN INDIA. THE ASSESSEE S CLAIM THAT THERE WAS NO CONTRADICTORY IN-AS-MUCH AS IT ITSELF CLAIMS THE ST AFF TO BE STAYING IN HOTEL. IF AS CLAIMED THEY HAD NOT USED ANY OF THE FACILITIES OR THE OFFI CE PREMISES OF GPI FOR THE PURPOSE OF WORK OR AS A PLACE OF THEIR WORK AS THE CASE MAY B E WHERE THEY HAD WORKED FROM? THE HOTEL ROOMS WHERE THE CONSULTANTS/PRINCIPAL CONSULT ANTS STAYED IN INDIA MUST IN THAT CASE NECESSARILY BE REGARDED AS THEIR PLACE OF WORK AND FOR CARRYING OUT THEIR ACTIVITY IN INDIA. THE SAME MUST THUS BE CONSTRUED AS A FIXED PLACE I .E. A PERMANENT ESTABLISHMENT BY DEFINITION. RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF DIT(IT) VS. MORGAN STANLEY & CO. [2007] 292 ITR 416 (SC). THE DECISION IN THE CASE O F AIRLINES ROTABLES LTD. (SUPRA) WAS DISTINGUISHED ON THE BASIS THAT THE SAME WAS IN RESPECT OF AGENCY PE WHICH IS NOT APPLICABLE IN THE INSTANT CASE AS THERE IS NO PROVI SION FOR THE SAME IN THE INDIA-MAURITIUS TAX TREATY. 4.2 WITHOUT DOUBT THE SOLE ISSUE ARISING IN THE IN STANT APPEAL THE OTHER BEING ALTERNATE IS THE DETERMINATION AS TO WHETHER A PER MANENT ESTABLISHMENT OF THE ASSESSEE- COMPANY WITHIN THE MEANING OF THE TERM AS DEFINED UNDER THE INDIA-MAURITIUS DTAA 8 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. CAN BE SAID TO EXIST IN RELATION TO ITS GPI PROJECT . THE MATTER IS THEREFORE PRINCIPALLY FACTUAL THOUGH WOULD REQUIRE AN EXPOSITION AND A C LEAR UNDERSTANDING OF THE CONCEPT OF PE AND TOWARD WHICH THE PARTIES BEFORE US HAVE REL IED ON THE STANDARD TEXTS AS WELL AS THE DECISIONS BY THE HIGHER COURTS OF LAW. THIS IS EVEN OTHERWISE INCUMBENT AS THE SAID CLEAR UNDERSTANDING MUST NECESSARILY PRECEDE THE APPLICAT ION OF THE CONCEPT AND FURTHER FOR THE REASON THAT THE ORDER BY THE TRIBUNAL A JUDICI AL BODY MUST REFLECT AND BEAR OUT THE SAME (UNDERSTANDING). THE PE IS AN IMPORTANT ISSUE IN THE TREATY BASED INTERNATIONAL FISCAL LAW AND ALL THE THREE MODEL CONVENTIONS NAMELY T HE UN THE OECD MODEL AND THE US MODEL USE IT AS AN INSTRUMENT TO ESTABLISH TAX JU RISDICTION OVER A BUSINESS INCOME OF A FOREIGN ENTITY. THE BASIS OF THE CONCEPT OF PE IS T HAT PROFIT OF AN ENTERPRISE OF ONE CONTRACTING STATE IS TAXABLE IN THE OTHER STATE ONL Y IF THE ENTERPRISE MAINTAINS A PE IN THE LATTER STATE AND FURTHER TO THE EXTENT THAT PROFI T ATTRIBUTABLE THERETO (PE) (ART. 7). THE PE THUS SEEKS TO COMPROMISE AND HARMONIZE THE TAXING J URISDICTION BETWEEN THE SOURCE STATE AND RESIDENCE STATE FOR THE PURPOSES OF TAXATION OF BUSINESS PROFITS. THE SAME MUST BE UNDERSTOOD WITH A VIEW TO ARRIVE AT THE DEGREE OF E CONOMIC PENETRATION AS PER THE APPLICABLE TREATY THAT JUSTIFIES A NATION IN TREATI NG A FOREIGN PERSON IN THE SAME MANNER AS A DOMESTIC PERSON. THE PROFITS ATTRIBUTABLE TO A PE BEING TAXABLE IN THE STATE OF SOURCE ARE EITHER EXEMPT IN THE STATE OF RESIDENCE OR IT ALLOW S CREDIT FOR THE TAXES PAID IN THE SOURCE STATE BY THE PE ON SUCH PROFITS. THERE IS THUS A TR ANSFER OF THE TAXING JURISDICTION BY THE STATE OF RESIDENCE TO THE STATE OF SOURCE AND WHIC H SHALL EXPLAIN OUR STATING OF THE PE BEING A CONCEPT DEVISED TO HARMONIZE AND COMPROMISE THE OPPOSING FISCAL INTERESTS OF THE CONTRACTING STATES. THIS UNDERSTANDING CORRESPONDS WITH THE VIEW AS EXPLAINED IN THE LANDMARK DECISION OF VISAKHAPATNAM PORT TRUST (SUPRA) ON WHICH HEAVY RELIANCE WAS PLACED BEFORE US AS WOULD BE APPARENT FROM THE FOL LOWING OBSERVATION BY THE HONBLE COURT (AT PG. 162): .THE WORDS PERMANENT ESTABLISHMENT POSTULATE THE EXISTENCE OF A SUBSTANTIAL ELEMENT OF AN ENDURING OR PERMANENT NAT URE OF A FOREIGN ENTERPRISE IN ANOTHER WHICH CAN BE ATTRIBUTED TO A FIXED PLACE OF BUSINESS IN THAT COUNTRY. IT SHOULD BE OF SUCH A NATURE THAT IT WOULD AMOUNT TO A VIRTUAL 9 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. PROJECTION OF THE FOREIGN ENTERPRISE OF ONE COUNTRY ONTO THE SOIL OF ANOTHER COUNTRY. IT IS GENERALLY DEFINED IN ARTICLE 5 OF THE TAX TRE ATY AND THOUGH THE INSTANT CASE SHALL BE GOVERNED STRICTLY BY ARTICLE 5 OF THE INDIA-MAURITI US DTAA IT WOULD BE RELEVANT TO DELINEATE THE STRUCTURE OF A STANDARD ARTICLE 5; ARTICLE 5(1) DEFINES A PERMANENT ESTABLISHMENT AND LAYS DOWN THE BASIC RULE THAT A B USINESS ACTIVITY CARRIED ON THROUGH A FIXED PLACE OF BUSINESS WOULD CONSTITUTE THE PE OF THE TAX PAYER. ARTICLE 5(2) MENTIONS SEVERAL EXAMPLES OF FIXED PLACE OF BUSINESS. THESE EXAMPLES COULD ALSO BE SAID TO FORM THE POSITIVE LIST. ARTICLE 5(3) INCLUDES CERTAIN CONSTRUCTION RELATED ACTIVITIES AN D SERVICE RELATED ACTIVITIES WITHIN THE SCOPE OF PE IF SUCH A CTIVITIES CONTINUE FOR CERTAIN PERIOD. ARTICLE 5(4) MENTIONS THAT A PE SHALL BE DEEMED NOT TO INCLUDE C ERTAIN ACTIVITIES. THESE COULD BE SAID TO FORM THE NEGATIVE LIST. ARTICLE 5(5) STIPULATES RULES FOR DETERMINING WHEN AN ENTERPRISE REPRESENTED BY AN AGENT WOULD HA VE A PE. ARTICLE 5(6) DEALS WITH THE CASE OF AN ENTERPRISE CARRYING ON INSURANCE BUSINES S. ARTICLE 5(7) AND ARTICLE 5(8) SET OUT RULES IN RESPECT OF AN ENTERPRISES REPRESENTED BY A N AGENT OR AN ENTERPRISES RELATED TO IT. 4.3 WE MAY PROCEED FURTHER BY REPRODUCING ARTICLE 5 OF THE DTAA WHICH READS AS UNDER: CHAPTER II DEFINITIONS ARTICLE 5 - PERMANENT ESTABLISHMENT - 1. FOR THE PURPOSES OF THIS CONVENTION THE TERM PERMANENT ESTABLISHMENT MEAN S A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF THE ENTERPRI SE IS WHOLLY OR PARTLY CARRIED ON. 2. THE TERM PERMANENT ESTABLISHMENT SHALL INCLUDE ( A ) A PLACE OF MANAGEMENT ; ( B ) A BRANCH ; ( C ) AN OFFICE ; ( D ) A FACTORY ; ( E ) A WORKSHOP ; ( F ) A WAREHOUSE IN RELATION TO A PERSON PROVIDING S TORAGE FACILITIES FOR OTHERS ; 10 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. ( G ) A MINE AN OIL OR GAS WELL A QUARRY OR ANY OTHE R PLACE OF EXTRACTION OF NATURAL RESOURCES ; ( H ) A FIRM PLANTATION OR OTHER PLACE WHERE AGRICULT URAL FORESTRY PLANTATION OR RELATED ACTIVITIES ARE CARRIED ON ; ( I ) A BUILDING SITE OR CONSTRUCTION OR ASSEMBLY PROJ ECT OR SUPERVISORY ACTIVITIES IN CONNECTION THEREWITH WHERE SUCH SITE PROJECT OR SUPERVISORY ACTIVITY CONTINUES FOR A PERIOD OF MORE THAN NINE MONTHS. 3. NOTWITHSTANDING THE PRECEDING PROVISIONS OF THIS A RTICLE THE TERM PERMANENT ESTABLISHMENT SHALL BE DEEMED NOT TO IN CLUDE: ( A ) THE USE OF FACILITIES SOLELY FOR THE PURPOSE OF STORAGE OR DISPLAY OF MERCHANDISE BELONGING TO THE ENTERPRISE ; ( B ) THE MAINTENANCE OF A STOCK OF GOODS OR MERCHANDI SE BELONGING TO THE ENTERPRISE SOLELY FOR THE PURPOSE OF STORAGE OR DIS PLAY ; ( C ) THE MAINTENANCE OF A STOCK OF GOODS OR MERCHANDI SE BELONGING TO THE ENTERPRISE SOLELY FOR THE PURPOSE OF PROCESSING BY ANOTHER ENTERPRISE ; ( D ) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOL ELY FOR THE PURPOSE OF PURCHASING GOODS OR MERCHANDISE OR FOR COLLECTING I NFORMATION FOR THE ENTERPRISE ; ( E ) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOL ELY ( I ) FOR THE PURPOSE OF ADVERTISING ( II ) FOR THE SUPPLY OF INFORMATION ( III ) FOR SCIENTIFIC RESEARCH OR ( IV ) FOR SIMILAR ACTIVITIES WHICH HAVE A PREPARATORY OR AUXILIARY CHARACTER FOR THE ENTERPRISE. 4. NOTWITHSTANDING THE PROVISIONS OF PARAGRAPHS ( 1 ) AND ( 2 ) OF THIS ARTICLE A PERSON ACTING IN A CONTRACTING STATE FOR OR ON BEHA LF OF AN ENTERPRISE OF THE OTHER CONTRACTING STATE [OTHER THAN AN AGENT OF AN INDEPENDENT STATUS TO WHOM THE PROVISIONS OF PARAGRAPH ( 5 ) APPLY] SHALL BE DEEMED TO BE A PERMANENT ESTABLISHMENT OF THAT ENTERPRISE IN THE F IRST-MENTIONED STATE IF : ( I ) HE HAS AND HABITUALLY EXERCISES IN THAT FIRST-ME NTIONED STATE AN AUTHORITY TO CONCLUDE CONTRACTS IN THE NAME OF THE ENTERPRISE UNLESS HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHANDISE FOR THE ENTERPRISE ; OR ( II ) HE HABITUALLY MAINTAINS IN THAT FIRST-MENTIONED STATE A STOCK OF GOODS OR MERCHANDISE BELONGING TO THE ENTERPRISE FROM WHI CH HE REGULARLY FULFILS ORDERS ON BEHALF OF THE ENTERPRISE. 5. AN ENTERPRISE OF A CONTRACTING STATE SHALL NOT BE DEEMED TO HAVE A PERMANENT ESTABLISHMENT IN THE OTHER CONTRACTING ST ATE MERELY BECAUSE IT CARRIES ON BUSINESS IN THAT OTHER STATE THROUGH A B ROKER GENERAL COMMISSION 11 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. AGENT OR ANY OTHER AGENT OF AN INDEPENDENT STATUS WHERE SUCH PERSONS ARE ACTING IN THE ORDINARY COURSE OF THEIR BUSINESS. HO WEVER WHEN THE ACTIVITIES OF SUCH AN AGENT ARE DEVOTED EXCLUSIVELY OR ALMOST EXCLUSIVELY ON BEHALF OF THAT ENTERPRISE HE WILL NOT BE CONSIDERED AN AGENT OF AN INDEPENDENT STATUS WITHIN THE MEANING 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 R ESIDENT OF THE OTHER CONTRACTING STATE OR WHICH CARRIES ON BUSINESS IN THAT OTHER CONTRACTING STATE (WHETHER THROUGH A PERMANENT ESTABLISHMENT OR OTHERWISE) SHALL NOT OF ITSELF CONSTITUTE EITHER COMPANY A PERMANENT ES TABLISHMENT OF THE OTHER. ARTICLE 5 OF THE DTA IS THUS IN SYNC WITH A STANDAR D ARTICLE 5 EXCEPT THAT THERE IS NO CLAUSE SPECIFICALLY FOR SERVICE PE SO THAT THE UND ERSTANDING ARRIVED AT WITH REFERENCE TO THE OTHER TAX TREATIES WOULD THUS ALSO BECOME APPLI CABLE AND RELEVANT FOR THE PURPOSE OF THE INSTANT CASE. PE IS ALSO DEFINED U/S. 92F(IIIA) OF THE ACT TO MEAN A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF THE ENTERPRI SES IS WHOLLY OR PARTLY CARRIED OUT. THE SAME IT WOULD BE SEEN IS PARI MATERIA WITH THE DEFINITION OF THE TERM UNDER THE TREATY WHICH THOUGH IS NOT OF MUCH CONSEQUENCE IN-AS-MUCH AS ONLY THE DEFINITION PER THE TREATY SHALL HOLD; SECTION 92F BEING APPLICABLE ONLY WITH REFERENCE TO SECTIONS DEFINED THERE- UNDER AND WHICH DOES NOT INCLUDE SECTION 90. THE SA ME HOWEVER STANDS REFERRED TO SO AS TO BRING FORTH THE UNANIMITY OF THE CONCEPT BOTH UN DER THE DOMESTIC LAW AS WELL AS THE TAX TREATY. THE FIXED PLACE CONCEPT HAS THUS FOLLOWING THE ELEMENTS BUILT THEREIN: THERE MUST BE A FIXED PLACE OF BUSINESS ( SITUS TEST) ; THE FIXED PLACE OF BUSINESS MUST BE LOCATED [IN A] CERTAIN TERRITORIAL AREA ( LOCUS TEST ); THE USE OF THE FIXED PLACE OF BUSINESS MUST LAST FO R A CERTAIN PERIOD OF TIME ( TEMPUS TEST ); THE TAXPAYER MUST HAVE A CERTAIN RIGHT OF USE [OVER ] THE FIXED PLACE OF BUSINESS ( IUS TEST ); THE ACTIVITIES PERFORMED THROUGH THE FIXED PLACE OF BUSINESS MUST BE OF A BUSINESS CHARACTER ( BUSINESS ACTIVITY TEST ) 4.4 IN ORDER TO THEREFORE DECIDE WHETHER A PE STO OD CONSTITUTED ONE HAS TO UNDERTAKE A FACTUAL AND FUNCTIONAL ANALYSIS OF THE ACTIVITIES UNDERTAKEN BY THE ESTABLISHMENT. THE DECISION BY THE TRIBUNAL IN THE FIRST ROUND (FOR A. Y. 1997-98) WHICH IS EVEN OTHERWISE 12 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. BINDING ON AND INCUMBENT FOR THE PARTIES TO FOLLOW IN-AS-MUCH AS THE SAME STANDS NOT CONTESTED SO THAT IT HAS ASSUMED FINALITY BECOMES RELEVANT IN THIS REGARD POINTS AS IT DOES TO THE AREAS ALONG WHICH ENQUIRY WOULD HAVE TO BE FOCUSED AS WELL AS OF THE MATTER AS AFORE-STATED BEING PRIMARILY FACTUAL. SECONDLY IT NEEDS TO BE CLARIFIED AS WELL AS EMPHASIZED THAT THE WORD PERMANENT IN THE TERM P ERMANENT ESTABLISHMENT DOES NOT IN ANY MANNER SIGNIFY OR DENOTE A PERMANENT CHARACTER OR THAT THE RIGHT TO USE THE PLACE SHOULD BE PERPETUAL BUT THAT THERE MUST BE A CERTA IN DEGREE OF PERMANENCE. NOT ONLY THEREFORE THE EXISTENCE OF PHYSICAL PRESENCE A MUS T IT MUST HAVE A CERTAIN DEGREE OF ENDURANCE ASSOCIATED THEREWITH EXCLUDING ONE WHICH IS TEMPORARILY IN NATURE. A FIXED PLACE WOULD THOUGH NOT EXCLUDE A MOVABLE PLACE OF B USINESS VIZ. A PETROLEUM DRILLING RIG MAY CONSTITUTE A PE IF IT IS MOVED FREQUENTLY FROM ONE LOCATION TO ANOTHER. HOW THE FIXED PLACE OR THE RIGHT TO USE THE SAME IS HOWEVER SECUR ED IS THOUGH OF LITTLE CONSEQUENCE SO THAT THE SAME MAY BE OWNED RENTED OR OTHERWISE ACQ UIRED IN ANY OTHER MANNER. EVEN A RIGHT WHICH IS NOT LEGAL IN ITS NATURE MAY THEREFO RE BE OF NO ADVERSE CONSEQUENCE. IN FACT IN THE INSTANT CASE AS WELL WHETHER THE HOTE L ROOMS COULD BE LEGALLY OR CONTRACTUALLY USED FOR BUSINESS PURPOSES IS NOT ASCERTAINED THOU GH WHERE SO IT COULD BE CONSIDERED AS PE DESPITE SUCH USER BEING PROSCRIBED. FURTHER ON THE SAME HOWEVER I.E. THE ESTABLISHMENT MUST HAVE A COMMERCIAL COHERENCE OR PURPOSE. DE HORS THE SAME THE ENDURING QUALITY WOULD OF ITSELF BE OF NO MOMENT. ON THIS ASPECT OF THE MATTER THOUGH THERE IS LITTLE OR NO DOUBT IN THE PRESENT CASE IN- AS-MUCH AS THE USER OF THE CLIENTS PREMISES OR THE HOTEL IF AND TO THE EXTENT SO IS ONLY FOR BUSINESS PURPOSES. 4.5 IT IS CLEAR THAT THE RULE TO BE INVOKED IN THE PRESENT CASE SHALL BE THE BASE RULE OF ART. 5(1) WHICH IS ALSO COMMONLY REFERRED AS THE BASIC RULE PE. THE SERVICE RULE OR ANY OTHER SUB-RULE FOR THAT MATTER IS ONLY DERIVED FROM THIS BASIC RULE AND NOT IN DEROGATION THEREOF. ITS PRINCIPAL INGREDIENTS STAND ALREADY DELINEATED HEREINBEFORE. THE SAME FIND EXPRESSION IN THE DECISION IN THE CASE OF AIRLINES ROTABLES LTD. (SUPRA) RELIED UPON BY THE ASSESSEE SIGNIFYING ITS PARAMETERS AG AIN WITH REFERENCE TO JUDICIAL 13 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. PRECEDENTS AND STANDARD TEXT IN TERMS OF THE OECD C OMMENTARY. THE SAME BEING RELEVANT WE MAY REPRODUCE IT AS UNDER: 10. IN TERMS OF THE PROVISIONS OF ARTICLE 5(1) I.E. THE BASIC RULE A PE IS SAID TO EXIST IN THE OTHER CONTRACTING STATE WHEN A N ENTERPRISE OF ONE OF THE CONTRACTING STATES HAS A FIXED PLACE OF BUSINESS IN THAT OTHER CONTRACTING STATE THROUGH WHICH BUSINESS IS CARRIED OUTWHOLLY OR PARTLY. THERE ARE THREE CRITERIA EMBEDDED IN THIS DEFINITIONPHYSICAL CRITERION I.E. EXISTENCE OF PHYSICAL LOCATION SUBJECTIVE CRITERION I.E. RIGHT TO USE THAT PLACE AND FUNCTIONALITY CRITERION I.E. CARRYING OUT OF BUSINESS THROUGH THAT PLACE. IT IS ONLY WHEN THESE THREE CONDITIONS ARE SATISFIED A P E UNDER THE BASIC RULE CAN BE SAID TO HAVE COME INTO EXISTENCE. 11. AS OBSERVED BY A CO-ORDINATE BENCH IN THE CASE OF WESTERN UNION FINANCIAL SERVICES INC. V. ASSTT. DIT [2007] 104 ITD 34 (DELHI) 'A PE SHOULD PROJECT IN THE FOREIGN ENTERPRISES IN INDIA (THE OTHER CONTRACTING STATE)'. IN THE CASE OF CIT V. VISAKHAPATNAM PORT TRUST [1983] 144 ITR 146 1 HONBLE ANDHRA PRADESH HIGH COURT AFTER AN ELABO RATE SURVEY OF WORLDWIDE JUDICIAL PRECEDENTS AND TECHNICAL LITERAT URE ON THIS ISSUE HAS OBSERVED THAT 'IN OUR OPINION THE WORDS PE POST ULATE THE EXISTENCE OF SUBSTANTIAL ELEMENT OF ENDURING OR PERMANENT NATURE OF A FOREIGN ENTERPRISE IN ANOTHER COUNTRY WHICH CAN BE ATTRIBUTED TO A FIX ED PLACE OF BUSINESS IN THAT COUNTRY'. THEIR LORDSHIPS FURTHER ADDED THAT ' IT SHOULD BE OF SUCH A NATURE THAT IT WOULD AMOUNT TO A VIRTUAL PROJECTION OF FOREIGN ENTERPRISE OF ONE COUNTRY INTO THE SOIL OF ANOTHER COUNTRY'. INCI DENTALLY THE TREATY DEFINITION OF PE BASIC CLAUSE WHICH CAME UP FOR CONSIDERATION OF THEIR LORDSHIPS WAS EXACTLY THE SAME AS IN THE CASE BEFO RE US. 12. 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 A ND 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 O THERWISE AT THE DISPOSAL OF THE ASSESSEE AND A MERE OCCASIONAL FACTUAL USE OF PLACE DOES NOT SUFFICE. AS OBSERVED BY A SPECIAL BENCH OF TRIBUNAL IN THE CASE OF MOTOROLA INC. V. DY. CIT [2005] 95 ITD 269 (DELHI) IT HAS UPHELD THIS SCHOO L OF THOUGHT AND INTER ALIA OBSERVED AS FOLLOWS : '. . . THE OECD COMMENTARY ON DOUBLE TAXATION CONVE NTIONS REFERS TO A FIXED PLACE AS A LINK BETWEEN THE PLACE OF BUSINE SS AND A SPECIFIC GEOGRAPHICAL POINT. IT HAS TO HAVE CERTAIN DEGREE O F PERMANENCE. IT IS 14 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. EMPHASIZED THAT TO CONSTITUTE A FIXED PLACE OF BUS INESS THE FOREIGN ENTERPRISE MUST HAVE AT ITS DISPOSAL CERTAIN PREMIS ES OR PART THEREOF. PHILIP BAKER IN HIS COMMENTARY ON DOUBLE TAXATION CONVENTIONS (THIRD EDITION) STATES THAT THE FIXED PLACE IS VERY MUCH THAT OF A PHYSICAL LOCATION I.E. ONE MUST BE ABLE TO PINPOINT TO A PHYSICAL LOCATIO N AT THE DISPOSAL OF THE ENTERPRISE THROUGH WHICH THE BUSINESS IS CARRIED ON. ON THE OTHER HAND POSSESSION OF A MAILING ADDRESS IN A STATE WITHOUT AN OFFICE TELEPHONE LISTING OR BANK ACCOUNT HAS BEEN HELD NOT TO CONSTITUTE A PE. FURTHER THE FIXED PLACE OF BUSINESS NEED NOT BE OWNED OR LEASED BY THE ENTERPRISE PROVIDED 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 PURPOSE OF PROJECT UNDERTAKEN ON BEHALF OF THE OWNER OF THE PREMISES .' [EMPHASIS SUPPLIED]. 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 OF THE FOREIGN ENTERPRIS E IS CARRIED OUT BUT ALSO SUCH A PLACE SHOULD BE AT THE DISPOSAL OF THE FOREI GN ENTERPRISE IN THE SENSE THAT FOREIGN ENTERPRISE SHOULD HAVE SOME SORT OF A RIGHT TO USE THE SAID PHYSICAL LOCATION FOR ITS OWN BUSINESS. 14. THE THIRD AND FINAL TEST FOR EXISTENCE OF PE U NDER THE BASIC RULE IS THE FUNCTIONALITY TEST I.E. THE FIXED PLACE OF BUSINESS SHOULD BE USED FOR THE PURPOSES OF BUSINESS OF THE FOREIGN ENTERPRISE. AS OBSERVED BY THE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF MOTOROLA INC. ( SUPRA ) SUCH A USE SHOULD NOT BE CONFINED TO MERE DOING THE WORK FOR O WNER OF THE ENTERPRISE OWNING THAT PHYSICAL LOCATION AND MUST EXTEND TO CA RRYING ON OF THE BUSINESS OF THE FOREIGN ENTERPRISE. THE BUSINESS CA RRIED OUT AT THAT PLACE SHOULD BE SUCH AS TO AMOUNT TO AS WAS OBSERVED BY HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF VISAKHAPATNAM PORT TRUST ( SUPRA ) 'VIRTUAL PROJECTION OF ENTERPRISE OF ONE COUNTRY IN TO SOIL OF ANOTHER COUNTRY'. THE PE MUST PROJECT THE FOREIGN ENTERPRIS E OF WHICH IT IS CLAIMED TO BE PE. IT IS IN THIS SENSE THAT THE BUSINESS MUS T BE CARRIED ON AT THE PHYSICAL LOCATION IN THE OTHER COUNTRY. IT IS ALSO IMPORTANT TO BEAR IN MIND THAT WHEN SUCH A PHYSICAL LOCATION HAS COME INTO PL AY AS AN END RESULT OF BUSINESS HAVING BEEN CARRIED OUT SUCH AS A BARGE I N TERRITORIAL WATERS OF THE OTHER COUNTRY UPON HAVING GIVEN SUCH BARGES ON HIRE TO A RESIDENT OF THE OTHER COUNTRYIN THE CASE OF A PERSON WHO IS ENGAGE D IN THE BUSINESS OF GIVING BARGES ON HIRE THE BUSINESS CANNOT BE SAID TO HAVE BEEN CARRIED OUT ON SUCH PLACE QUA THAT BUSINESS ACTIVITY. IT WAS SO HELD BY A CO-ORD INATE BENCH IN THE CASE OF ADDL. DIT (INTERNATIONAL TAXATION) V. VALENTINE MARITIME (MAURITIUS) LTD. [IT APPEAL NO. 1532 (MUM.) OF 2005 DATED 5-4- 15 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. 2010]/[2010] 3 TAXMANN.COM 92 (MUM. - ITAT) WHEREIN IT WAS HELD THAT THAT 'BY NO STRETCH OF LOGIC WHEN AN ASSESSEE IS I N THE BUSINESS OF HIRING OUT THE BARGES A BARGE SO HIRED OUT CANNOT BE VIEWED A S A PLACE OF CARRYING ON ITS BUSINESS WHICH AS WE UNDERSTAND IS LIMITED T O QUA THAT BARGE THE BARGE HAVING BEEN SO HIRED OUT'. 4.6 WE MAY PROCEED WITH OUR ANALYSIS OF THE FACTS O F THE CASE. OUR FIRST OBSERVATION EVEN AS EMPHASIZED BY THE FIRST APPELLATE AUTHORITY IS THAT THE ASSESSEES CASE IS SANS ANY MATERIAL DESPITE THE FACT OF THE MATTER HAVING BEE N RESTORED BACK AT THE INSTANCE OF THE TRIBUNAL (FOR ONE YEAR) SO AS TO ENABLE A FACTUAL D ETERMINATION OF THE ISSUE AND THE OBSERVATIONS WHEREIN (REPRODUCED HEREINBEFORE) WOU LD APPLY EQUALLY FOR THE OTHER YEAR AS WELL. THE ASSESSEE HAS SOUGHT TO BUILD ITS CASE ON AMONG OTHERS THE BASIS THAT WHAT WAS BEING CARRIED IN INDIA WERE ESSENTIALLY PREPARA TORY OR AUXILIARY SERVICES EXCLUDED UNDER ARTICLE 5(3); THE EMPLOYEES ONLY GATHERING AN D COLLATING THE DATA FOR BEING TRANSMITTED TO THE HEAD OFFICE AND THEN ACTING ON THE INSTRUCTIONS RECEIVED THERE-FROM. THE SAME APART FROM THE FACT THAT WHERE SO COULD ONLY BE EASILY EXHIBITED PROVING THE ASSESSEES CLAIM IS COMPLETELY INCONSISTENT WITH T HE MODUS OPERANDI FOLLOWED AS EXPLAINED BY THE ASSESSEE ITSELF ENTAILING RENDERI NG OF EXTENSIVE IF NOT THE ENTIRE SERVICES IN INDIA AND WHICH CONSTITUTES THE ASSESSEES BUSI NESS IN INDIA I.E. TO APPLY RENOIR PERFORMANCE IMPROVEMENT PROGRAMME (RPIP) DESIGNED B Y IT FOR IMPROVING THE MANAGEMENT PERFORMANCE QUOTIENT OF AN ENTERPRISE BY ENHANCING THE OPERATING PARAMETERS AS REDUCING COSTS IMPROVING THE WORK M ETHODS/SERVICES PROVIDING EFFICIENT MANAGEMENT CONTROL AS DELINEATED BY THE ASSESSEES LETTERS DATED 17.05.1996 AND 26.08.1997 (PB 2 PGS.1-5) WHICH PROVIDE THE FRAME WORK FOR BOTH THE SERVICES TO BE RENDERED AND THE MANNER IN WHICH THEY SHALL BE ALS O SPECIFYING THE OBJECTIVE OF THE EXERCISE OR ITS OUTPUT IN TERMS OF DELIVERABLES TH EREBY SERVING AS BASE DOCUMENTS REGULATING THE BUSINESS RELATIONSHIP BETWEEN THE EN TERPRISES. THE TOTAL CONSIDERATION WOULD BE FOR: A) DEVELOPMENT AND IMPROVEMENT PROGRAMME; B) PROVIDING INFORMATION AND SCIENTIFIC KNOWLEDGE. 16 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. THE PROJECT WAS TO BE COMPLETELY IN THREE PHASES E ACH BEGINNING UPON SATISFACTORY COMPLETION OF THE PRECEDING ONE SO THAT TIME THOUGH OF SIGNIFICANCE WAS NOT OF ES SENCE WITH AN EXPECTED TIME SCHEDULE THERETO AS: PHASE I : MODEL PHASE 30 WEEKS PHASE II: FOR DELHI REGION 20 WEEKS PHASE III: OTHER REGIONS 30 WEEKS AS STATED PHASE III WAS ABANDONED SO THAT IT CONT INUED ONLY UPTO THE COMPLETION OF PHASE II. THE PROJECT WAS AIMED AT IMPROVED MARKET SHARE AND AS ALSO IMPROVED FINANCIAL RESULTS. DEFINED MANAGEMENT INDICES SUCH AS BETTER CUSTOMER SERVICES; INCREASED MANAGEMENT AND SUPERVISION EFFECTIVENESS; IMPROVED MORAL ETC. ARE AMONG THE STATED DELIVERABLES. THE SAME IT WOULD BE NOTED ARE IN C OMPLETE HARMONY AND SYNC WITH THE STATED OBJECTIVES OF THE RPIP. AND THE ASSESSEE WAN TS US TO BELIEVE AND THAT TOO WITHOUT SUBSTANTIATION THAT ALL THAT WAS BEING DONE IN IND IA WERE MERELY PREPARATORY AND AUXILIARY SERVICES BY WAY OF COLLECTION OF DATA ITS TRANSMIS SION AND CARRYING OUT THE INSTRUCTIONS OF THE BOARD OF DIRECTORS THROUGH THE PRINCIPAL CONSUL TANTS. WHY SHOULD THEN EVEN THE PRINCIPAL CONSULTANTS BE REQUIRED TO COME TO INDIA AND THAT TOO FREQUENTLY THE MEETINGS OF THE STEARING COMMITTEE BEING SCHEDULED FORTNIGHT LY ? IN OUR VIEW ON THE OTHER HAND IN COMPLETE CONTRADISTINCTION EVEN THE SECURING OF TH E RELEVANT CONTRACT VALUED AT OVER RS.7.5 CRORES (GBP 12.76 LACS) WOULD REQUIRE EXTEN SIVE EXECUTION AND THUS PRESENCE IN INDIA. THOUGH BAGGING A CONTRACT DOES NOT BY ITSELF GENERATE INCOME IT DEFINITELY REQUIRES UNDERTAKING OF CONCERTED WORK WHICH IS ONLY TOWARD AND IN CARRYING ON ITS BUSINESS. THE SAME REQUIRES EXTENSIVE PREPARATION AS WELL AS COMM UNICATION SKILLS WHICH MAY ASSUME BOTH VARIOUSLY AS WELL AS IN COMBINATION T HE FORM OF LETTERS/MAILS INTERVIEWS MEETINGS PRESENTATIONS ETC. EXHIBITING BOTH PERS ONAL AS WELL AS PROFESSIONAL COMPETENCIES. THE PROJECT THUS AS A PREREQUISITE REQUIRES A DEEP CONVICTION ON THE PART OF THE CUSTOMER/CLIENT OF THE CONTINUED PRESENCE OV ER THE PERIOD OF THE CONTRACT WHICH IS ITSELF INDEFINITE IN-AS-MUCH AS EACH SUBSEQUENT PHA SE WOULD ENSUE ONLY ON THE 17 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. SATISFACTORY COMPLETION OF THE PRECEDING ONE. IN FA CT THE BASE DOCUMENT CLEARLY OUTLINES THAT THE APPLICATION OF RPIP WOULD REQUIRE THAT GPI SHARE IDEAS WHICH WOULD BE COMBINED WITH THAT OF THE ASSESSEE. THE CLIENTS AS THE GPI WOULD ONLY BE UNAWARE OR ONLY VAGUELY AWARE OF RPIP WHOSE THEORY MECHANICS METHODOLOGIES ETC. WOULD BE REQUIRED TO BE EXPLAINED TO THEIR PERSONNEL AND WH O IN FACT WOULD BE REQUIRED TO PARTICIPATE ACTIVELY IN ITS IMPLEMENTATION AND THUS RESPONSIBLE FOR ITS SUCCESS. CONSTANT INTERACTION AT ALL LEVELS OR AT LEAST UPTO THE SEN IOR MANAGEMENT LEVEL BETWEEN THE PERSONNEL OF THE CONTRACTING PARTIES IS THUS CONT EMPLATED. THE INITIAL EXCHANGES AND INTERACTIONS ARE TO FORM THE BASIS OF THE PRELIMINA RY ANALYSIS AND PROPOSALS FOLLOWED BY A DETAILED STUDY. THE STUDY IS TO BE FOLLOWED BY ITS ACTUAL IMPLEMENTATION I.E. OF THE CONTENTS OF THE STUDY ENTAILING WHAT IS REQUIRED T O BE DONE AND HOW. CONSTANT FEEDBACK WHICH AGAIN HAS TWO VARIANTS THERETO - FORMAL AND I NFORMAL ON A REGULAR AND DEFINED BASIS AND REVIEW IS CONTEMPLATED SO THAT CORRECT IVES AND CHANGES VALIDATING OR REVISING THE ASSUMPTIONS MADE ARE APPLIED AND THE IMPLEMENT ATION STAYS ON COURSE I.E. TOWARD THE DESIRED OBJECTIVE AND PROVIDED FOR. IT IS THU S AS APPARENT ESSENTIALLY AN INTERACTIVE EXERCISE AND WHICH IS TO ASSUME VARIOUS FORMS VIZ . INTERVIEWS INTERACTIONS EXCHANGES MEETINGS TRAINING SESSIONS SEMINARS ETC. AS SUI TABLE FOR THE SPECIFIC OBJECTIVE AT HAND. UNDERSTANDABLY THEREFORE THE ASSESSEE-COMPANY OPE RATES AT ALL THE THREE MANAGEMENT LEVELS. AT TIER I OR THE BASE LEVEL CONSULTANTS (5 TO 8) ARE TO WORK FULL TIME AS A TEAM DURING THE COURSE OF THE PROJECT. THIS IS SUBJECT T O SUPPLY OF ADDITIONAL RESOURCES IF SO CONSIDERED BY RENOIR MANAGEMENT THOUGH AT NO EXTRA COST TO GPI WHO IS ALSO REQUIRED TO DEDICATE 10 TO 15 OF ITS EMPLOYEES FULL TIME ON THE PROJECT AND WHICH IS DESIGNATED AS THE TASK FORCE. THE NEXT LEVEL IS OF THE STEARING C OMMITTEE CONSISTING OF SENIOR MANAGEMENT POSITIONS FROM BOTH THE COMPANIES WHICH IS TO MEETING FORTNIGHTLY MANAGE THE PROJECT. WHILE THIS WAS THE INITIAL UNDERSTANDI NG THE SECOND LETTER I.E. DATED 26.08.1997 IS SOMEWHAT MORE SPECIFIC RESTRICTING THE TEAM OF THE CONSULTANTS TO BE DEPUTED BY THE ASSESSEE AT BETWEEN 3 TO 4 AND THE T ASK FORCE TO 12 EMPLOYEES. CLEARLY THE INITIAL UNDERSTANDING HAD CRYSTALLIZED INTO A DEFIN ITE PROGRAM OF IMPLEMENTATION AND ONLY 18 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. ON THE BASIS OF REGULAR INTERACTIONS BETWEEN THE PA RTIES ITSELF REQUIRING THE ASSESSEES PRESENCE IN INDIA. FURTHER THE LETTERS ARE SILENT ON THE ROLE OF THE TOP MANAGEMENT WHICH HAS BEEN PROJECTED AS THE SOLE REPOSITORY OF THE DE CISION-MAKING AND THUS THE SOLE DRIVER AND ARBITER OF THE IMPLEMENTATION PROCESS BY THE AS SESSEE BEFORE THE REVENUE. THE SAID SILENCE IS IN FACT ONLY UNDERSTANDABLE IN-AS-MUCH AS THE EXECUTION OF THE PROJECT IS ONLY A REGULAR BUSINESS FUNCTION CARRIED OUT IN THE ORDIN ARY COURSE THEREOF REQUIRING LITTLE IF AT ALL INTERVENTION BY THE TOP MANAGEMENT I.E. ONCE AN UNDERSTANDING BETWEEN THE TWO PARTIES IS ARRIVED AT. WITHOUT DOUBT THE TOP MANAG EMENTS SANCTION OR OVERALL CONTROL AND MANAGEMENT CANNOT BE EXCLUDED SO THAT IN THE ABSEN CE OF ANY EVIDENCE WE WOULD CONFINE ITS ROLE TO JUST THAT I.E. PROVIDING STRA TEGIC GUIDANCE AND POLICY FRAMEWORK I.E. THE NORMAL ROLE OF THE TOP MANAGEMENT IF AND TO TH E EXTENT REQUIRED FOR THE PROJECT AT HAND. THE ASSESSEES CLAIMS AND CONTENTIONS RAISED BOTH BEFORE US AND THE REVENUE AUTHORITIES BESIDES BEING UN-EVIDENCED ARE AT POL AR OPPOSITE TO WHAT WOULD ONE WOULD NORMALLY EXPECT AS WELL AS THE MATERIAL ON RECORD I N THE FORM OF THE BASE DOCUMENTS AND THE COMMUNICATIONS EXCHANGED BETWEEN THE PARTIES IN THE REGULAR COURSE OF BUSINESS (PB- 2 PGS.7-14). THE PLEA OF THE EMPLOYEES BEING SUBJE CT TO CHANGE IS WITHOUT MATERIAL. RATHER THE ASSESSEE COMMITS ITSELF TO THE CONTINUI TY OF THE SAME PERSONNEL FOR THE SAKE OF BETTER AND SMOOTH IMPLEMENTATION OF THE PROJECT. FU RTHER IT IS THE CONTINUED PRESENCE OF THE ASSESSEE-COMPANY AND NOT OF ITS PARTICULAR PE RSON THAT IS RELEVANT. THE CONTENTION OF THE PERSONNEL OPERATING FROM DIFFERENT PLACES SO T HAT THERE IS NO FIXED PLACE OF BUSINESS IS AGAIN WITHOUT MERIT IGNORE AS IT DOES THE FACT THAT THE LOCATION IN CASE OF A FIELD JOB AS OF A SALESMAN HAS NECESSARILY TO BE A SHIFTING ONE ; IT BEING FIXED IN TERMS OF ITS OPERATING PARAMETER/S AND THE CONTINUED PHYSICAL PRESENCE IN INDIA AT THE DIFFERENT LOCATIONS BEING AS WARRANTED BY THE EXIGENCIES OF THE CONTRACT WHI CH IS UNDISPUTED. THE CLAIM OF THE PERSONNEL ONLY EXECUTING PLANNING AND SUPERVISING WORK IS AGAIN WITHOUT SUBSTANCE AND CONTRADICTORY OF THE CONTRACT WORK AS PROFILED BY T HE DOCUMENTS AND AS STATED HERE-IN- BEFORE. HERE WE ALSO CLARIFY THAT A FIXED PLACE OF BUSINESS AS CONTEMPLATED IN THE 19 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. DEFINITION OF PE UNDER ART. 5 DOES NOT AT ALL IMPL Y OR IS CONFINED TO A PLACE WHERE THE TOP MANAGEMENT OF THE COMPANY IS LOCATED. THUS APART F ROM THE IMPORT OF THE SAID ARGUMENT IN THE CONTEXT OF THE PRESENT CASE BEING NOT CLEAR IT IS EVEN DEVOID OF ANY MERIT. A BRANCH OF AN ENTERPRISES MAY WELL BE ITS PE; ONLY THE PRO FIT ATTRIBUTABLE TO THE SAME BEING LIABLE TO BE TAXED IN THE SOURCE STATE. THE ASSESSEES NEX T ARGUMENT IS THAT NO PLACE OF BUSINESS APART FROM MEETINGS WITH ITS PERSONNEL HAS BEEN AS SIGNED OR MADE AVAILABLE BY THE GPI TO THE ASSESSEES TEAM. THE ARGUMENT IS DEVOID OF A NY SUBSTANCE WHATSOEVER. FIRSTLY IT IS TO BE APPRECIATED THAT IT IS FOR THE ASSESSEE IN T HE INTIMATE KNOW OF ITS AFFAIRS TO SPECIFY AS TO HOW AND FROM WHERE IT HAS PERFORMED ITS WORK . IF THE TEAM OF ITS PERSONNEL DEPUTED ON THE CONTRACT HAVE NOT FUNCTIONED FROM THE GPIS PREMISES THE SAME HAS OF ITSELF NO BEARING ON THE ASSESSEES CASE IN-AS-MUCH AS IT IS FOR IT TO IN THAT CASE SPECIFY THE PLACE/S FROM WHERE THEY HAVE FUNCTIONED OVER THEIR CONTINUE D STAY IN INDIA WHICH IS STATED TO BE AT 874 MAN-DAYS FOR THE CONSULTANTS AND 81 DAYS FOR THE PRINCIPAL CONSULTANTS AND HOW. SURELY THEY COULD NOT ONLY BE MEETING THE ASSESSEE S EMPLOYEES OR CUSTOMERS OR RETAIL OUTLETS ETC. ALL THE TIME AND NEITHER WITHOUT DO UBT COULD THEY PERFORM THEIR WORK IN VACUUM . IT IS IN THIS CONTEXT THAT THE LD. CIT(A) HAS INF ERRED OF THE HOTEL/S WHERE THE ASSESSEES EMPLOYEES STAYED AS ALSO SERVING AS THE IR WORK PLACE. THE COMMUNICATIONS BETWEEN THEM AND THE HEAD OFFICE WHICH IS AGAIN A PART OF THEIR WORK HAS AGAIN ADMITTEDLY BEEN CARRIED OUT IN INDIA AND AS STATED FROM A PLACE IN THE VICINITY OF THE PLACE OF THE STAY. TWO THOUGH TO NO EFFECT SO THA T WHETHER THE COMMUNICATION HAS TAKEN PLACE FROM THE HOTEL ROOM THROUGH THE MEDIUM OF INT ERNET USING LAPTOPS A TANGIBLE ASSET/S BY THE PERSONNEL OR SIMILAR FACILITIES PR OVIDED BY THE HOTEL OR BY A RETAIL OUTLET PROVIDING SUCH SERVICES IS OF LITTLE MOMENT. RATHER AS WE DISCERN THE ASSESSEES PERSONNEL ARE ONLY WORKING TOGETHER IN CONJUNCTION WITH THE GPI TASK FORCE ASSIGNED WHOLE TIME ON THE PROJECT IN-AS-MUCH AS THE WORKING OF THE TASK FORCE IN ISOLATION OR REMOVED FROM THE ASSESSEES EMPLOYEES EXCEPT PERHA PS SPARINGLY MAKES LITTLE SENSE IN THE FITNESS AND THE SCHEME OF THINGS. THIS IS AS TH E TWO HAVE TO WORK IN TANDEM COMPLIMENTING EACH OTHER. IN FACT EVEN WORKING SEP ARATELY (AS IT IN PRACTICE WELL BE A 20 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. COMBINATION OF THE TWO FORMS OF WORK ORGANIZATION O R GUIDED BY WORK IMPERATIVES) AGAIN ONLY IMPLIES AVAILABILITY OF A SEPARATE PLACE /S AT ITS DISPOSAL TO THE ASSESSEES TEAM. SECONDLY AS IS APPARENT FROM THE MODUS OPERANDI TO BE ADOPTED THE REGULAR INTERVIEWS INTERACTIONS MEETINGS TRAINING SESSIONS AND SEMIN ARS ETC. BOTH BY THE CONSULTANTS AND THE PRINCIPAL CONSULTANTS FORMING TIER I AND TIER II OF THE ASSESSEES TEAMS DEPUTED ON THE PROJECT AND WHICH ARE ADMITTEDLY AND PRINCIPAL LY AT THE GPIS PREMISES IS AS MUCH A PART OF THE WORK UNDERTAKEN BY THE ASSESSEE-COMPANY AS IS THE INDEPENDENT COLLECTION COLLATION ANALYSIS AND REVIEW ETC. OF THE DATA/IN FORMATION BEING SOUGHT FROM THE ORGANIZATION DURING ANY PHASE OF THE PROJECT MANAGE MENT. THAT THUS SOME PLACE IS AT THE DISPOSAL OF THE ASSESSEE OR ITS EMPLOYEES DURING TH E ENTIRE PERIOD OF THE STAY IN INDIA IS THUS MANIFEST AND EMINENT AND FOLLOWS UNMISTAKABLY FROM THE WORK NATURE/PROFILE AND THE MODUS OPERANDI FOLLOWED. THE ARGUMENT THUS IS OF NO MOMENT. 4.7 WE MAY NEXT CONSIDER THE ASSESSEES RELIANCE ON CASE LAW. IN FACT THE SAME BASED ON THE STANDARD TEXTS AS THE OECD COMMENTARY OR TH AT BY PROFESSOR KLAUS VOGEL HAS BEEN MADE BY BOTH THE PARTIES BEFORE US. WE HAVE IN FACT REPRODUCED FROM THE DECISIONS IN THE CASE OF VISAKHAPATNAM PORT TRUST (SUPRA) AND AIRLINES ROTABLES LTD. (SUPRA) RELIED UPON BY THE ASSESSEE CAPSULING THEIR RATIOS . THE ISSUE AS WE DISCERN AND AS CLARIFIED IS PRINCIPALLY AND PRIMARILY FACTUAL AN D OUR DECISION FOLLOWS A FACTUAL EXAMINATION OF THE MATTER. AS SUCH RELIANCE ON THE CASE LAW APART FROM THE THRUST ON THE LEGAL CONCEPT OF PE WHICH HAS BEEN FOLLOWED/ADOPTE D IS OF LITTLE MOMENT. WE ACCORDINGLY DO NOT CONSIDER IT NECESSARY TO DWELL ON THE FACTS OF EACH CASE NONE OF WHICH THOUGH ARE SIMILAR TO THAT OF THE PRESENT CAS E. 4.8 IN OUR CLEAR VIEW THEREFORE THE ASSESSEE CLEA RLY HAS A PE IN INDIA DURING THE RELEVANT YEARS. THIS DECIDES GROUND NO. 1 OF THE AS SESSEES APPEALS FOR A.YS. 1997-98 AND 1999-2000. WE DECIDE ACCORDINGLY. 21 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. 5. THE NEXT ISSUE THAT ARISES FOR OUR CONSIDERATION IS THE PROFIT ATTRIBUTABLE TO THE PE I.E. FOR THE RELEVANT YEARS. THE SAME THOUGH NOT RAISED BY THE ASSESSEE PER ITS MEMORANDUM OF APPEAL WAS AGITATED BY THE LD. AR DU RING HEARING AND BEING GERMANE TO THE ISSUE AT HAND ADMITTED BY US. AS EXPLAINED BY THE APEX COURT IN MORGAN STANLEY & CO. (SUPRA) ECONOMIC NEXUS IS AN IMPORTANT ASPECT OF T HE PRINCIPLE OF ATTRIBUTION OF PROFITS. THE MATTER BEING NOT SUBJECT TO EXAMINATIO N BY THE AUTHORITIES BELOW WE ONLY CONSIDER IT FIT AND PROPER TO RESTORE THIS ASPECT O F THE MATTER BACK TO THE FILE OF THE A.O. TO DECIDE THE SAME IN ACCORDANCE WITH THE LAW AND IN C ONSISTENCE WITH THE FACTS OF THE CASE THE ONUS TO LEAD WHICH IS ON THE ASSESSEE. WE DECID E ACCORDINGLY. 6. THE ONLY OTHER GROUND FOR A.Y. 1997-98 BY THE AS SESSEE IS WITH REGARD TO THE RESTRICTION OF ITS CLAIM FOR BUSINESS EXPENDITURE. THE CLAIM HAS BEEN RESTRICTED BY THE REVENUE ON THE GROUND OF IT BEING NOT SUBJECT TO VE RIFICATION; THE ASSESSEE FAILING TO PRODUCE THE RELEVANT VOUCHERS. NO IMPROVEMENT IN IT S CASE STOOD MADE BEFORE US. THE PLEA OF THE RECORDS BEING OLD SO THAT THE SAME ARE NOT TRACEABLE IS NOT ADMISSIBLE; THE ASSESSEE BEING IN APPEAL RIGHT FROM THE PASSING OF THE ASSESSMENT ORDER IN THE FIRST INSTANCE. IN FACT THIS POSITION HAS OBTAINED EVEN BEFORE THE A.O. BEFORE WHOM THE PROCEEDINGS IN THE SECOND ROUND HAVE BEEN ON SINCE OCTOBER 2002 I.E. AFTER THE DISPOSAL BY THE TRIBUNAL IN THE FIRST ROUND WHEREIN THE TRI BUNAL HAS ITSELF (VIDE PARA 13 OF ITS ORDER) CLARIFIED THAT THE A.O. SHALL CALL FOR THE RELEVANT RECORDS AND EXAMINE THE VERACITY OF THE EXPENDITURE CLAIMED. FURTHER EVEN SO THE LD. CIT( A) HAS SOUGHT TO REFURBISH THE DISALLOWANCE ARISING ON THE PRINCIPAL GROUND OF NO N-VERIFICATION OF THE CLAIM BY THE DISCLOSED OPERATING RESULTS OF A COMPARABLE CASE DCM INTERNATIONAL LTD. NO INTERFERENCE IN OUR VIEW IS UNDER THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE CALLED FOR. WE DECIDE ACCORDINGLY AND THE ASSESSEE FAILS ON ITS GROUND NO. 2. 7. THE NEXT AND THE ONLY SURVIVING ISSUE IN THESE A PPEALS IS THE PART ALLOWANCE OF THE BUSINESS EXPENDITURE AS CONFIRMED BY THE FIRST APPE LLATE AUTHORITY FOR A.Y. 1999-2000 QUA WHICH BOTH THE PARTIES ARE IN APPEAL. 22 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. 8. AS REGARDS THE REVENUES APPEAL IT AGITATES THE DELETION OF THE DISALLOWANCE MADE WITH REFERENCE TO SECTIONS 40(A)(III) (WRONGLY WRIT TEN AS 40(A)(IA) BY THE A.O.) AND 44C. THE SAME IS COVERED BY THE DECISION BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR A.Y. 1997-98 EVEN AS CLARIFIED BY THE FIRST APPELLATE A UTHORITY. THE LIMITATION AS REGARDS THE ACTUAL EXPENSES MADE PARTICULARLY WITH REFERENCE T O SECTION 44C HAS ALSO BEEN CLARIFIED BY HIM AS NOT APPLICABLE IN VIEW OF CIRCULAR NO.333 DATED 02.04.1982 BY CBDT SO THAT ART. 7(3) OF INDIO-MAURITIUS DTA WOULD PREVAIL. NO ARGUMENT MUCH LESS MATERIAL HAS BEEN LED BY TH E REVENUE BEFORE US. THE ASSESSEE IN FACT ALSO ARGUES THAT NO TAX IS DEDUCTI BLE IN VIEW OF ART. 15 OF THE DTAA. WE ACCORDINGLY HAVE LITTLE HESITATION IN FOLLOWING TH E DECISION BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE PRECEDING YEAR AS WELL AS THE CBDT CIRCULAR TO CONFIRM THE IMPUGNED ORDERS ON THESE GROUNDS. THE REVENUE ACCO RDINGLY FAILS. 9. THE ONLY OTHER ISSUE RAISED BY THE ASSESSEE PER ITS APPEAL FOR A.Y. 1999-2000 IS THE DISALLOWANCE OF THE ASSESSEES CLAIM FOR INDIRE CT EXPENDITURE MADE AT GBP 73151 VIDE GROUND NO. 2 THEREOF. THOUGH THE SAME STOOD RE STRICTED BY THE A.O. TO 5% OF THE ADJUSTED PROFITS OR THE ACTUAL EXPENDITURE WHICH E VER IS LESS I.E. IN TERMS OF SECTION 44C THE SAID RESTRICTION WAS SET ASIDE BY THE LD. CIT(A ) IN-AS-MUCH AS SECTION 44C IS NOT APPLICABLE AND WHICH WE HAVE UPHELD (REFER PARA 8) . SO HOWEVER SOME REASONABLE BASIS FOR THE ALLOCATION OF THE INDIRECT EXPENDITURE IS T O BE MADE. ACCORDINGLY HE FOLLOWING HIS PREDECESSOR ALLOWED THE ASSESSEES CLAIM FOR INDIR ECT EXPENDITURE IN THE RATIO OF THE DOMESTIC TURNOVER TO THE TOTAL (GLOBAL) TURNOVER. T HE A.O.S REPORT AFTER DUE VERIFICATION QUA GLOBAL INDIRECT EXPENDITURE WAS CALLED FOR BY HIM FOR THE PURPOSE. ONLY THE EXPENDITURE FOR WHICH THE VOUCHERS COULD BE PRODUCE D I.E. FOR GBP 9 71 335 (AS AGAINST THE TOTAL GLOBAL EXPENDITURE AT GBP 14 63 024) WER E ADMITTED AND THE DISALLOWANCE WORKED OUT PROPORTIONATELY. AGGRIEVED THE ASSESSEE IS IN APPEAL. 10. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN OUR VIEW THE REVENUES STAND IS NOT MAINTAINABLE. THE ASSESSEES CLAIM FOR INDIRECT EXPENDITURE IS NOT 23 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. BEING DISALLOWED ON THE BASIS OF IT BEING INCURRED SPECIFICALLY FOR THE PURPOSE OF ITS BUSINESS IN INDIA BUT ON THE BASIS THAT A PART OF THE EXPENDITURE INCURRED CAN BE REASONABLY ATTRIBUTED TO THE INDIAN OPERATIONS TAK ING THE TURNOVER AS A SURROGATE MEASURE OF THE QUANTUM OF THE OPERATIONS. IN OUR VIEW THER EFORE THE INDIRECT EXPENDITURE AS REFLECTED IN THE ASSESSEE-COMPANYS GLOBAL AUDITED ACCOUNTS CAN BE WITHOUT DEMUR TAKEN AS A LEGALLY FIRM BASIS FOR APPLYING THE SAME TO TH E INDIAN OPERATIONS IN TERMS OF ART. 7(3) OF THE TREATY. THE REVENUE MAY TO SATISFY ITSELF FURTHER SEEK A CERTIFICATE FROM THE AUDITORS OF THE COMPANY AFTER ARRIVING AT AN AGREEM ENT AS TO WHAT CONSTITUTES AND COMPRISES INDIRECT EXPENDITURE. INSISTENCE ON THE PRODUCTION OF VOUCHERS IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE IS IN OUR VIE W EXAGGERATED. SUBJECT TO THE VERIFICATION/SATISFACTION AS STATED ABOVE WE ACCE PT THE ASSESSEES CLAIM IN PRINCIPLE. WE DECIDE ACCORDINGLY. 11. IN THE RESULT THE ASSESSEES APPEALS FOR BOTH THE YEARS ARE PARTLY ALLOWED ON THE AFORE-SAID TERMS AND THE REVENUES APPEAL IS DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON APRIL 11 201 4 SD/- SD/- (AMIT SHUKLA) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER 3. MUMBAI; 4$ DATED : 11.04.2014 (.$../ ROSHANI SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. ') / THE APPELLANT 2. -') / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. 7(8 9 $:% / :%2 3. / DR ITAT MUMBAI 6. 9 ;& < . / GUARD FILE 24 ITA NOS. 4323/M/11 4125/M/11 & 5298/M/09 (A.YS. 1999-2000 1999-2000 & 1997-1998) RENOIR CONSULTING LTD. ! ( / BY ORDER )/(* + (DY./ASSTT. REGISTRAR) 3. / ITAT MUMBAI