GE Energy Parts Inc vs. CIT (Delhi High Court)

* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 24.05.2018
Pronounced on: 21.12.2018
+ ITA 621/2017; ITA 627/2017; ITA 628/2017; ITA 629/2017; ITA
671/2017; ITA 674/2017, C.M. APPL.29470/2017; ITA
675/2017, C.M. APPL.29471; ITA 677/2017
GE ENERGY PARTS INC. …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 643/2017; ITA 646/2017; ITA 655/2017; ITA 669/2017 &
ITA 685/2017
GE GENBACHER GMBH & CO. …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 644/2017; ITA 652/2017, C.M. APPL.29312/2017; ITA
653/2017; ITA 666/2017 & ITA 837/2017
GE ENGINE SERVICES MALAYSIA SDN BHD……. Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 645/2017; ITA 654/2017; ITA 657/2017; ITA 668/2017; ITA
684/2017 & ITA 688/2017
GE PACKAGED POWER INC. …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 647/2017; ITA 670/2017; ITA 686/2017 & ITA 687/2017
GE TRANSPORTATION PARTS LLC …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. RespondentsITA 621/2017 & connected matters Page 2 of 85
+ ITA 648/2017; ITA 649/2017; ITA 660/2017; ITA 661/2017; ITA
678/2017; ITA 679/2017 & ITA 836/2017
GE ENGINE SERVICES DISTRIBUTION LLC …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 650/2017; ITA 651/2017; ITA 662/2017; ITA 663/2017; ITA
664/2017; ITA 680/2017; ITA 681/2017 & ITA 682/2017
GE ENGINE SERVICES INC. …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 656/2017; ITA 665/2017; ITA 683/2017 & ITA 838/2017
GE JAPAN LTD. …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 828/2017, C.M. APPL.35327/2017
GE ELECTRIC CANADA COMPANY …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 839/2017
GE AIRCRAFT ENGINE SERVICES LTD……. Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 840/2017; ITA 841/2017 & ITA 842/2017
GE AVIATION SERVICE OPERATION LLP …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. RespondentsITA 621/2017 & connected matters Page 3 of 85
+ ITA 843/2017; ITA 844/2017; ITA 845/2017; ITA 846/2017; ITA
847/2017; ITA 848/2017; ITA 849/2017 & ITA 850/2017
GE AVIATION MATERIALS LP …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 851/2017
GE CALEDONIAN LTD. …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 852/2017
GE ELECTRIC POWER SYSTEMS INC. …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 853/2017; ITA 854/2017; ITA 855/2017; ITA 856/2017 &
ITA 857/2017;
GENERAL ELECTRIC CANADA COMPANY …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 858/2017& ITA 859/2017
GE MULTILIN …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. Respondents
+ ITA 860/2017; ITA 861/2017; ITA 862/2017; ITA 863/2017 &
ITA 864/2017;
GE PACIFIC PVT. LTD. …… Appellant
Versus
COMMISSIONER OF INCOME TAX (INTERNATIONAL
TAXATION), DELHI-I ….. RespondentITA 621/2017 & connected matters Page 4 of 85
Through: Mr. Sachit Jolly and Mr. Siddharth
Joshi, Advocates, for appellants.
Mr. Ruchir Bhatia, Sr. Standing Counsel, for the
respondent.
CORAM:
HON’BLE MR. JUSTICE S. RAVINDRA BHAT
HON’BLE MR. JUSTICE A.K. CHAWLA
MR. JUSTICE S. RAVINDRA BHAT
%
1. The present statutory appeals, under Section 260A of the Income
Tax Act, 1961 (hereafter “the Act”) are directed against the order dated
27.01.2017 (hereafter “impugned order”) passed by the Income Tax
Appellate Tribunal (hereafter “ITAT”) in ITA No. 67/DEL/2011 for the
AY 2001-2002 whereby the ITAT held that the GE Energy Parts Inc.
(hereafter “Appellant”) had a fixed place Permanent Establishment
(hereafter “PE”) and DAPE in India under the DTAA.
2. The appellants in these groups of appeals under Section 260A of the
Act comprise the General Electric group of companies: GE Energy Parts
Inc (“GEP” hereafter); General Electric International Operations
Company Inc. (“GEIOC” hereafter); GE India Industrial Pvt. Ltd and
(GEIIPL). All challenge a common order of the Income Tax Appellate
Tribunal (“ITAT”) which concluded that the appellant PE in India and
were, therefore, liable to file income tax returns in the country.
3. GE Energy Parts Inc (GEP) is incorporated in and is a tax resident
of the USA. It is engaged in the business of manufacture and offshore sale
of highly sophisticated equipments such as gas turbine parts and subITA 621/2017 & connected matters Page 5 of 85
assemblies. GEP and the other appellant/assessees are hereby collectively
referred to as “GE” or “the assessees”, as the context demands. GE sells
its products offshore on a principal to principal basis to customers all over
the world, including to customers located in India, whereby the title to the
goods sold to Indian customers passes from it outside India. GEIOC,
another US incorporated company, set up a liaison office (LO) in 1991 in
New Delhi with permission of the Reserve Bank of India (“RBI”
hereafter) only to act as a communication channel and not carry on any
business activity. GEIIPL is an India incorporated company and is party to
the Global Service Agreement (GSA) with GEIOC, for providing limited
market support services to GE and its affiliates (including GEPI.). In
exchange, it was remunerated on a cost-plus basis. It was assessed to
income tax and also subjected to arms‟ length price (ALP) determination
by a Transfer Pricing Officer (hereafter “TPO”) who held that the
transaction with its associated enterprise (AE) was at arm‟s length. The
GSA forbids GEIIPL from:
(a) entering into any contract on behalf of GE Group
companies (GEIOC and affiliates);
(b) from acting as an agent for any GE Group company
(GEIOC and affiliates).
4. GE International Inc, i.e GEII is a U.S. incorporated entity; it
assumes and performs payroll responsibility for expatriates who work in
India to support various businesses of the GE Group. GEIOC had on its
payroll more than 50 employees and the designation of such employees
was mostly as Head India Operations. These assessees contended that
employees are deputed to various GE companies and they work as theirITA 621/2017 & connected matters Page 6 of 85
employees and they remain on the payroll of GEIOC till their transfer to
other entities. In terms of the application made to RBI and permission
obtained, the liaison office was to act as a communication channel
between the head office and the customers in India. The assessees did not
file returns of income for any year.
5. A survey under Section 133A of the Act was conducted on
02.03.2007 in the premises of GEIOC at its AIFACS, 1 Rafi Marg, New
Delhi and it was concluded that GEIOC‟s liaison office (‘LO”) started
operating in India from July 01, 1987. It was set up to undertake liaison
activities. From the information available, it is seen that GEIOC has
employed various persons and is sending these employees on assignments
to GE entities located worldwide. From these premises, other entities,
incorporated in India as well as non-resident entities of the GE group were
also operating. During the course of survey statement of Shri Rupak Saha,
who is employed with GE Capital Services, India as Tax Manager, but
having extended responsibilities of tax matters relating to all companies of
GE Group in India was recorded. Statement of Shri Chandan Jain,
working with GEIOC, who provides interface between GE, USA and
GE,India, was also recorded. During the course of survey, photocopies of
various documents were obtained and the same were inventoried as
Annexures ‘A’ to ‘G’.
6. The GE group was asked to furnish various information by
summons under Section 131 of the Act. The assessee furnished the
information through its representative – RSM & Co./Pricewaterhouse
Coopers Pvt. Ltd. vide letters dated 16.03.2007, 09.04.2007, 27.02.2008,ITA 621/2017 & connected matters Page 7 of 85
24.03.2008 and 26.03.2008. The GE Group is a diversified technology,
media and financial services company with products and services ranging
from aircraft engines, power generation, water processing and security
technology to medical imaging, business and consumer financing, media
content and advanced materials. GE serves customers in more than 100
countries and employs more than 300,000 people worldwide. GE had been
in India since 1902. Its global businesses had a presence in India and the
group had become a significant participant in a wide range of key
services, technology and manufacturing industries. Employment across
India exceeds 12,000. Over 1 billion dollar of exports from India support
GE’s global business operations around the world. It has sourced products,
services and intellectual talent from India for its global businesses. It
pioneered the concept of software sourcing from India and was one of the
largest customers for the IT service industry of India.
7. Based on these observations, the AO continued the reassessment
proceedings. The assessees resisted the move to assess them, contending
that they were not subjected to income tax laws of India as they had no
permanent establishment. The AO by order dated 31.12.2008 held that the
appellant has a fixed place PE and DAPE in India. Further, the AO also
deemed 10% of the value of supplies made to the clients in India as the
profits arising from such supplies and attributed 35% of such profit to the
Appellant‟s PE in India. These findings were appealed against by the
assessees, to the Commissioner of Income Tax [CIT (A)].
8. The CIT(A) upheld the order of the AO with respect to the initiation
of proceedings under Section 147/148 of the Act and existence of PE andITA 621/2017 & connected matters Page 8 of 85
attribution of income but allowed appeal on the issue of levy of interest
under Section 234B of the Act. Aggrieved by the order dated 30.09.2010,
the appellants preferred an appeal before the ITAT.
GE Group submission to the ITAT
9. The Appellant submitted that the technology and not marketing
enabled it to be successful in their business – since products are so
sophisticated, marketing is a minimal component of the sale. All strategy
decisions reside with the applicant outside India – work in India is only
limited to providing market inputs and interface. In this case, the LO is
only collecting information about potential customers in India and passing
on this information to its non-resident businesses; and creating awareness
of the business products.
10. Further, the Appellant submitted that mere participation in
negotiations or even negotiation of some terms of the contract by
employees of non-resident tax payer does not result in a PE unless all
terms of the contract are negotiated and finalized by such employees. The
OECD Commentary goes on to state that mere attendance/participation in
negotiations is regarded as a preparatory and auxiliary activity and,
therefore, cannot by itself create a Fixed Place PE. It also urged that no
inferences could be drawn with respect to negotiating and finalizing the
critical terms of the contract. GE placed reliance on the case of U.A.E.
Exchange Centre Ltd. vs. Union of India and Ors. (2009) 313 ITR 94
(Del) 10 and submitted that subsidiary activities do not count – even if
such activities are necessary for the completion of the contract. It was
urged that such a reading would render the core purpose of the clause nullITA 621/2017 & connected matters Page 9 of 85
and void. Similar reliance is placed on National Petroleum Construction
Company vs. Director of Income Tax (International Taxation) 2016 (383)
ITR 648 (Del). where it is held that mere participation in negotiations is
not sufficient – it is necessary to actually be responsible for the conclusion
of negotiations.
Impugned findings by ITAT
11. On appeal, before the ITAT, the assessee-GE‟s contentions were
negatived. The ITAT considered the Indo-US Double Tax Avoidance
Agreement („DTAA‟) to examine the provisions concerning of ‘Fixed
Place PE‟ (Article 5.1 to 5.3) and observed that on a conjoint reading of
the relevant parts of Article 5, a PE meant a fixed place of business
through which the business of an enterprise is wholly or partly carried on
and such fixed place is not maintained for activities of a preparatory or
auxiliary character. Based upon its analysis of the facts, the ITAT held
that GEII‟s expatriates permanently used its liaison office at the premises.
It was also held that those expats and GEIIPL employees working under
expats were so working and the same was never denied by the assessee. It
further stated that the primary, specific and original proven material in the
form of survey documents, self-appraisals, manager assessment, etc., and
showed that GE overseas concerns were selling its products in India and
the core activities in regard to sale, namely, pre-sale, during-sale and postsale were being carried out in India by GE India.
12. The ITAT held that all conditions for constituting a fixed place PE
in terms of paras 1, 2 and 3 of the Article 5 were met with, as the AIFCASITA 621/2017 & connected matters Page 10 of 85
building was a “fixed place” from which business of GE overseas entities
was partly carried on in India and the activities carried out from such fixed
place are not of preparatory or auxiliary character. It was also held that
Article 5 (4) stated that where a person, other than an agent of
independent status to whom Article 5 (5) applies, and fulfils the
conditions as set out in the Article 5(4), that person will constitute a PE of
the enterprise. It was furthermore held that the first part of Para 5 refers to
an agent of independent status and the second part of that para refers to an
agent of independent status who is not considered an agent of independent
status because of the conditions set out in the said paragraph. Thus, it
follows, that the „person‟ referred to in para 4 refers to an agent of
dependent status and also an agent of an independent status who is
covered in part 2 of para 5. Exception to the first part of para 5 created in
part 2 is restricted only to ‘an agent of independent status‟. On the other
hand, if there is an agent of dependent status per se whose activities are
devoted to one or multiple related enterprises, he will be directly covered
within the scope of para 4 of Article 5 of the DTAA. Therefore, ITAT
observed that the nature of activities done by GE India, were of a core
nature, and they demonstrated its authority to conclude contracts on behalf
of GE overseas entities. The ITAT held, therefore, that GE India
constituted agency PE of all the GE overseas entities in India.
13. The ITAT observed that the AO was correct in its approach in
estimating total income at 10% of sales made in India due to
unavailability of year-wise, and entity-wise profits of GE overseas entities
for the operations carried out in India. Further, the impugned order heldITA 621/2017 & connected matters Page 11 of 85
that GE India conducted core activities and the extent of activities by GE
Overseas in making sales in India is roughly one fourth of the total
marketing effort. It, therefore, estimated that the 26% of total profit (i.e.
10% of sales) in India, as attributable to the operations carried out by the
PE in India, instead of 35% estimated by the AO.
14. The following questions of law were framed for consideration, in
all these appeals:
(1) Did ITAT fall into error in its findings with respect to
existence of a fixed place Permanent Establishment (PE) of the
assessee in India?
(2) Did ITAT fall into error in concluding that the
assessee/appellants separately had an independent agent PE,
located in India; and,
(3) Whether on the facts and the circumstances of the case and
the law, the ITAT was justified in attributing as high as 35% of
the profits to the alleged marketing activities and thereafter,
attributing 75% of such 35% profits to the alleged PE of the
Appellant in India
Submission of parties
15. It is argued that GE is incorporated in the United States of America
(“USA”) and its tax resident for the purposes of the DTAA between India
and USA. The Appellant is engaged in the business of manufacture and
supply of highly sophisticated components and sub-assemblies of gas
turbines to various clients all over the world. Similarly, other entities, part
of the present batch of appeals are engaged in manufacture and supply of
various equipments in the oil and gas, aviation and energy sector. SomeITA 621/2017 & connected matters Page 12 of 85
entities are also engaged in rendering offshore services to various clients
across the world.
16. Mr. Sachit Jolly, arguing for GE, states that it is an undisputed
position that research and development, design, fabrication and
manufacture of all equipments are done outside India. It is also undisputed
that title to the goods passes outside India. It is also not the allegation or
finding by any of the lower authorities that any marketing activity is
undertaken by any of the appellants in India. However, the AO found [and
the CIT confirmed- as did the Dispute Resolution Panel (“DRP”)] and
later, the ITAT that a part of the sales function is done in India through
expatriates, which are deputed by the appellants along with a team of
employees of GEIIPL and, therefore, the office space occupied by such
expatriates along with the employees of GEIIPL constitute a fixed place
PE. The lower authorities also held that such expatriates along with
GEIIPL‟s employees had authority to conclude contracts on behalf of the
appellants and, therefore, constituted Dependent Agent PE (“DAPE”).
17. Counsel stated that to conclude the existence of a fixed place (PE)
and DAPE, the ITAT relied upon three sets of documents: (a) Appraisal
Reports of the expatriates and the employees of GEIIPL; (b) Certain emails collected during survey conducted at the liaison office of GE
International Operations Company (“GEIOC”) in India and statements
recorded during survey; and (c) submissions dated 14.11.2008 filed by the
appellant before the AO. GE urges that ITAT‟s findings are incorrect,
both on law and facts. As to fixed place PE, it is submitted that in terms of
Article 5(1) of the DTAA, a fixed place (PE) is said to exist when aITA 621/2017 & connected matters Page 13 of 85
foreign enterprise has a fixed place at its disposal in India and carries on
business through such fixed place in India. However, in terms of Article
5(3)(e) of the India-US DTAA, activities that have a preparatory or
auxiliary character for the foreign enterprise as a whole do not constitute a
fixed place PE. Therefore, notwithstanding the presence of a fixed place,
if the activity carried on through such place of business is preparatory and
auxiliary for the foreign enterprise then no PE can be said to exist. In other
words, in order to constitute a fixed place PE, both the disposal test and
the business function test must be cumulatively specified. In this regard,
reliance is placed on Formula One World Championship v Commissioner
of Income Tax [2017] 390 ITR 199 [affirmed in Formula One World
Championship v Commissioner of Income Tax CIT 2017 (394) ITR 80
(SC)]; Director of Income Tax v. E-Funds IT Solution 2014 (364) ITR 256
[affirmed in Additional Director International Taxation v. E-Funds IT
Solutions Inc. 2017 (399) ITR 34 (SC) and National Petroleum
Construction Company v. DIT 2016 (383) ITR 648].
18. It is argued that the expatriates and employees of GEIIPL, no doubt,
participated in the negotiation for conclusion of contracts, but never had
the authority, whether expressed or implied, to finalize any contract on
their own volition. These personnel, even though highly qualified did not
have any authority to bind the foreign enterprises. Due to the complex
equipment being supplied by the appellants, to understand the technical
specifications of the product, issues pertaining to warranty, pricing, time
of delivery, etc., technically qualified personnel were required in India to
understand the needs of the clients.ITA 621/2017 & connected matters Page 14 of 85
19. Mr. Jolly urged that it is a settled law that the onus on proving the
existence of PE lies on the Revenue. [Refer E-Funds IT Solutions Inc
(supra)]. In the present case, the fixed place PE is alleged only in respect
of the sales function, which function is a small part of the overall business
of research and development, design, fabrication and manufacture all of
which happened outside India. Therefore, mere participation of the
expatriates and employees of GEIIPL in the negotiations, (without any
authority to conclude contracts) which is a small part of the sales function,
cannot be said to be the core business activity for the appellants. The
revenue, having failed to prove that the personnel in India had the
authority to close and conclude contracts on their own volition and accord,
could not have proceeded to treat the existence of the personnel as
constituting a PE in India.
20. Counsel emphasized that it is settled law that the question whether
an activity constitutes preparatory and auxiliary activity or core business
function is not to be judged from the viewpoint of importance of the
function but from the viewpoint of its role in the overall business of the
foreign enterprise. [Refer UAE Exchange Centre Ltd. v. Union of India
2009 (313) ITR 94 (Del). In the present case, it is undisputed that research
and development, design, fabrication and manufacture of equipments all
happened outside India. It is also undisputed that title of the goods passes
of the Indian customers outside India and no marketing activity is done in
India. Therefore, if a small portion of the sales function, i.e. participation
in negotiation takes place inside India, no fixed place (PE) can be set to
exist because such activity which is performed in India has preparatoryITA 621/2017 & connected matters Page 15 of 85
and auxiliary character for the business as a whole of the Appellants
herein. Reliance is placed on Director International Taxation v. Mitsui &
Co. Ltd. [2017] 399 ITR 505.
21. It is argued that the ITAT in this regard erred in disregarding the
OECD Commentary on Model Tax Convention (paragraph 33 on Article
5) which unambiguously states that mere participation in negotiation does
not lead to either a fixed place PE or a dependent agent PE (“DAPE”). The
view taken by the ITAT is not only contrary to the OECD Commentary
but also the UN Commentary on Model Tax Convention (paragraph 24 on
Article 5) as well as settled jurisprudence under Indian Contract Law,
wherein it is specifically recognized that authority to negotiate is different
from authority to conclude contracts and that unless the agent is
authorized to conclude all elements (or at least critical elements of the
contract), he cannot be said to have the authority to bind the principal.
Therefore, even if the OECD Commentary was not considered relevant by
the ITAT, it should have referred to the position of law under the Indian
Contract Law to interpret and adjudicate on the existence of fixed place
(PE) in the present context. Reliance is placed on Black’s Law Dictionary
10th Edition, (Pgs 350, 1199, 1200); Major Law Lexicon P.R. Aiyar 4th
Edition 2010, (Pgs 1361 (Vol2), 4530 (Vol4) and Devkubai N. Mankar v.
Rajesh Builders AIR 1997 Bom 142.
22. Coming next to the question of DAPE it is argued that Article 5(4)
of the DTAA between India and USA states that notwithstanding the
provisions of paragraphs 1 & 2, where a person acts on behalf of a foreign
enterprise in India and he has the authority to conclude contracts on behalfITA 621/2017 & connected matters Page 16 of 85
of the foreign enterprise and he habitually exercises such authority then
the foreign enterprise can be set to have a DAPE in India. However, if the
activities of the so-called agent in India are preparatory and auxiliary in
character then even the authority to conclude contracts does not lead to the
formation of a DAPE in India. In other words, the DAPE acts as an
alternative to the fixed place PE, i.e., even without the existence of a place
at the disposal of the foreign enterprise, a PE can exist if the foreign
enterprise carries on core business through a dependent agent in India. In
support, Paras 31 and 32 of the OECD Model Tax Commentary on Article
5 are relied upon by Mr. Jolly.
23. It is argued that Article 5(5) further restricts Article 5(4) and states
that if the agent in India is not dependent on the foreign principal and the
agent acts in ordinary course of business, then no DAPE can be said to
exist. Counsel submitted that in present case, the revenue alleges that the
same set of expatriates and employees of GEIIPL render services to more
than 24 foreign enterprises. This submission of the revenue that these
expatriates together constitute dependent agents of 24 entities is selfdefeating. In fact, GEIIPL, apart from rendering these services, for which
it is compensated on arm’s length basis, has 12 different business divisions
and they cannot be said to be dependent, whether economical or legal, on
the various appellants herein. On that ground alone, the case of the
revenue, insofar as the existence of DAPE must fall. Learned counsel
relied on Varian India (P) Ltd. v. Additional Director Income Tax 2013
(142) lTD 692 (Mum).ITA 621/2017 & connected matters Page 17 of 85
24. It is urged by the appellants that in any case, the expatriates and
employees of GEIIPL neither had the authority, whether expressed or
implied to conclude contracts in India nor was such authority exercised
habitually in India. It is urged that the expatriates and employees of
GEIIPL participated in negotiations for conclusion of contracts but that by
itself did not lead to the conclusion that the said personnel had the
authority to conclude contracts in India. The authority to negotiate,
without any authority to conclude contracts, cannot be treated as fulfilling
the requirements of Article 5(4)(a) of the India USA DTAA. Reference is
made to Para 33 of the OECD Commentary on Article 5; Para 24 of the
UN Commentary on Article 5 and Protocol to the India-USA DTAA
interpreting the term “secure orders”).
25. Referring to the appraisal reports it is urged that neither ITAT nor
any of the lower authorities have been able to point out a single document,
which demonstrates that the expatriates or the employees of GEIIPL had
any authority to close and conclude contracts in India. The ITAT has
purely based its conclusion on the educational qualifications and
designation of the expatriates to infer the role which they may have played
in the conclusion of contracts on behalf of the Appellants herein. In fact,
none of the expatriates referred to by the lower authorities were in India
until AY 2005-06 and, therefore, the reliance on the appraisal sheets of
such expatriates for AY 2001-02 to AY 2004-05 is entirely misplaced.
26. Dealing with the material found during survey, reference is made to
pages 175-182 of the point by point rebuttal of each e-mail made by
appellants before the ITAT. Counsel complains that however, the ITAT,ITA 621/2017 & connected matters Page 18 of 85
in the impugned order has not even referred to those submissions.
Reliance is placed on the detailed rebuttal made before the ITAT
incorporated at Pages 54-64 of the Appeal. For instance, it is urged that
the e-mail at Pg.127 of the Survey Documents-1, referred to by the ITAT
in the impugned order clearly shows that personnel from Italy, i.e., La
Motta, Nicoletti and Paolo negotiated and concluded contracts with
prospective clients and Riccardo was merely marked on the
correspondence without any authority to negotiate or finalize contracts.
Similarly, e-mail at page no.195 of the Survey Documents-I, referred to
by the ITAT, -if read with page no. 23 of the Survey Documents-, the
proposal, both technical and commercial, were sent by Danila Araniti
directly to BHEL on 28.02.2007 which is reflected in the e-mail@ page
no.23.Similarly, the statements of Mr. Chandan Jain or Mr. Rupak Saha
do not even remotely suggest that the expatriates or the employees of
GEIIPL had the authority to conclude contracts on behalf of the appellants
herein.
27. It is submitted that the impugned order has obfuscated the authority
to negotiate and participate in negotiation, with the authority to conclude
contracts. It is apparent from a bare perusal of the submissions filed by the
Appellant that the expatriates and the employees of GEIIPL merely
provided sales support and participated in negotiation, without any
express or implied authority to conclude contracts. Therefore, the reliance
placed upon the submissions dated 14.11.2018 is out of context and
perverse.
28. It was next argued that pursuant to the Global Services Agreement
dated 26.01.2001, GEIIPL was required to render sales support services toITA 621/2017 & connected matters Page 19 of 85
GEIOC and all affiliates of GEIOC including the appellants here. It is also
an admitted position that for rendering such services, GEIIPL was
remunerated at arm’s length. In fact, transfer pricing orders were passed in
the case of GEIIPL both pre and post survey and continue to be passed till
date and it has never been alleged that GEIIPL has rendered services
beyond the scope of GSA. Transfer Pricing orders till AY2013-14 have
been passed in the case of GEIIPL and scope of services rendered by
GEIIPL has never been doubted by the TPO. If that be the case, it is the
submission of the appellant that once the so-called agent is remunerated at
arm’s length, no further attribution can be made. Counsel relies on EFunds IT Solutions Inc. (supra) and Honda Motor Company Ltd. v.
Commissioner of Income Tax 2018 (6) SCC 70. It is urged that the
undisputed position is that title to the goods passes outside India and,
therefore, the profits arising from such sales which accrue outside India
cannot be taxed in India since admittedly the sales made to independent
third parties (the clients herein like Reliance, BHEL etc.) are at arm’s
length. Reference is made to Commissioner of Income Tax v. Hyundai
Heavy Industries Ltd.2007 (291) ITR 482 (SC).
29. It is submitted that ITAT erred in attributing as high as 35% of the
profits to the alleged sales function performed in India. As submitted
earlier, research and development, design, fabrication and manufacture of
equipments all took place outside India. It is also undisputed that title to
the goods passes of the Indian customers outside India and no marketing
activity is done in India. Therefore, the ITAT erred in confirming the
orders of the lower authorities in attributing as high as 35% of the profitsITA 621/2017 & connected matters Page 20 of 85
as alleged PE in India. At best, 10-15% of the overall profits could have
been held to be attributable to the alleged PE in India. Reliance is placed
on Director of Income Tax v. Galileo International Inc. 2011 (336) ITR
264 (Del); Anglo-French Textile Company Ltd. v. CIT 1954 (25) ITR 27
(SC). It was argued that without prejudice, even if 35% profits are to be
attributed to the alleged sales function, admittedly not the entire sales
function is carried on in India. A bare perusal of the e-mails which have
been relied upon by the Revenue leads to the inescapable conclusions that
majority of the sales function is carried outside India. Accordingly, not
more than 20% of the 35% profits attributable to the sales function can be
attributed to the alleged PE in India. The ITAT, therefore, erred in
attributing profits equivalent to 75% of the sales function to the activities
done in India.
30. On behalf of the Revenue, Mr. Ruchir Bhatia, learned counsel
argued that the lower authorities correctly refused to accept the assessee‟s
contentions that sale consideration was not taxable in India as the title in
respect of the equipments was transferred outside India and the payments
were also received outside India. It was pointed out that several activities
relating to marketing and sales took place in India. Expatriates from GEII
along with employees of GEIIPL constituting the Indian team were mostly
involved and participated in the negotiation of prices. These price
negotiations took place in India. The Indian customers discussed MOD
terms with the Indian team. These facts, in the opinion of the AO, were
clear indicators of the GE India securing orders for GE Overseas. It was
also argued that the revenue authorities found that GE Overseas, byITA 621/2017 & connected matters Page 21 of 85
remotely sitting in foreign countries, could not make any sales, without
the active involvement of GE India. This was held to be a business
connection of GE Overseas in India under Section 9 of the Act. The AO,
therefore, correctly held that all the profits did not accrue or arise to the
assessee on foreign soil, but part of such profits arising in India,
corresponding to the activities carried out in India, was chargeable to tax
under the Act. Considering the fact that sales were made to Indian
customers on a regular basis and the GE overseas entities were physically
present in some form or the other in India and such physical presence had
full role in these sales, the AO held that the business connection of GE
Overseas was established in India and, consequently, income accrued or
arose to them in India. Mr. Bhatia stated that the position about the
taxability under the Act has not been challenged by the assessee before us
inasmuch as it assailed only the existence of PE in terms of the DTAA,
more particularly, the activities carried out in India, which were of
preparatory or auxiliary character. It was argued that all the GE overseas
entities had PE in India in all the years under consideration in two forms,
namely, AIFACS premises of GEIOC, constituting a ‘fixed place PE’; ‘GE
India’ comprising of expatriates of GEII and employees of GEIIPL
constituting ‘dependent agent PE’. The learned AR argued that none of the
activities carried out by the assessee in India lead to the creation of PE.
31. Mr. Bhatia relied on the ITAT‟s findings, particularly in Para 27 to
submit that facts on record show the following, i.e. that firstly GEII‟s
expats were highly qualified (and some even with double qualifications),
worked in India for different business interests of the GE group; their
activities were not confined to the business of a particular entity andITA 621/2017 & connected matters Page 22 of 85
secondly, they were heading the operations of GE overseas entities in
India. From the description of their job and appraisal reports with the
Manager assessment, wherever given, it was clear that these expats were
India “country heads” or working at the leading positions, managing
business, securing orders and doing everything that was feasible which
was needed to carry GE overseas entities‟ India operations. It was
submitted that the assessee did not and could not deny that its business
model and GEII‟s expats‟ role is similar in respect of all businesses in
India. Furthermore, the expats were not confined to a particular GE entity
but working for one of its three major business lines, viz., Infrastructure,
Industrial and Healthcare.
32. The revenue relied on the following findings and submitted that
they are factual, which ought not to be disturbed:
“27.4 Now, we will discuss the role of the employees of GEIIPL
in assisting the expats in Indian operations of GE overseas
entities, as unfolding from the survey documents.
i. Nalin Jain – Pages 247 and 264 of the Survey documents
PB contain profile of Nalin Jain duly signed by him which
shows his designation in India as ‘Sales Director’ of GE
Transportation, Aircraft engines. ‘Job description’ has been
given as ‘Market Intelligence and Support to Headquarters.’ He
has indicated his ‘Reporting Manager’ as William Blair, who is
one of the seven expats from GEII working in India for GE
overseas.
ii. Pritam Kumar – Page 277 of the Survey documents PB is
a profile of Pritam Kumar, an employee of GEIIPL with the
designation of ‘Market Strategy Manager’. He is reporting to
Pierre Cante.ITA 621/2017 & connected matters Page 23 of 85
iii. Yashdeep Sule – Page 280 contains details of Yashdeep
Sule, again an employee of GEIIPL. His job description is
‘Sales and Marketing for signaling and locomotives.’ His
reporting manager is Pritam Kumar as discussed immediately
hereinabove, who, in turn, is reporting to Pierre Cante.
iv. Janak Chaudhary – Page 292 is report of Janak
Chaudhary with designation of ‘Vice President’ and job
description of ‘Sector analysis for growth in India.’ His
reporting manager is again some foreign employee.
27.5. Above narration of the nature of jobs carried out by these
employees of GEIIPL makes it amply clear that they were at the
higher positions in the general administration and, more
specifically, sales of GE Overseas, reporting directly to the
expats, who, in turn, were India country heads or occupying the
peak positions in GE Overseas in India.”
33. It was argued by the revenue that a proper application of the
principles enunciated in the authorities show that the assessee regularly
sold equipments to its customers in India which were documented and
detailed in the course of survey and assessment proceedings. All sales
related activities sales are not carried out from outside the country; some
important sales activities took place within India. GEHPL employees are
intensely involved in those activities. They are involved right through the
negotiation process in India. Indian customers discuss the MOU terms and
other items with these expats and GEHPL employees. The GE Overseas
entities submit their bids in India. The overseas entities would not have
been able to make any sales in India without involvement of Indian team
constituted by employees of GEHPL along with expatriates heading the
relevant team. It is, therefore, held that the appellant has a business
connection in India in terms of the principles laid down through variousITA 621/2017 & connected matters Page 24 of 85
judicial pronouncement discussed above, in view of the presence of the
expatriates who are working for the business of the appellant in India
along with employees of GEIIPL. The business activities carried out
through GEHPL results into a business connection of the nature referred
to in Explanation 2 of Section 9(1)(i) of the Act.
34. It was argued that the activities carried out by the expatriates and
the activities of GEIOC, LO are not preparatory or auxiliary in nature as
claimed by the appellant. The activities of various GE entities in India,
carried out through their expatriate employees, are related to marketing
and sales which is a core activity and integral part of any business.
Marketing and sales activities of the GE entities in India contribute to the
income of the concerned entity. According to the appellants GEIOC, LO
acts as a communication channel only and is providing support services.
However, all the employees (of the LO) are deputed to different GE
entities. Its office space, facilities and staff are being used by GE Overseas
entities for their business. The agreement for providing support services
by GEHPL to GEIOC and affiliates is with GEIOC which means that
GEIOC, LO is providing all the facilities and support in India for the
business of GE Overseas entities. For that reason too the benefit of
preparatory and auxiliary clause to GEIOC, LO is not available in terms of
para 26 of the Commentary on Article 5 of OECD Model Tax Convention
as discussed in detail by the AO and affirmed by the lower appellate
authorities.
35. It was argued that marketing and sales activities, controlled and
monitored by the assessee‟s expats, which were on its payroll, is a coreITA 621/2017 & connected matters Page 25 of 85
management activity. The two premises, from where these activities were
undertaken, and the deep and pervasive nature of control, at every stage,
leading to finalization of all technical specifications in regard to supply of
equipments and customized machinery, its pricing and all material details
involved the active and detailed involvement of these expats. If any
consultations did take place, it was only a part of the process. Therefore,
activities such as scouring the market, development, market strategy
(which is specific to each geographic sector having regard to its
peculiarities) negotiations, price adjustments etc were integral to contract
formation. It could not be termed as mere negotiation, with the final “yes”
or approval by the overseas entity. The end of the process, i.e the formal
approval, might in fact be a ritualistic one, where every part of the
meaningful negotiation phase took place, or significant parts of it, took
place in India. Learned counsel relied upon the Allahabad High Court
judgment in Brown & Sharpe Inc v Commissioner of Income Tax 2014
(369) ITR 704 in support of his submissions. Reliance was also placed on
the Division Bench judgment in Rolls Royce Plc v Director of Income Tax
2011 (339) ITR 147 (Del).
36. As regards the assessees‟ submission with respect to agency PE it
was argued that GE India is an agent of independent status and it is both
legally and economically independent of the GE Overseas entities. It
provided marketing support to GE Overseas entities. Further, GE India
performs activities on its own account, independently and without any
detailed instructions and control from GE Overseas entities. Reliance wasITA 621/2017 & connected matters Page 26 of 85
also placed on AAR ruling in the case of AI Nisr Publishing 1999 (239)
ITR 879 (AAR).
37. Mr. Bhatia also refuted Mr. Jolly‟s submission with respect to
attribution and argued that the margin of 35% was correct and reasonable.
Analysis and Conclusions:
38. The relevant provision of the DTAA, i.e the Indo-US DTAA reads
as follows:
“Article 5.1. 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’ includes especially:
(a) a place of management;
(c) an office;
(d) to (l)
3. Notwithstanding the preceding provisions of this Article,
the term „permanent establishment’ shall be deemed not to
include any one or more of the following :
(a) to (d)
(e) the maintenance of a fixed place of business solely for the
purpose of advertising, for the supply of information, for
scientific research or for other activities which have
a preparatory or auxiliary character, for the enterprise.
4. Notwithstanding the provisions of paragraphs 1 and 2,
where a person— other than an agent of an independent status
to whom paragraph 5 applies— is acting in a Contracting State
on behalf of an enterprise of the other Contracting State, thatITA 621/2017 & connected matters Page 27 of 85
enterprise shall be deemed to have a permanent establishment
in the first-mentioned State if :
(a) he has and habitually exercises in the first-mentioned
State an authority to conclude contracts on behalf of the
enterprise, unless his activities are limited to those mentioned
in paragraph 3 which, if exercise through a fixed place of
business, would not make that fixed place of business a
permanent establishment under the provisions of that
paragraph;
(b) to (c)……
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, provided that such persons are
acting in the ordinary course of their business.
However, when the activities of such an agent are
devoted wholly or almost wholly on behalf of that
enterprise and the transactions between the agent and the
enterprise are not made under arm’s length conditions, he
shall not be considered an agent of independent status within
the meaning of this paragraph.”
Re: Question No. 1
39. Fixed place permanent establishments (“fixed place PE”) are
governed by Articles 5(1) to 5(3) of the U.S. – India Double Taxation
Avoidance Agreement [“DTAA”]. In the current context, the relevant
articles spell out three conditions – which were also considered by ITAT –
for the establishment:
(i) The enterprise must have a fixed place of business
[Article 5(1) of DTAA]
(ii) The business of the enterprise must be wholly or partly
carried on through the fixed place [Article 5(1) of the DTAA]ITA 621/2017 & connected matters Page 28 of 85
(iii) The fixed place of business must not be solely for the
purposes of advertising, supply of information, scientific
research or other activities which have a preparatory or
auxiliary character [Article 5(3)(e) of the DTAA]
40. GE‟s overseas enterprises have a place of business in India, per
Article 5(1) of the DTAA. The term “place of business” has been
understood to mean any premises, facilities or installations used for
carrying on the business of the enterprise – does not have to be
exclusively used for that purpose [OECD Model Tax Convention on
Income and on Capital, Commentary on Article 5 Concerning the
Definition of Permanent Establishment, para. 4 (“OECD MTC”)], with
even a certain amount of space at its disposal is sufficient to cause fixed
place of business.1 Moreover, having space at disposal does not require a
legal right to use that place – mere continuous usage is sufficient if it
indicates being at disposal. (Ref Para 4.1 of OECD MTC).
41. In the decision in Formula One, (supra), the Supreme Court had
occasion to deal with what is a permanent establishment. After reviewing
several previous authorities and legal commentaries, the court stated as
follows:
“The term “place of business” is explained as covering any
premises, facilities or installations used for carrying on the
business of the enterprise whether or not they are used
exclusively for that purpose. It is clarified that a place of
business may also exist where no premises are available or
1The para reads as follows:
“4. The term “place of business” covers any premises, facilities or installations used for carrying on the business of
the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no
premises are available or require for carrying on the business of the enterprise and it simply has a certain amount of
space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or
otherwise at the disposal of the enterprise….”ITA 621/2017 & connected matters Page 29 of 85
required for carrying on the business of the enterprise and it
simply has a certain amount of space at its disposal. Further, it
is immaterial whether the premises, facilities or installations
are owned or rented by or are otherwise at the disposal of the
enterprise. A certain amount of space at the disposal of the
enterprise which is used for business activities is sufficient to
constitute a place of business. No formal legal right to use that
place is required. Thus, where an enterprise illegally occupies
a certain location where it carries on its business, that would
also constitute a PE. Some of the examples where premises are
treated at the disposal of the enterprise and, therefore,
constitute PE are: a place of business may thus be constituted
by a pitch in a market place, or by a certain permanently used
area in a customs depot (e.g. for the storage of dutiable goods).
Again the place of business may be situated in the business
facilities of another enterprise. This may be the case for
instance where the foreign enterprise has at its constant
disposal certain premises or a part thereof owned by the other
enterprise. At the same time, it is also clarified that the mere
presence of an enterprise at a particular location does not
necessarily mean that the location is at the disposal of that
enterprise.
The OECD commentary gives as many as four examples where
location will not be treated at the disposal of the enterprise.
These are:
The first example is that of a salesman who regularly visits a
major customer to take orders and meets the purchasing
director in his office to do so. In that case, the customer’s
premises are not at the disposal of the enterprise for which the
salesman is working and therefore do not constitute a fixed
place of business through which the business of that enterprise
is carried on (depending on the circumstances, however,
paragraph 5 could apply to deem a permanent establishment to
exist). Second example is that of an employee of a company
who, for a long period of time, is allowed to use an office in the
headquarters of another company (e.g. a newly acquired
subsidiary) in order to ensure that the latter company compliesITA 621/2017 & connected matters Page 30 of 85
with its obligations under contracts concluded with the former
company. In that case, the employee is carrying on activities
related to the business of the former company and the office
that is at his disposal at the headquarters of the other company
will constitute a permanent establishment of his employer,
provided that the office is at his disposal for a sufficiently long
period of time so as to constitute a “fixed place of business”
(see paragraphs 6 to 6.3) and that the activities that are
performed there go beyond the activities referred to in
paragraph 4 of the Article.
The third example is that of a road transportation enterprise
which would use a delivery dock at a customer’s warehouse
every day for a number of years for the purpose of delivering
goods purchased by that customer. In that case, the presence of
the road transportation enterprise at the delivery dock would be
so limited that that enterprise could not consider that place as
being at its disposal so as to constitute a permanent
establishment of that enterprise.
Fourth example is that of a painter, who, for two years, spends
three days a week in the large office building of its main client.
In that case, the presence of the painter in that office building
where he is performing the most important functions of his
business (i.e. painting) constitute a permanent establishment of
that painter.
It also states that the words „through which‟ must be given a
wide meaning so as to apply to any situation where business
activities are carried on at a particular location which is at the
disposal of the enterprise for that purpose. For this reason, an
enterprise engaged in paving a road will be considered to be
carrying on its business „through‟ the location where this
activity takes place.”
42. Applying the standard to the facts at hand, the ITAT and the lower
appellate authorities found that GE India – is located in the space leased
by GEIOC in the AIFACS building. This space was at the constantITA 621/2017 & connected matters Page 31 of 85
disposal of GEIOC as evidenced by specific chambers/rooms and
secretarial staff allotted to GE staff, and was used by GE staff for their
work. GE has not made new submissions on this specific question in this
case. Based on the factual record, it appears that ITAT‟s factual
determinations in this regard are sound and in consonance with the general
meaning of the expression PE vis-à-vis continuity of space available for
GEIOC‟s activities.
43. GE‟s activities in India are wholly or partly carried on through its
fixed place of business. The term “through which” is to be given a wide
latitude – when business is carried out at a particular location at the
disposal of an enterprise, it is sufficient to say it meets the “through
which” threshold.
44. The ITAT found that the core of the sales activity was done from
the AIFACS building (“the premises”). Contrariwise, GE challenged this
finding of fact, arguing that there was a difference between sales made
from the AIFACS building and the presence of GE India employees at the
premises. Its argument is that merely because expatriates and employees
were found at the premises, could not lead to the conclusion that the sales
were made from that place. GE‟s argument in this context is unpersuasive.
If the premises were not where the relevant business activities occurred,
then the location where they did would likely form the fixed place PE.
The ITAT determination in this context is reasonable and sound. Insofar
as GE has not contested that the premises were indeed used for activities
of some form, it is reasonable to assume those activities occurred through
the premises.ITA 621/2017 & connected matters Page 32 of 85
45. The next issue is a thornier one; i.e whether the presence and
availability of the space at the disposal of GE in this case, and the
evidence relied on by the lower authorities, could lead one to conclude
that it carried on business through its employees from that place. GE‟s
contention here is that the activities fall within the description in Article 5
(3), that excludes applicability of Article 5 (1), i.e that the premises are
maintained “solely for the purpose of advertising, for the supply of
information, for scientific research or for other activities which have
a preparatory or auxiliary character, for the enterprise.”
46. The ITAT‟s finding on this aspect was that the assessee‟s
arguments with respect to the activities being preparatory or auxiliary
character were unfounded. The relevant part of the discussion, which is
fairly detailed after analyzing several documents and e-mails, and on the
basis of survey recovered documents, reads as follows:
“28.1. The third condition for constituting a fixed place PE, to
the extent it is relevant for our purpose, is that the activities
carried on from such fixed place should not be of preparatory
or auxiliary character. If the activities done from such fixed
place fall within the purview of ‘preparatory or auxiliary’, the
fixed place sheds its character of a permanent establishment.
The term ‘preparatory activity’ is understood in common
parlance as some job concerned with the preparation of the
main task to be undertaken. It is pursued before the taking up of
the actual activity. Black’s Law Dictionary 7th Edition at page
130 defines the term ‘auxiliary’ to mean as ‘aiding or
supporting, subsidiary.’ An activity becomes auxiliary if it is in
support or aid of the core income generating activity. The
Hon’ble jurisdictional High Court in U.A.E. Exchange Centre
Ltd. vs. Union of India and Ors. (2009) 313 ITR 94 (Del)
considered a case in which the activity to be done through the
Liaison Office in India was of downloading the data;ITA 621/2017 & connected matters Page 33 of 85
preparation of cheques for remitting the amount; and
dispatching the same through courier by Liaison Office. The
Hon’ble High Court designated it as auxiliary to the main
activity of the petitioner. The Hon’ble jurisdictional High Court
in a more recent decision in National Petroleum Construction
Company vs. DIT (IT) MANU/DE/0223/2016 : (2016) 383 ITR
648 (Del), considering the earlier decisions in Morgan Stanley
(supra) and UAE Exchange Centre (supra), has held that
activity of preparatory or auxiliary character is remote from
actual realization of profits and is simply in aid or support of
the main activity. In that case, the activities of the liaison office
in India were held not to contribute directly or indirectly to the
earning of profits by the assessee and the same being of
preparatory or auxiliary nature, did not constitute PE in terms
of Article 5(3)(e) of the DTAA. The Hon’ble Supreme Court in
Morgan Stanley (supra) held that back office functions
performed in India are the activities of preparatory or auxiliary
character, which do not constitute a fixed place PE under
Article 5(1) of the DTAA.
28.2. It is discernible from an outline of the above judgments
rendered by the Hon’ble Apex Court and the Hon’ble
jurisdictional High Court that the test for determining a
preparatory or auxiliary activity is not to see if the core activity
can or cannot be performed without it. Rather, the test is that
such activity merely supports the core activity and does not per
se lead to earning of income. If the activity carried on from a
fixed place in India is simply in aid or support of the core
income generating activity and is remote from the actual
realization of profits, the same assumes the character of a
preparatory or auxiliary nature and falls within clause (e) of
Article 5(3) to bring the case out of the ambit of a ‘permanent
establishment’. One thing is clear from all the above decisions
cited by the ld. AR that the activities performed by those
assesses in India were either done by their liaison offices acting
as communication channel strictly as approved by the RBI or
were in aid and support of the main activity, not generating any
income in themselves.ITA 621/2017 & connected matters Page 34 of 85
28.3. Section 2(e) of Foreign Exchange Management
(Establishment in India of Branch of Office or Other place of
business) Regulations, 2000 defines ‘Liaison office’ to mean a
place of business to act as a channel of communication between
the principal place of business or HO and entities in India, but
which does not undertake any commercial/trading/industrial
activity and maintains itself out of inward remittances received
from abroad through normal banking channel. From the
definition of Liaison office seen in juxtaposition to the above
referred judgments, it becomes clear that acting as a
communication channel is an activity of auxiliary character
and hence does not constitute a PE in India.
28.4 Now, let us examine if the activities carried out in India by
the GE overseas entities through GE India are of preparatory
or auxiliary character. Main focus of the ld. AR was to
establish that the activities done by GE India were of
preparatory or auxiliary character. As per the application
made to RBI and permission obtained, the LO of GEIOC was to
act as a communication channel between the head office and
the customers in India. Thus, there remains no doubt that the
activities to the extent of communication channel, as sanctioned
by the RBI, being of preparatory or auxiliary character, would
not constitute any PE in India. However, it has been noticed
above that the actual activities carried on from the fixed place
of AIFCAS building did not remain confined only to those of a
communication channel as was allowed by the RBI to GEIOC
at the time of setting up its LO in India.
28.5 The ld. AR harped on the assessee’s reply to the AO’s letter
dated 14.11.2008 submitting four stages of sales to contend that
the activities carried out in India by GE India were merely
preparatory or auxiliary. He further relied on the roles and
responsibilities of employees of GEIIPL etc. supplied by the
assessee to Department, pursuant to the judgment of the
Hon’ble High Court. Based on such submissions, it was argued
that all the activities carried out in India were of preparatory
or auxiliary nature and the core activity of earning income was
done by GE Overseas outside India.ITA 621/2017 & connected matters Page 35 of 85
28.6 We have gone through the aforesaid reply given by the
assessee which has been incorporated on page 45 onwards of
the assessment order and also the role and responsibilities of
the employees of GEIIPL etc. working in India, which we will
now espouse for consideration. The reply briefly explains the
sales process in four stages, viz.,
Stage 1-Pre-qualification;
Stage 2-Bid/no bid and Proposal development;
Stage 3-Bid approval and negotiations; and Stage
Stage 4-Final contract development and approval
28.7.1. The ld. AR contended that for the first stage of ‘Prequalification’, the assessee stated before the AO that GE India’s
role comprises of assisting GE Overseas in identifying business
opportunities/leads. GE India collects and furnishes
information pertaining to market trends, key policy changes in
the industry, etc. Through these efforts, GE India is able to
identify opportunities for GE Overseas. Once GE India
identifies a business opportunity, it communicates the potential
opportunity to GE Overseas. GE India provides its marketing
support services at this stage within the broad framework and
strategy formulated by GE Overseas.
28.7.2 It is clear from the above that the assessee admitted the
role of GE India (expats of GEII and the employees of GEIIPL)
in identifying business opportunities, collecting and furnishing
information pertaining to market trends, key policy changes in
the industry, etc.
28.8.1. For the second stage of ‘Bid/no bid and Proposal
development’, the ld. AR contended that the assessee stated
during the course of the assessment proceedings that on receipt
of communication from GE India regarding an identified viable
business opportunity, GE Overseas analyses the same
independently for deciding whether the same is worth pursuing.ITA 621/2017 & connected matters Page 36 of 85
In case GE Overseas requires any
inputs/clarifications/additional information (as part of its
decision making process), it may request GE India to provide
the same. GE Overseas examines the opportunity in detail and
thus arrives at an independent decision of whether to pursue
the identified business opportunity or not. Entire technical and
commercial evaluation of the opportunity at this stage is
carried out by GE Overseas with inputs from its various
functional personnel spanning operations, finance, marketing,
etc. In the event, GE Overseas decides to pursue the identified
business opportunity, it commences the proposal development
process and intimates GE India in this regard. GE India (on
receipt of such intimation and under the explicit instructions of
GE Overseas) undertakes an interaction with the prospective
end-customer so as to identify customer’s requirements/which
are passed on to GE Overseas as inputs in the proposal
development process. As part of the proposal development
process, GE Overseas may seek inputs from GE India in respect
of various aspects such as pricing, preparation of bidding
package and other supplementary information.
28.8.2. It is noticed that the assessee has admitted a small role
played by GE India. Claim of independent decision taken by GE
overseas has been rightly held by the AO as erroneous. Various
survey documents, as discussed above, abundantly show GE
India playing an important and proactive role in the
finalization of the deal and the terms and conditions with
customers in India. In reality, the major activities about
sourcing of customers and finalizing the deals with them were
done by GE India in consultation, wherever required, with GE
Overseas. The assessee frankly admitted in the same para that:
‘In some instances, the proposal development is jointly run by
the GE Overseas and GE India teams.’ This is also borne out
from page 104 of the Survey documents PB-II, as discussed
above, which is an e-mail from Pump Design Department to GE
India and copy to other members of GE India requesting the
Indian team to send the draft of MOU along with complete
comments, so that the same could be incorporated in the
original MOU. Similarly, page 127 of the Survey documentsITA 621/2017 & connected matters Page 37 of 85
PB-I shows that the MOU with BHEL reflected the
conversation what GE India and GE overseas discussed. Thus,
there is not even an iota of doubt that GE India was fully
involved in proposal development.
28.9.1. The ld. AR submitted for the third stage of ‘Bid approval
and negotiations’, that the assessee stated before the AO that
once the proposal/bid/tender have been put together as
described in Stage 2 above, it is approved by the senior
management during the Stage 3 and, thereafter, submitted to
the end customer. Subsequently, GE Overseas may carry out
negotiations with the customer, which may entail addressing
queries, if any, raised by the end-customer, seeking/providing
clarifications regarding work scope, pricing, etc required by
the end customer. For the fourth stage of ‘Final contract
development and approval’, the assessee stated that GE
Overseas discusses the outcome of the negotiation process
internally amongst its various overseas functional
heads/approving authorities (operations, finance, legal, etc.) so
as to decide whether or not to go-ahead with the contract on
the agreed terms and conditions with the customer. If the
negotiated contract terms are approved and accepted both by
GE Overseas and the end-customer, the contract documents are
prepared and executed/signed by GE Overseas. Local inputs
are obtained from GE India at this stage on a need basis.
28.9.2. Here again we find that the assessee’s submissions are
only partly true. Pages 101-103 of the Survey documents PB-II,
as discussed above, evidence GE India finalizing MOU with the
Indian customer, Pump Design Department of IOC, and
advising accordingly to the GE Overseas. Then, there is a mail
showing that the change was permitted in the terms of MOU by
the Indian team, which was conveyed by GE India to the
customer, with a copy to another member of GE India. GE
India was negotiating terms with the Indian customers is also
borne out from page 195 of Survey Documents PB-I as
discussed above, whereby Indian customer was requesting GE
India to revise the offer. Similarly, page 82 of Survey
Documents PB-I, as discussed above, shows that GE IndiaITA 621/2017 & connected matters Page 38 of 85
changed the terms and conditions. In the like manner, pages 2
and 3 of Survey Documents PB-II show that the draft
agreement by Reliance Industries Ltd. to GE Overseas was sent
back to GE India to get it reviewed from aftermarket colleagues
in India. Pages 32 and 33 of Survey documents PB-II show that
when GE Overseas tried to contact directly with RIL, GE India
objected to the same and wanted the entire consultations only
through the Indian team, which was positively responded by GE
Overseas. Page 39 of the Survey documents PB-II again shows
that it is GE India which was negotiating with Indian customers
and not allowing GE Overseas even to change the terms and
conditions.
28.10. At this juncture, it is significant to note that the assessee
is not dealing in off the shelf goods. Sales are made on the basis
of a prior contract. In such cases, customer’s requirements are
first properly understood and thoroughly examined; then
commercial and technical discussion meetings take place; then
proposals are prepared after negotiations on technical and
commercial aspects taking Indian laws and regulations in
consideration. These are all significant and essential parts of
sales activity, which have to be necessarily done in India by GE
India. Ordinarily, it is not the Indian customer, who would visit
GE entities overseas, but it is GE India, who has to have
physical presence in India and such presence is through the GE
India team.
28.11. It follows from the foregoing discussion that most of the
work concerning the first stage of Pre-qualification was
admittedly done by GE India; for the second stage of Bid/no bid
and Proposal development, albeit the assessee admitted that in
some instances, the proposal development was jointly done by
the GE Overseas and GE India teams, but we have noticed from
the survey documents that the core activities of finding the
customers and finalizing the deals with them were done by GE
India in consultation, wherever required, with GE Overseas;
for the third stage of Bid approval and negotiations and the
fourth stage of Final contract development and approval, again
we have found that it was GE India who was finalizing andITA 621/2017 & connected matters Page 39 of 85
changing the terms and conditions of MOU with the Indian
customers and GE Overseas was not even allowed to change
any of the terms and conditions directly without consulting GE
India. The mere fact that the contracts were formally signed
outside India by GE Overseas does not in any manner
undermine the doing of core activity of sales by GE India. It is
so for the reason that GE India finds customers in India,
understands their requirements, negotiates necessary terms and
conditions with them, prepares or helps in preparing MOU and
finalizes the deal with them. With the doing of all the above
activities, when MOU is prepared in India and the Indian
customer signs it first in India and then it is sent to GE overseas
for signature, for all practical purposes, it will have to be
concluded that core sales activity was undertaken by GE India
alone.
28.12. Next leg of the submissions to bolster the argument of
the preparatory or auxiliary services rendered by GE India was
reference to the Roles and responsibilities of some of the expats
and employees of GEIIPL etc. supplied by the assessee to
Department pursuant to the judgment of the Hon’ble High
Court. Based on such details, it was argued that GE India was
simply assisting GE Overseas and their role was not more than
that of a support staff to GE Overseas, who, in turn, was taking
all the relevant decisions regarding sales in India.
28.13. At this point it is pertinent to mention that the
Department collected Linked in profiles of some employees of
GE group, who in its opinion were carrying on the operations
of GE overseas in India. Such details were filed before the
Tribunal on an earlier occasion as additional evidence. The
tribunal passed a separate order admitting such evidence. On a
writ petition, the Hon’ble High Court vide its order dated
21.11.2014 set aside the tribunal order but required the
assessee to furnish the details of :’Names, designations, roles
and responsibilities of the employees of G.E. Group
Companies, who were working in India during the relevant
period along with their educational qualifications’. The
assessee filed the information, whose copy has been placedITA 621/2017 & connected matters Page 40 of 85
before us. Thus, it is clear that this information was given by
the assessee after the passing of the assessment order and no
Income-tax authority had any occasion to verify its veracity.
This information is about the persons engaged in Indian
activities of GE overseas companies.
28.14. Now let us see the status of role and responsibilities of
some members of GE India team as given by the assessee
following the Hon’ble High Court judgment and what
transpired from the documents found during the survey and
post-survey proceedings but before issuing notice u/s. 147.
i. William BlairAnnexure 5 to the assessee’s letter pursuant to the Hon’ble High
Court’s order explains his roles and responsibilities. It has been
written that William, inter alia,: ‘had limited involvement in a
transaction as he was primarily responsible to overseeing the
functioning of his group. … He was just acting as a
communication channel and was responsible for
communicating GE overseas entity’s position to the Indian
customer and transmitting customer’s feedback to the GE
overseas entity for further inputs. William had no authority to
finalize any deal. … All the pricing and terms and condition
decisions were taken by GE overseas entity and he had no role
in such decision making. … William’s responsibility was to take
prior approval for initiating any dialogue with customers in
India. Further, he had no authority to sign or execute any
contract on behalf of GE overseas entity and he never executed
any contract with customers in India.’ The above narration of
role and responsibilities shows that William was to act as a
mere communication channel between the customers in India
and GE Overseas. In contrast, when we see his ‘Job description’
given under his own signature in the documents as discussed
above, it transpires that he was to: “Organize local aviation
team including commercial and military sales leaders; Conduct
compliance risk assessments, audits and support training for
aviation team members in India; Develop aviation growth
strategy for India and obtain HQ support for same.” In otherITA 621/2017 & connected matters Page 41 of 85
words, he was responsible for all the activities of sales in India
and only the requisite support was to be taken from HQ. There
is an apparent contradiction between what William said in a
document signed by him and the picture of his role which the
assessee portrayed after the conclusion of assessment. It goes
without saying that the primary document duly signed by
William showing his job responsibilities will have precedence
over what the assessee stated by way of Annexure after the
termination of assessment.
ii. Kumar PratyushAnnexure 12 to the assessee’s letter pursuant to the Hon’ble
High Court’s order explains his roles and responsibilities. It
has been written that, inter alia, : ‘Pratyush was not involved in
any sales….. was never involved in negotiating deals, terms and
conditions and pricing for or on behalf of any GE overseas
entity. He was more involved in overall management of client
and government relationships including smooth functioning of
GE businesses in India’. In contrast, when we see his
designation in the Assignment letter as ‘Leader, GE
Infrastructure, Ops-India’ of GE Transportation reporting
directly to the Global CEO of GE Infrastructure and the ‘job
description’ given by him in the earlier referred documents of
having a specific role to: ‘Help GE infrastructure business
develop their strategy in India; Align GE solutions with
customer need; Help shape policy to realize opportunities; and
Facilitate business development discussions’, it becomes
manifest that the assessee intentionally trimmed his role to
justify its stand, which, being contrary to the primary and
source documents, cannot be accepted.
iii. Nalin Ashfaq
Annexure 18 to the assessee’s letter pursuant to the Hon’ble
High Court’s order explains his roles and responsibilities. It
has been written that, inter alia,: ‘Ashfaq was responsible for
providing support to the Transportation Division ….He was not
involved in any parts sales to customers in India. At theITA 621/2017 & connected matters Page 42 of 85
relevant time, he was involved in promoting the business of sale
of parts to Railways and developing market strategies. His role
was to get into the discussion with Railways for marketing
development. Ashfaq had no signing authority’. This shows that
though the assessee candidly admitted in the post assessment
letter that Ashfaq was involved in promoting the business of
sale of parts to Railways and developing market strategies, but
it also simultaneously undermined his actual role by saying that
he was not involved in any actual sales. This is contrary to the
Appraisal report showing his job as also including to:
“Coordinate activities of the marketing and sales teams to
develop potential solutions…. to Evaluate the team’s
performance against the business goals and objectives…..’. He
has mentioned his ‘Accomplishments’ in terms of sales and
orders in India. Then, there is the ‘Manager Assessment’ on
page 63, which shows that he made solid progress in ’06 with
‘Orders and sales’. It is discernible from the above discussion
that the assessee did not properly state the role and
responsibilities of Ashfaq in the letter filed post assessment, on
which the ld. AR has relied to canvass that the role played by
GE India was only auxiliary and preparatory.
iv. Pierson KennethAnnexure 19 to the assessee’s letter pursuant to the Hon’ble
High Court’s order explains his role and responsibilities. It has
been written, inter alia, that,: ‘Kenneth’s profile was more of
locating opportunity and providing marketing development
strategies for the GE overseas entity…. Kenneth had no
authority to take any decision with respect to the sale of
product/parts in the signaling business. All prices and terms
and conditions were negotiated and finalized only by the GE
overseas entity. Kenneth being technical person did not have
any authority to negotiate any terms of contracts in India.’ Now
let us have a look at his Assignment letter, which shows his
position as ‘Sales & Marketing Manager’ of GE Transportation.
We fail to comprehend as to what a ‘Sales & Marketing
Manager’ will do without any authority to take any decision
w.r.t. sale. Fallacy of the assessee’s claim in the postITA 621/2017 & connected matters Page 43 of 85
assessment letter is established from the Self appraisal report of
Kenneth, which states that ‘He Led the GS team through key
activities – Sales, Cross-approval, Partnership approvals,
Marketing and Resourcing.’ Then there is ‘Manager assessment’
of the self appraisal of Kenneth M. Pierson. It has been
mentioned that: ‘Ken is committed to growing the India
signaling business, but missed the orders target for the year’.
This shows that Kenneth Pierson was given sales target, which
he could not achieve. Here, it is relevant to note the judgment
of the Hon’ble Allahabad High Court in Brown and Sharpe Inc.
vs. CIT & Anr. (2014) 369 ITR 704 (All) in which the Tribunal,
while affirming the order of the CIT (A), relied upon relevant
documentary material in arriving at the conclusion that the
activities of the liaison office established that it was promoting
the sales of the assessee in India and the Assessing Officer was
justified in holding that the income attributable to the liaison
office was taxable in India. Upholding such a view, the Hon’ble
High Court held that: ‘the Tribunal has correctly noted that in
the present case, the liaison office was promoting the sales of
the goods of the assessee company through its employees, to
whom a sales incentive plan was provided for achieving a sales
target and the performance of the employees was being judged
by the orders secured by the assessee.’ In the instant case also,
it is clear that the sales targets were assigned to the expats etc.
and Kenneth Pierson, a ‘Sales & Marketing Manager’, could
not achieve the sales target given to him. Going by the ratio
decidendi of Brown and Sharpe (supra), it is palpable that PE
of GE Overseas was established in India.
v. Ricardo ProcacciAnnexure 20 to the assessee’s letter pursuant to the Hon’ble
High Court’s order explains his role and responsibilities. It has
been written, inter alia, that,: ‘Riccardo’s role was to find out
how India would be relevant for Oil & Gas business and also to
gather information on the customers in such industry. … His
role was limited to understanding the needs of the customers in
India and pass such information to the GE overseas entity in
Italy. … At any point of time, he was not delegated any power toITA 621/2017 & connected matters Page 44 of 85
take decision on behalf of the GE overseas entity. He was
acting as liaison between GE overseas entity and customers in
India. His responsibility was to liaise the relationship with
Indian customers….Most of commercial negotiations were done
by the commercial operation team sitting in Italy… Riccardo
never took any decision or negotiated on behalf of the GE
overseas entity. … and he was merely acting as channel
between the Commercial team and the Customers’. Here again,
the assessee misled by stating wrong facts about the working of
Ricardo in the post-assessment letter. His Assignment letter
shows his position as ‘Oil & Gas, India Country Leader’ of GE
Energy. We have noticed from the survey documents above that
Ricardo was not only negotiating and finalizing the terms and
conditions with customers in India but also not allowing GE
Overseas to alter any such terms without the consent of GE
India. The assessee did not furnish his Appraisal report and
Manager assessment despite a specific request by the AO till
the completion of assessment.
vi. Nalin Jain (GEIIPL)-
Annexure 8 to the assessee’s letter pursuant to the Hon’ble High
Court’s order explains his role and responsibilities. It has been
written, inter alia, that, : ‘Nalin’s role was to collect the market
intelligence and initiate a dialog with the Indian customer to
understand their requirements… His role was to pass on the
information/queries between the overseas entity and the Indian
customer…Nalin has no authority to finalize any deal. He was
just acting as a communication channel…All the pricing and
terms and condition decisions were taken by GE overseas entity
and he had no role in such decision making’. Here again, we
find that the assessee did not come out clean. Survey documents
show his designation in India as ‘Sales Director’ of GE
Transportation, Aircraft engines. ‘Job description’ has been
given as ‘Market Intelligence and Support to Headquarters.’ He
has indicated his ‘Reporting Manager’ as William Blair, who is
one of the seven expats from GEII working in India for GE
overseas entities.ITA 621/2017 & connected matters Page 45 of 85
28.15. On a holistic consideration of the entire material before
us, por una parte, there is primary, specific and original
substantiated material relied by the ld. DR in the form of survey
documents, Self appraisals, Manager assessment and Job
descriptions given under the signature of such persons, showing
the doing of core sale activity by GE India, and por otra parte,
there is somewhat contrary, generalized and unsubstantiated
material relied by the ld. AR in the form of the downplayed role
of GE India in four stages of sales and job responsibilities
stated by the assessee (not by the concerned employees) after
the completion of assessment, for a claim that GE India was
rendering services to GE Overseas as a mere communication
channel and such services were of preparatory or auxiliary
character. It goes without saying that the specific, primary,
original and substantiated material will have primacy over the
generalized and unsubstantiated material. But for the survey
action unearthing the specific and primary material divulging
the doing of core sale activity by GE India, the reality would
have remained under the carpet and the assessee would have
continued to harp on its general submissions with downsized
roles and underplayed responsibilities of GE India, to avoid the
establishment of PE in India.
28.16. Having seen that how the assessee degraded the
designations and lowered the roles and responsibilities of the
expats etc. in the statement filed pursuant to the Hon’ble High
Court judgment, showing as if they were mere communication
channel as against the stark reality of their performing all the
core functions in India relating to sales, we will now discuss the
details filed by the assessee along with the same letter about
some other employees of GEIIPL who were engaged in the
activities in India. Despite showing all of them as doing mainly
the work of mediator, the assessee has also accepted
involvement of some of them in core activities, which is as
under:-
i. Anand Mohan Awasthy – He is a Mechanical Engineer with
Diploma in Finance and is an employees of GEIIPL working
since Financial year 2000-01. His designation is ‘ServiceITA 621/2017 & connected matters Page 46 of 85
Manager’. Annexure 1 discusses his roles and responsibilities,
being, ‘Responsible for aftermarket sales (spares) and services
in respect of steam turbines and generators sold by various GE
overseas entities in India’.
ii. Anand Bansal-He is in Business Administration/Management
and is an employees of GEIIPL working since Financial year
2002-03. His designation is ‘Sales Manager’. Annexure 2
discussing his roles and responsibilities provides through the
second bullet point that : ‘As a part of his job, Anand’s role was
to formulate marketing strategy for wind energy related
equipments in India, which involved, among other things,
determining a marketing strategy that helps distinguish GE
products from its competitors, assist potential customers in
their study phase and help define their needs for wind energy
equipments.’ Bullet point 5 also provides that : ‘From 2007
onwards, Anand was supporting BGGTS (Joint venture of GE
and BHEL), and was responsible to providing after sale and
maintenance support.’
iii. Sharmila Barathan – She is MA in Economics and also did
her Masters in International Business. She is an employee of
GEIIPL. Her designation is ‘Government Affairs’. Annexure 3
discussing her roles and responsibilities provides through the
second bullet point that : ‘She supports the team of Market
Development and assist them through shaping government
policies. Her role was to provide recommendations on the
integrated energy policies and also to prepare enabling policies
to encourage investments in the Energy sector on behalf of GE.’
iv. Scott Bayman – He did his masters in Management and
Bachelors in Marketing. His designation is ‘President and
CEO’. Annexure 4 discussing his roles and responsibilities
provides through the first bullet point that his: ‘primary role
was to help set-up local support teams in India.’ The second
bullet point provides that he: ‘would ask for headcount from
HQ to create local teams. He was responsible for growth of
GE’s businesses in the Indian market. He was also responsible
for management of local business affairs, compliance practices,ITA 621/2017 & connected matters Page 47 of 85
integrity aspects, HR and also had oversight over capital
business’.
v. Sujoy Ghosh – He is an Electrical Engineer and is an
employee of GEIIPL. His designation is ‘Sales Manager’.
Annexure 6 discussing his roles and responsibilities provides
through bullet point five that ‘At that point of time there was a
robust R Table process followed by all GE businesses. Under
such R Table process, no person sitting in India could make a
proposal to any customer in India without prior approval of GE
overseas entities nor could any person sitting in India negotiate
or finalize any contract in India.’ One thing is clear from the R
Table process that there was no blanket bar on GE group
employees in India for making proposals or to negotiate or
finalize any contract in India. Making a proposal envisages
examining the opportunity in detail, undertaking an interaction
with the prospective end-customer so as to identify his
requirements, studying all the relevant aspects, finding out the
technical and financial viability, and then arriving at the
ultimate conclusion of the supplying and pricing. The only
condition set out under the R Table process on the Indian
employees working for GE overseas entities in India was that
the approval was required to be sought from the GE overseas
before sending the proposal to customers in India. The assessee
has itself admitted through stage 2: Bid/no bid and Proposal
development of the ‘Sales process’ that: ‘In some instances, the
proposal development is jointly run by the GE Overseas and
GE India teams. However, even in such cases, decision making
authority continues to remain only with GE Overseas.’
vi. Sanjeev Kakkar – He did his masters in Mechanical
Engineering. His designation is ‘Sales Director’. He is an
employee of GEIIPL working since 2000. Annexure 10
discussing his roles and responsibilities provides through the
sixth bullet point that:’ As a part of his job, Sanjeev would
understand the requirements of clients in terms of equipment
required as well as financing required and thereafter,
communicate these requirements to the overseas entities.’ There
is again a reference to R Table process and it has beenITA 621/2017 & connected matters Page 48 of 85
mentioned that he will not sign or negotiate with any customer
in India without any prior approval of the overseas entities.
This again shows that he was signing or negotiating with
customers in India, but with the approval of the GE overseas. It
has been specifically provided in the eighth bullet point that:
‘Although Sanjeev and other people sitting in India were part of
the negotiating team with customers, however, at no point of
time could they commit to any negotiation with respect to terms
and conditions or discount without prior approval from the
overseas people listed on the R Table.’
vii. Alpana Khera – She did her Engineering in Instrumentation
and Diploma in Marketing. Her designation is ‘Sales Manager’.
She is an employee of GEIIPL working since 2001. Annexure
11 discussing her roles and responsibilities again refers to R
Table process, which implies that signing or negotiating with
customers in India was allowed but with the approval of the GE
overseas.
viii. Ashish Malhotra – He did his Electrical Engineering and
PG Diploma in Marketing. His designation is ‘Sales Manager’.
He is an employee of GEIIPL working since 2001.
ix. Jaimin Shah – He did his Mechanical Engineering. His
designation is ‘Account Executive’. He is an employee of
GEIIPL working since 2002. Annexure 21 discussing his roles
and responsibilities provides through the first bullet point that
he: ‘was responsible for the aftermarket sales services of
equipment’.
x. Vivek Venkatachalam – He did his B. Tech in Chemical
Engineering. His designation is ‘Executive – Business
Operations’. He is an employee of GEIIPL.
28.17. Taking above discussion into consideration, more
specifically, the primary, specific and original substantiated
material in the form of survey documents, self appraisals and
Manager assessment etc., there remains no doubt whatsoever
that GE Overseas was selling its products in India and the coreITA 621/2017 & connected matters Page 49 of 85
activities in regard to sale, namely, pre-sale, during-sale and
post-sale were being carried out in India by GE India.
Notwithstanding the fact that the AO has categorically held that
all the core activities regarding sales were done by GE India,
which has been confirmed by the ld. CIT(A) as well, the
assessee has failed to tender any evidence to show that such a
view canvassed by the authorities below is wrong and in fact,
such core operations were carried out in India by some other
means. Except for lip service that GE Overseas was doing core
sale activity and GE Overseas doing only preparatory or
auxiliary activities, the assessee did not place on record even
an iota of evidence to prove its contention. If we minutely
consider the nature of activities done by GE Overseas and GE
India, it clearly surfaces that GE India was doing core
marketing and sales activity and GE Overseas was doing only
auxiliary activities, in aid and support of the activities of the
marketing activities carried out by GE India.
28.18. Moreover, para 26 of the OECD Commentary discussing
exemption under sub-para (e), being activities of preparatory
or auxiliary nature, clearly provides that : ‘A fixed place of
business which renders services not only to its enterprise but
also directly to other enterprises, for example to other
companies of a group to which the company owning the fixed
place belongs, would not fall within the scope of subparagraph
e)’. This part of the Commentary explaining ‘preparatory or
auxiliary activities’ makes it clear that if a fixed place of
business is used for rendering services to more than one
companies of a group, as is a case under consideration, then
such services cannot be treated as of preparatory or auxiliary
character.”
47. Determining whether a practice is preparatory or auxiliary requires
asking whether the activity undertaken at the fixed place of business is an
essential and significant part of the activity of the enterprise as a whole. In
National Petroleum Construction Company vs. DIT (IT) (2016) 383 ITRITA 621/2017 & connected matters Page 50 of 85
648 (Del), it was held that activities that are remote from the realization of
profits are considered preparatory or auxiliary:
“26. The language of sub-para (e) of paragraph 3 of Article
5 of the DTAA is similar to the language of sub-para (e) of
paragraph 4 of Article 5 of the Model Conventions framed by
OECD, United Nations as well as the United States of America.
The rationale for excluding a fixed place of business
maintained solely for the purposes of carrying on activity of a
preparatory or auxiliary character has been explained by
Professor Dr. Klaus Vogel. In his commentary on “Double
Taxation Conventions, Third Edition”, he states that “It is
recognised that such a place of business may well contribute to
the productivity of the enterprise, but the services it performs
are so remote from the actual realisation of profits that it is
difficult to allocate any profit to the fixed place of business in
question. Examples are fixed places of business solely for the
purpose of advertising or for the supply of information or for
scientific research or for the servicing of a patent or a knowhow contract, if such activities have a preparatory or auxiliary
character”.
Accordingly, it is not simply that an activity is necessary for the
completion of a contract– it must be the case that the activities must per se
be responsible for the realization of profits.
48. Courts have also indicated clear markers for the requisite
involvement of Liaison Offices (LO) in the context of auxiliary or
preparatory activities. UAE Exchange (supra) held that in the context of
the transnational remit of funds, the mere processes of downloading
cheques and preparing the amount for remitting in India – where the
transaction occurred overseas – is auxiliary and preparatory:
“However, Article 5 (3) which opens with a non-obstante
clause, is illustrative of instances where-under the DTAAITA 621/2017 & connected matters Page 51 of 85
various activities have been deemed as ones which would not
fall within the ambit of the expression „permanent
establishment‟. One such exclusionary clause is found
in Article 5 (3) (e) which is: maintenance of fixed place of
business solely for the purpose of carrying on, for the
enterprise, any other activity of a preparatory or auxiliary
character. The plain meaning of the word “auxiliary‟ is found
in Black‟s Law Dictionary 7th Edition at page 130 which reads
as “aiding or supporting, subsidiary”. The only activity of the
liaison offices in India is simply to download information which
is contained in the main servers located in UAE based on which
cheques are drawn on banks in India whereupon the said
cheques are couriered or despatched to the beneficiaries in
India, keeping in mind the instructions of the NRI remitter. Can
such an activity be anything but auxiliary in character. Plainly
to our minds, the instant activity is in “aid” or “support‟ of the
main activity. The error into which, according to us, the
Authority has fallen is in reading Article 5 (3) (e) as a clause
which permits making a value judgment as to whether the
transaction would or would not have been complete till the role
played by liaison offices in India was fulfilled as represented by
the petitioner to their NRI remitter. According to us, what has
been lost sight of, is that, by invoking the clause with regard to
permanent establishment, we would, by a deeming fiction tax an
income which otherwise neither arose nor accrued in India –
when looked at from this point of view, the exclusionary clause
contained in Article 5 (3) and in this case in particular, subclause (e) have to be given a wider and liberal play. Once an
activity is construed as being subsidiary or in aid or support of
the main activity it would, according to us, fall within the
exclusionary clause. To say that a particular activity was
necessary for completion of the contract is, in a sense saying
the obvious as every other activity which an enterprise
undertakes in earning profits is with the ultimate view of giving
effect to the obligations undertaken by an enterprise vis-a-vis
its customer. If looked at from that point of view, then, no
activity could be construed as preparatory or of an “auxiliary‟
character.”ITA 621/2017 & connected matters Page 52 of 85
49. E-Funds (supra) held that the mere rendering of back office support
to foreign entities does not constitute essential and significant part of the
activities of the business as a whole.2 DIT v. Morgan Stanley 2007 (292)
ITR 416 (SC) likewise held that back-office activities for an international
bank that were occurring in India were auxiliary in relation to the main
business of the entity. However, the following observations in Morgan
Stanley (supra) are also relevant:
“Article 5(2)(l) of DTAA applies in cases where MNE furnishes
services within India and those services are furnished through
its employees. In the present case we are concerned with two
activities, namely, stewardship activities and the work to be
performed by deputationists in India as employees of MSAS. A
customer like MSCo who has worldwide operations is entitled
to insist on quality control and confidentiality from the service
provider. For example in the case of software PE a server
stores the data which may require confidentiality. A service
provider may also be required to act according to the quality
control specifications imposed by its customer. It may be
required to maintain confidentiality. Stewardship activities
involve briefing of the MSAS staff to ensure that the output
meets the requirements of MSCo. These activities include
monitoring of the outsourcing operations at MSAS. The object
is to protect the interest of MSCo. These stewards are not
involved in day-today management or in any specific services to
be undertaken by MSAS. The stewardship activity is basically to
protect the interest of the customer. In the present case as held
hereinabove MSAS is a service PE. It is in a sense a service
provider. A customer is entitled to protect its interest both in
terms of confidentiality and in terms of quality control. In such
a case it cannot be said that MSCo has been rendering the
services to MSAS. In our view MSCo is merely protecting its
own interests in the competitive world by ensuring the quality
2DIT vs. E-Funds IT Solutions (2014) 364 ITR 256 (Del)ITA 621/2017 & connected matters Page 53 of 85
and confidentiality of MSAS services. We do not agree with the
ruling of AAR that the stewardship activity would fall under
Article 5(2)(l). To this extent we find merit in the civil appeal
filed by the appellant (MSCo) and accordingly its appeal to that
extent stands partly allowed.
17. As regards the question of deputation, we are of the view
that an employee of MSCo when deputed to MSAS does not
become an employee of MSAS. A deputationist has a lien on his
employment with MSCo. As long as the lien remains with MSCo
the said company retains control over the deputationist‟s terms
and employment. The concept of a service PE finds place in the
UN Convention. It is constituted if the multinational enterprise
renders services through its employees in India provided the
services are rendered for a specified period. In this case, it
extends to two years on the request of MSAS. It is important to
note that where the activities of the multinational enterprise
entails it being responsible for the work of deputationists and
the employees continue to be on the payroll of the multinational
enterprise or they continue to have their lien on their jobs with
the multinational enterprise, a service PE can emerge.
18. Applying the above tests to the facts of this case we find that
on request/requisition from MSAS the applicant deputes its
staff. The request comes from MSAS depending upon its
requirement. Generally, occasions do arise when MSAS needs
the expertise of the staff of MSCo. In such circumstances,
generally, MSAS makes a request to MSCo. A deputationist
under such circumstances is expected to be experienced in
banking and finance. On completion of his tenure he is
repatriated to his parent job. He retains his lien when he comes
to India. He lends his experience to MSAS in India as an
employee of MSCo as he retains his lien and in that sense there
is a service PE (MSAS) under Article 5(2)(l). We find no
infirmity in the ruling of ARR on this aspect. In the above
situation, MSCo is rendering services through its employees to
MSAS. Therefore, the Department is right in its contention that
under the above situation there exists a service PE in IndiaITA 621/2017 & connected matters Page 54 of 85
(MSAS). Accordingly, the civil appeal filed by the Department
stands partly allowed.” (at pages 15-16)
18. It has already been seen that none of the customers of the
assessees are located in India or have received any services in
India. This being the case, it is clear that the very first
ingredient contained in Article 5(2)(l) is not satisfied. However,
the learned Attorney General, relying upon paragraph 42.31 of
the OECD Commentary, has argued that services have to be
furnished within India, which does not mean that they have to
be furnished to customers in India. Para 42.31 of the OECD
Commentary reads as under: “Whether or not the relevant
services are furnished to a resident of a state does not matter:
what matters is that the services are performed in the State
through an individual present in that State.”
50. Jebon Corporation India v. CIT 2012 Taxmann 7 (Kar) held that
commercial activities including procuring orders, identifying buyers,
negotiating with buyers, agreeing to the price, and requesting them to
place an order with the foreign headquarters were not auxiliary or
preparatory in nature. The observations and findings of the High Court are
eerily similar to the facts of this case:
“Relying on these provisions, it is contended by the assessee
that the liaison office was opened to act as a communication
channel between the head office at Korea and the parties in
India. They have not undertaken any other activity of a trading
or commercial or industrial nature nor have they entered into
any business contract in their names. They have not charged
any commission or any remuneration and they have not earned
any such amount in India for liaison activities. The entire
existence of the office in India is made exclusively out of the
funds of the head office and they have not borrowed any money.
They have not acquired any properties. They have no direct
commitment with the customers and therefore, it was contendedITA 621/2017 & connected matters Page 55 of 85
that the liaison office in Bangalore cannot be considered as a
PE so as to attract the provisions of the Act. It is in this
background, we have to see what was unearthed in the course
of investigation by an investigating agency.
9. The liaison office of the assessee was opened in 1998. The
operations of the assessee at Bangalore were carried out
pursuant to the approval by the RBI. The liaison office has five
employees in all. The South Korean based company is a trader
in semi-conductor components manufactured by various
companies across the world. In the course of the said survey
and investigation, the authorities have recorded the statement
of one Sri V. Natarajan, the country manager. He has stated on
oath that out of the five employees who are working in the
liaison office, three of them are directly related to sales
(including him) and two administrative assistants. They also
identify new customers by way of their past experiences in the
field of sales and sometimes, the customers themselves will
enquire with them regarding the products based on the market
information. Once this is done, they will fix an appointment
with the right person in the organization and try to identify the
exact requirement and also to explain the availability of
products. After this, the customer will give his requirement
based on the products available with them. The customer
expects their sales personnel to quote within a reasonable time.
After this, the same enquiry is converted into a request for a
quotation format to the head office staff responsible for
purchase activities from their suppliers in Korea and China. As
soon as they get the request for a quotation format fully filled
up with price, delivery and specification in Bangalore through
e-mail, the sales person who is responsible for generating the
enquiry will reply to the customer with a quotation adding the
sales margin. They have a thumb rule to calculate the sales
margin depending upon the end-use of the product and the
competition in the market and the volumes. They get only the
buying price from the head office and the margins are decided
by the sales team based in Bangalore on a case to case basis
depending upon the merits of the case. After this, there will be a
negotiation for each enquiry between the customers and theITA 621/2017 & connected matters Page 56 of 85
sales personnel of the office and in some cases, they are able to
close the order to the satisfaction of the customer and the head
office. In other cases, if the customer is not happy with the price
and if he asks for more discount, the personnel at Korea will
discuss the same with the suppliers to request for more discount
in the price. If the supplier agrees for giving more discount,
then accordingly, they quote a new discounted price to the
customers and close the deal. After this, if the deal is through
they have to process the order. They fill the details in the order
processing chart and send the same to the head office through
e-mail as an attachment. The purchase team at the head office
will process and place the order to the supplier and then wait
for the goods to be ready. Once the goods are ready, they will
be inspected by the quality control team at the head quarters to
ensure that the specifications are properly met. After that the
goods are packed and shipped to the freight forwarder
appointed by the customer. The same will be shipped directly to
the customer by the first available flight or ship. The head
office will send a copy of the commercial invoice, packing list
and airway bill/bill of lading to the liaison office at Bangalore
by e-mail/fax. They in turn send these three documents to the
customer. Then the responsibility of getting the goods cleared
lies with the customers. The payments will be made by the
customer through telegraphic transfer through bank to the head
office account at Korea. Their work also involves following up
of payments from the customers and offer sales support, if
necessary. He has also deposed that they have cent per cent
freedom in deciding the margin or selling price provided they
are not incurring any loss. It was stated that the marketing man
is given the liberty to sell the goods on profit within a band
margin of profit and in case any discount is asked then he has
to revert back to the head office. Hence, only in those cases
where the price quoted by the liaison office is not competitive
then they have to revert back to the head office. Sri H.B.
Raghumaran who was working as a Senior Engineer
(Marketing) has stated that he enjoys full freedom in deciding
the price of the material while negotiating with the customer.
Once the selling price is arrived at with the customer, he doesITA 621/2017 & connected matters Page 57 of 85
not need to discuss with the head office or the organization. He
immediately requests the customer to release the purchase
order. The annual sales target has also been fixed by the
organization.
10. It is on the basis of the aforesaid material, the Tribunal held
that the activities carried on by the liaison office are not
confined only to the liaison work. They are actually carrying on
the commercial activities of procuring purchase orders,
identifying the buyers, negotiating with the buyers, agreeing to
the price, thereafter, requesting them to place a purchase order
and then the said purchase order is forwarded to the head
office and then the material is dispatched to the customers and
they follow up regarding the payments from the customers and
also offer after-sales support. Therefore, it is clear that merely
because the buyers place orders directly with the head office
and make payment directly to the head office and it is the head
office which directly sends goods to the buyers, would not be
sufficient to hold that the work done by the liaison office is only
liaison and it does not constitute a PE as defined in art. 5 of
DTAA. In fact, the AO has clearly set out what was discovered
during the investigation and the same has been properly
appreciated by the Tribunal and it came to the conclusion that
though the liaison office was set up in Bangalore with the
permission of the RBI and in spite of the conditions being
stipulated in the said permission preventing the liaison office
from carrying on commercial activities, they have been
carrying on commercial activities.
11. It was further contended that the RBI has not taken any
action and therefore, such interference is not justified. Once the
material on record clearly establishes that the liaison office is
undertaking an activity of trading and therefore entering into
business contracts, fixing price for sale of goods and merely
because the officials of the liaison office are not signing any
written contract would not absolve them from liability. Now
that the investigation has revealed the facts, we are sure that
the same will be forwarded to the RBI for appropriate action in
the matter in accordance with law. But merely because noITA 621/2017 & connected matters Page 58 of 85
action is initiated by RBI till today would not render the
findings recorded by the authorities under the IT Act as
erroneous or illegal.”
51. GE contends that the business activities in India must include the
authority to conclude contracts for such activities to not be auxiliary or
preparatory in nature. This is not necessary. The assessee‟s reading is
based on a misapplication of the principles of Article 5(4)(a) – dealing
with agency PE – in the context of Article 5(3) which deals with only
fixed place PE. It is indeed correct that neither a dependent agent PE nor a
fixed place PE can be constituted if the business activities undertaken are
preparatory or auxiliary. However, Article 5(3) makes no mention of the
authority to conclude contracts – language that is explicitly used in Article
5(4)(a). Accordingly, reading the conditions as equivalent would erode a
key distinction between fixed place PE and agency PE – and it is
accordingly recommended that GE‟s contention should be rejected. This
interpretation also accords with the decision of the Karnataka High Court
in Jebon (supra).
52. In Browne & Sharpe Inc. v. Commissioner of Income Tax and
Another 2014 (369) ITR (All), the Allahabad High Court held as follows,
in the context of a liaison office operating on behalf of a foreign company:
“14. The disclosures which were made by the assessee before
the Assessing Officer clearly indicate that during the year
previous to the assessment year in question, the activities of the
liaison office were not confined only to being a channel of
communication between the Head Office in the US and
prospective buyers in India. The activities of the liaison office
included: (i) explaining the products to buyers in India; (ii)
furnishing intimation in accordance with the requirements of
the buyers; and, (iii) a discussion of commercial issuesITA 621/2017 & connected matters Page 59 of 85
pertaining to the contract through the technical representative,
after which an order was placed by the buyer directly. Apart
from this, it is significant that the performance of the personnel
in India was, as disclosed by the Chief Representative Officer,
judged by the number of direct orders that the assessee
received and by the extent of awareness of the assessee that was
generated in India. The assessee had an incentive plan, and it is
not in dispute, as was disclosed by the Chief Representative
Officer, that in the sales incentive plan an employee was
allowed to receive upto 25% of its annual remuneration as SIP.
Whether or not any incentive was, in fact, paid to an employee
during the year in question, is not material. What is relevant is
that the nature of the incentive plan would clearly indicate that
the purpose of the liaison office in India was not merely to
advertise the products of the assessee or to act as a link of
communication between the assessee and a prospective buyer
but involved activities which traversed the actual marketing of
the products of the assessee in India because it was on the basis
of the orders generated that an incentive was envisaged for the
employees. The assessee sought to explain away the incentive
plan by stating before the Assessing Officer that the incentive
which was provided for in the letters of the appointment was
only “standard language of the appointment letter of the
company”, which had inadvertently not been deleted from the
contract of appointment by the liaison office. Such an
explanation was, to say the least, far-fetched because the
assessee which has a transnational business with a range of
advisors cannot readily be assumed to have committed an
inadvertent mistake on an issue as significant as this. The
Assessing Officer has quite justifiably declined to accept the
explanation.”
53. Applying the above standards to the factual matrix at hand, the
ITAT concluded that GE‟s activities in India were not of an auxiliary or
preparatory nature. Substantial reliance was placed on e-mail exchanges
between employees in India and overseas, the job description of
employees in India and their appraisal reports. In the brief before thisITA 621/2017 & connected matters Page 60 of 85
Court, GE strongly disagreed with ITAT‟s characterization of the above
sources and provided a point by point rebuttal to ITAT‟s inferences drawn
from various e-mails.
54. The above factual records are too extensive to comprehensively
discuss in this section. Nonetheless, as an overall matter, GE is correct
that in some instances, ITAT‟s characterization of certain conversations
appears to overstate the importance of the activities in India (for e.g. email chain on Reliance-GT Exhaust Height; e-mail chain on confirmation
of RIL PO No. DG8/3389741). Nevertheless, in many other instances,
ITAT‟s decision is sound, and gives rise to the inference that business
activities that were not auxiliary or preparatory were taking place in India.
(for e.g. e-mail chain on Reliance CS-1 GE Oil & Gas).
55. It would be useful to recapitulate briefly that the tasks performed by
some of the employees. Ricardo‟s Assignment letter showed him to be GE
Energy‟s “Oil & Gas, India Country Leader” the revenue has concurrently
stated that he was not merely “negotiating and finalizing the terms and
conditions with customers in India but also not allowing GE Overseas to
alter any such terms without the consent of GE India. The assessee did not
furnish his Appraisal report and Manager assessment despite a specific
request by the AO till the completion of assessment.” Similarly with
respect to Kumar Pratyush, the findings are pertinent and decisive; he was
designated as ‘Leader, GE Infrastructure, Ops-India‟ “of GE
Transportation “reporting directly to the Global CEO of GE
Infrastructure and the ‘job description’ given by him in the earlier referred
documents of having a specific role to: ‘Help GE infrastructure businessITA 621/2017 & connected matters Page 61 of 85
develop their strategy in India; Align GE solutions with customer need;
Help shape policy to realize opportunities; and Facilitate business
development discussions’, it becomes manifest that the assessee
intentionally trimmed his role to justify its stand, which, being contrary to
the primary and source documents, cannot be accepted.”
56. The decision of the lower authorities reveal that the process adopted
for business development involved four steps: Stage 1-Pre-qualification;
Stage 2-Bid/no bid and Proposal development; Stage 3-Bid approval and
negotiations; and Stage 4-Final contract development and approval. The
first step is identification of a market opportunity, involving collection of
information, analysis etc. The next two steps are described elaborately as
follows:
“…survey documents, as discussed above, abundantly show GE
India playing an important and proactive role in the
finalization of the deal and the terms and conditions with
customers in India. In reality, the major activities about
sourcing of customers and finalizing the deals with them were
done by GE India in consultation, wherever required, with GE
Overseas. The assessee frankly admitted in the same para that:
‘In some instances, the proposal development is jointly run by
the GE Overseas and GE India teams.’ This is also borne out
from page 104 of the Survey documents PB-II, as discussed
above, which is an e-mail from Pump Design Department to GE
India and copy to other members of GE India requesting the
Indian team to send the draft of MOU along with complete
comments, so that the same could be incorporated in the
original MOU. Similarly, page 127 of the Survey documents
PB-I shows that the MOU with BHEL reflected the
conversation what GE India and GE overseas discussed. Thus,
there is not even an iota of doubt that GE India was fully
involved in proposal development.ITA 621/2017 & connected matters Page 62 of 85
28.9.1. The ld. AR submitted for the third stage of ‘Bid approval
and negotiations’, that the assessee stated before the AO that
once the proposal/bid/tender have been put together as
described in Stage 2 above, it is approved by the senior
management during the Stage 3 and, thereafter, submitted to
the end customer. Subsequently, GE Overseas may carry out
negotiations with the customer, which may entail addressing
queries, if any, raised by the end-customer, seeking/providing
clarifications regarding work scope, pricing, etc required by
the end customer. For the fourth stage of ‘Final contract
development and approval’, the assessee stated that GE
Overseas discusses the outcome of the negotiation process
internally amongst its various overseas functional
heads/approving authorities (operations, finance, legal, etc.) so
as to decide whether or not to go-ahead with the contract on
the agreed terms and conditions with the customer. If the
negotiated contract terms are approved and accepted both by
GE Overseas and the end-customer, the contract documents are
prepared and executed/signed by GE Overseas. Local inputs
are obtained from GE India at this stage on a need basis.
28.9.2. Here again we find that the assessee’s submissions are
only partly true. Pages 101-103 of the Survey documents PB-II,
as discussed above, evidence GE India finalizing MOU with the
Indian customer, Pump Design Department of IOC, and
advising accordingly to the GE Overseas. Then, there is a mail
showing that the change was permitted in the terms of MOU by
the Indian team, which was conveyed by GE India to the
customer, with a copy to another member of GE India. GE
India was negotiating terms with the Indian customers is also
borne out from page 195 of Survey Documents PB-I as
discussed above, whereby Indian customer was requesting GE
India to revise the offer. Similarly, page 82 of Survey
Documents PB-I, as discussed above, shows that GE India
changed the terms and conditions. In the like manner, pages 2
and 3 of Survey Documents PB-II show that the draft
agreement by Reliance Industries Ltd. to GE Overseas was sent
back to GE India to get it reviewed from aftermarket colleagues
in India. Pages 32 and 33 of Survey documents PB-II show thatITA 621/2017 & connected matters Page 63 of 85
when GE Overseas tried to contact directly with RIL, GE India
objected to the same and wanted the entire consultations only
through the Indian team, which was positively responded by GE
Overseas. Page 39 of the Survey documents PB-II again shows
that it is GE India which was negotiating with Indian customers
and not allowing GE Overseas even to change the terms and
conditions.
28.10. At this juncture, it is significant to note that the assessee
is not dealing in off the shelf goods. Sales are made on the basis
of a prior contract. In such cases, customer’s requirements are
first properly understood and thoroughly examined; then
commercial and technical discussion meetings take place; then
proposals are prepared after negotiations on technical and
commercial aspects taking Indian laws and regulations in
consideration. These are all significant and essential parts of
sales activity, which have to be necessarily done in India by GE
India. Ordinarily, it is not the Indian customer, who would visit
GE entities overseas, but it is GE India, who has to have
physical presence in India and such presence is through the GE
India team.”
57. This court is of the opinion that the process of sales and marketing
of GE‟s product through its various group companies, in several segments
of the economy (gas and energy, railways, power, etc.) was not simple. As
noticed by the tribunal, entering into contract with stakeholders (mainly
service providers in these segments) involved a complex matrix of
technical specifications, commercial terms, financial terms and other
policies of GE. To address these, GE had stationed several employees and
officials: high ranking, and in middle level. At one end of the spectrum of
their activities was information gathering and analysis- which helped
develop business and commercial opportunities. At the other end was
intensive negotiations with respect to change of technical parameters ofITA 621/2017 & connected matters Page 64 of 85
specific goods and products, which had to be made to suit the customers.
Standard “off the shelf” goods – or even standard terms of contract, were
inapplicable. In this setting, a potential seller of equipment – like GE, had
to create intricate and nuanced platforms to address the needs of
customers identified by it, in the first instance. After the first step, of
gathering information, GE had to commence the process of marketing its
product, understanding the needs of Indian clients, giving them options
about available technology, address queries and concerns with respect to
technical viability and cost efficacy of the products concerned andwherever necessary indicate how and to what extent it could adapt its
known products, or design parameters, to suit Indian conditions as well as
Indian local regulations. This process was time consuming and involved a
series of consultations between the client, its technical and financial
experts and also its headquarters. Oftentimes the headquarters too had to
be consulted on technical matters. After this consultative process ended
and the terms of supply were agreed to, the final affirmative to the offer,
to be made by the Indian customer, would be indicated by GE‟s
headquarters.
58. This court is of the opinion that the facts of the present case clearly
point to the fact that the assessee‟s employees were not merely liaisoning
with clients and the headquarters office. E-mail communications and
chain mails indicate that with respect to clients and possible contracts of
GE with Reliance CS-1, GE Oil & Gas, Bongaigaon Refinery, Draft LOA
for WHRU (E-mail from Andrea Alfani (GE Overseas) to Vivek
Venkatachalam (GEIIPL) and Riccardo Procacci (GEII) on proposed eITA 621/2017 & connected matters Page 65 of 85
mail to send Reliance, including comments to RIL on the proposed letter
of acceptance and relevant attachments. Also, asked them whether they
wanted to send the e-mail themselves to RIL or for it to be sent directly.
These appear to show important role for Vivek and Riccardo in the
negotiating process.
59. The e-mail chain on “CONFIDENTAL: Ad Syst” contains e-mail
from Gioseppe La Moita (GE Overseas). These suggest that Gioseppe La
Moita, Renato Mascii (GE Overseas) and Riccardo Procacci (GEII) were
in India negotiating the BHEL contract. Rest of the correspondence is not
particularly relevant. These suggest that substantive negotiation work on
the BHEL contract was done in India by a mix of GE Overseas and GE
India team.
60. It is clear that in the kind of activity that GE carries out, i.e
manufacture and supply of highly specialized and technically customized
equipment, the “core activity” of developing the customer (identifying a
client), approaching that customer, communicating the available options,
discussing technical and financial terms of the agreement, even price
negotiations, needed a collaborative process in which the potential client
along with GE‟s India employees and its experts, had to intensely
negotiate the intricacies of the technical and commercial parameters of the
articles. This also involved discussing the contractual terms and the
associated consideration payable, the warranty and other commercial
terms. No doubt, at later stages of contract negotiations, the India office
could not take a final decision, but had to await the final word from
headquarters. But that did not mean that the India office was just for muteITA 621/2017 & connected matters Page 66 of 85
data collection and information dissemination. The discharge of vital
responsibilities relating to finalization of commercial terms, or at least a
prominent involvement in the contract finalization process, discussed by
the revenue authorities, in the present case, clearly revealed that the GE
carried on business in India through its fixed place of business (i.e the
premises), through the premises.
61. In view of the above analysis and conclusions, it is held that
Question No. 1 is answered in favour of the revenue and against the
assessee. They are so found.
Question No. 2
62. With respect to this question of law, the ITAT relied on a two-part
framing to see if Agency PE is met, that is para 4 of the DTAA, especially
4(a) lays down framework for when something is an agency PE and the
exception to the application of 4(a) laid out in Para 5, which says that the
use of a broker, general commission agent, or any other agent of an
independent status, provided that such persons are acting in the ordinary,
course of their business shall not be considered Agency PE.
63. Applying the standard to the facts at hand, ITAT recorded in its
findings that the expats of GEII and employees of GEIIPL were rendering
services to multiple entities. But also, that these expats were dealing on
behalf of the major business lines of the GE Group. Accordingly, GE
India comprising of expats and other employees of GEIIPL etc., were not
working for a particular enterprise, but, for multiple enterprises dealing in
one of the three major businesses of GE group. Activities of an agent must
be “devoted wholly, or almost wholly on behalf of that enterprise.” On aITA 621/2017 & connected matters Page 67 of 85
conjoint reading of part 2 of para 5 of Article 5 and Article 3(g), it is
apparent that the second part of para 5 refers to an agent looking after the
activities of a single enterprise and not multiple enterprises. GE relies on
Varian India (supra) which held in para 5 it is necessary that the activities
of agent must be devoted wholly or almost wholly to one enterprise. Nondisclosure of transactions are not sufficient to establish someone as agent
of independent status – there was needed to fulfill both conditions.
Furthermore, there also was the need to show that they were not at arm‟s
length practice. Nonetheless, ITAT held that GE India counts as agency
PE. An agent of a foreign company is an agent of dependent status even if
there is more than one company in the related group. If there are multiple
independent customers – you qualify as an agent of independent status.
The fact that transactions between such an agent of dependent status and
multiple related enterprises are or are not at ALP, is not relevant at the
stage of establishment of a dependent agent PE in India, which is created
solely due to the nature of activities of such an agent for the overseas
entity.
64. The ITAT opinion focuses on Article 5(4)(a) i.e. the authority to
conclude contracts. GE relies on Para 33 of OECD commentary to suggest
the understanding of such authority – “a person who is authorized to
negotiate all elements and details of a contract in a way binding on the
enterprise can be said to have exercised this authority” and “the mere
fact, however, that a person has attended or even participated in
negotiations . . . will not be sufficient, by itself, to conclude that the person
has exercised in that State an authority to conclude contracts in the nameITA 621/2017 & connected matters Page 68 of 85
of the enterprise.” The revenue responded by clarifying that India had
clarified its position that it does not agree with the above portions of Para
33 commentary. The position of India is that
“a person has attended or participated in negotiations in a
State between an enterprise and a client, can, in certain
circumstances, be sufficient, by itself, to conclude that the
person has exercised in that State an authority to conclude
contracts in the name of the enterprise; and that a person who
is authorized to negotiate the essential elements of contract,
and not necessarily all the elements, can be said to exercise the
authority to conclude contracts.”
65. The ITAT noted that India‟s position has a binding effect on all
conventions entered after the date – but does not retrospectively apply to
conventions entered before the date. And, therefore, the Indian
commentary (which serves as a reservation) cannot modify bilateral
treaties prior to 2008 such as the US-India DTAA. At the same time, it
cannot be said that every line of the OECD commentary is read into the
statute by incorporation. ITAT notes that “it is only an interpretation of
the OECD Model Convention. One should take cognizance of the view
given in the Commentary on a holistic basis and not as emanating from
individual and selective lines, which, at times, may turn out to be
overlapping in nature”.
66. Regarding the OECD commentary this court notices that the
position in Para 32.1 runs contrary to Para 33 that GE relies on. Therefore,
the assessee cannot selectively quote on certain parts of the commentary –
rather, must read the spirit of the entire commentary. The ITAT concluded
that as long as the activities of the agent in concluding contracts is notITA 621/2017 & connected matters Page 69 of 85
auxiliary, and at the same time, does not require concluding every single
element of the contract. As Italian court noted in Ministry of Finance (Tax
Office) v. Philip Morris (GmBH), Corte Suprema di Cassazione
No.7682/02 of May 25 2002:
“the participation of representatives or employees of a resident
company in a phase of the conclusion of a contract between a
foreign company and another resident entity may fall within the
concept of authority to conclude contracts in the name of the
foreign company, even in the absence of a formal power of
representation.”
Therefore, GE India‟s activities clearly constitute activities
that would establish agency PE in India
67. As regards the question that whether the position of Varian India v.
ADIT 2013 (142) ITD 692 (Mumbai) is to be followed in this case, ITAT
chose to distinguish that decision since facts of that case are
distinguishable. In that case, there were AEs and separate agreements and
different payments– this did not occur here (was not able to find proof on
whether this is the case – this is ITAT‟s finding of fact). As regards the
level of activity which is required for an agent to have habitually
exercised an authority to conclude on behalf of the enterprise, it is
necessary to make a reference to the parties‟ arguments.
68. Counsel on behalf of the Appellant, drawing on OECD
commentary, argued that person who is authorized to negotiate all
elements and details of a contract which is in a way binding on the
enterprise can be said to have exercised this authority. Accordingly, the
mere fact, however, that a person has attended or even participated inITA 621/2017 & connected matters Page 70 of 85
negotiations, will not be sufficient. The revenue, on the other hand,
suggested that in 2008, India had clarified its position with respect to
paragraph 33 of the OECD commentary – suggesting it did not agree with
the above sentences. Rather, India‟s position was that if a person has
attended or participated in negotiations in a State between an enterprise
and a client, can, in certain circumstances, be sufficient, ipso facto, to
conclude that the person has exercised in that State an authority to
conclude contracts in the name of the enterprise; and that a person who is
authorized to negotiate the essential elements of contract, and not
necessarily all the elements, can be said to exercise the authority to
conclude contracts.
69. On this question of law, ITAT recorded in its finding that India‟s
comments do not have retroactive application. Further, OECD
commentary is not binding, but can only be used as a guidance, they do
not form part of the treaty under doctrine of incorporation. This view finds
support in the judgment of this court in Chryscapital Investment Advisors
India (P) Ltd v DCIT 376 ITR 183. Further, the ITAT also relied on para
32 of the OECD commentary which says that lack of active involvement
by an enterprise in transactions may be indicative of a grant of authority to
an agent.
70. “Lack of” does not mean „none‟. The court notices that since the
OECD commentary appears to be contradictory across paragraphs 32 and
33, it cannot be relied upon wholly. The term “authority to conclude”
does not mean all elements and details, since that would make other
portion of the clause redundant – therefore only means that the activityITA 621/2017 & connected matters Page 71 of 85
needs to be core in nature. This is the opinion in Philip Morris (supra), the
participation of representatives or employees of a resident company in a
phase of the conclusion of a contract between a foreign company and
another resident entity may fall within the concept of authority to
conclude contracts in the name of the foreign company.
71. It would be useful to notice the facts and analysis of the law in Rolls
Royce Plc (supra). The assessee had a local office (LO) in India; the AO
determined that it constituted dependent agent PE. Though the dependent
agent had no authority to negotiate and enter into contracts for and on
behalf of the assessee, it habitually secured orders for RRIL and was its
PE. At the same time, this court held that Rolls Royce Plc‟s presence in
India was also a fixed place of the assessee constituting PE. Activity at
this fixed place was no auxiliary but was a core activity of marketing,
selling, negotiating. RRIL was a sales office for assessee – employees
worked wholly and exclusively for assessee and its group. Employees of
assessee in India were also present in various locations in India and
reported to director of RRIL India. The following extracts of the judgment
are indicative of the approach to be adopted wherever the court has to see
if the entity has a PE and a dependent agent PE:
“…16. After holding that the assessee had business connection
in India, the Tribunal adverted to the question as to whether
there was any PE in India within the meaning of Article 5 of
the Indo-UK DTAA. The Tribunal extracted the provisions
of Article 5 and stated the legal position that emerged
therefrom. Thereafter, it referred to various documents in para
22 and narrated its effect in detail. Our purpose would beITA 621/2017 & connected matters Page 72 of 85
served by extracting para 23 of the impugned order which
reads as under:-
“23. It is also seen that the appellant has a dependent agent in
India in the form of RRIL. The fact that RRIL is totally
dependent upon the appellant is not denied.
However, the contention of the appellant is that even though
RRIL is a dependent agent and such agency is to be deemed as
PE, so long such dependent agent has no authority to negotiate
and enter into contracts, under Article 5 (4), there is no PE in
India. It is to be noted that Article 5 (4) has three clauses,
namely, a, b & c. Thus, even if one has to hold that the
dependent agent has no authority to negotiate and enter into
contracts for and on behalf of appellant, still as per clause (c)
of sub Article (4) , it is found that RRIL habitually secures
orders in India for the appellant. It is a set practice that no
customers in India are directly to send orders to the appellant
in UK. Such orders are required to be routed only through
RRIL. This fact is evident from the letter of Mr. L.M. Morgan to
Mr. Prateek Dabral and Ms. Usha. In the said letter, it is made
clear that even request for quotation/extension could not be
communicated directly to the appellant but are to be routed
through the office of RRIL. This is applicable even to the
orders. The fact is not denied that the orders are firstly received
by RRIL from the customers in India and only then
communicated to the appellant. Thus, as per Para 4(c)
of Article 5 , the dependent agent habitually secures orders
wholly for the enterprise itself and hence, is deemed to be a
permanent establishment of the appellant. The contention of
appellant that the role of RRIL is merely of a post office is,
therefore, unacceptable in view of the facts of the case as
evidenced by various documents and correspondence found
during the course of survey. It can, therefore be summarized
that in the light of the facts as well as documents mentioned
above, RRIL’s presence n India is a permanent establishment of
appellant because:ITA 621/2017 & connected matters Page 73 of 85
(a) It is a fixed place of business at the disposal of the Rolls
Royce Plc and its group companies in India through which
their business are carried on.
(b) The activity of this fixed place is not a preparatory or
auxiliary, but is a core activity of marketing, negotiating,
selling of the product. This is a virtual extension/projection of
its customer facing business unit, who has the responsibility to
sell the products belonging to the group.
(c) RRIL acts almost like a sales office of RR Plc and its
group companies.
(d) RRIL and its employees work wholly and exclusively for
the Rolls Royce Plc and the Group.
(e) RRIL and its employees are soliciting and receiving
orders wholly and exclusively on behalf of the Rolls Royce
Group.
(f) Employees of Rolls Royce Group are also present in
various locations in India and they report to the Director of
RRIL in India.
(g) The personnel functioning from the premises of RRIL are
in fact employees of Rolls Royce Plc. This has been admitted by
the MD Mr. Tim Jones, GM, and can be discerned from
statement of Mr. Ajit Thosar and documents like terms of
employment of GMS.
Thus, the appellant can be said to have a PE in India within the
meaning of Article 5 (1) 5 (2) and 5 (4) of the Indo UK DTAA.
Since we have found that the appellant 496/2008, 497/2008,
498/2008,498/2008 584/2008, 647/2008, 648/2008, 649/2008,
650/2008,663/2008 has a business connection in India as well
as PE in India, the income arising from its operation in India
are chargeable to tax in India.”ITA 621/2017 & connected matters Page 74 of 85
17. We are thus convinced that there is a detailed discussion
after taking into consideration all the relevant aspects while
holding that RRIL constituted PE of the assessee in India. While
undertaking critical analysis of the material on record, the
Tribunal kept in mind the objections filed by the assessee as
well as the documents on which it wanted to rely upon. Those
objections were duly met and answered.
18. We thus, do not find any need to remand the case back to
the Tribunal for this purpose which was the plea raised by the
learned Counsel for the appellant/assessee. Agreeing with the
view taken by the ITAT in the impugned order as well as in the
Misc. Application, we answer questions no.2 & 4 against the
assessee. As a result, we find no merits in the appeals of the
assessee which are accordingly dismissed.”
72. In Varian (supra), on the other hand, the assessee‟s orders were not
binding on the VGCs, Varian India has no authority to negotiate or
conclude contracts on behalf of VGCs; Varian India did not maintain any
cost of analytical instruments supplied by VGCs to customers in India, or
title of goods supplied by VGCs was ever transferred to Varian India. It
did not keep inventory or regularly deliver goods on behalf of foreign
enterprise. For the spare parts, it owns those goods and delivers on its own
accounts. Varian India did not secure orders on behalf of VGC – merely
introduced and liaised those orders to VGC. These sales orders were not
binding on VGCs until accepted by them. Therefore, it was held that it did
not habitually accept orders on behalf of the enterprise. Lastly it was not
shown to have any authority to conclude contracts on behalf of the
enterprise. Interestingly Varian India was not devoted to only a single
enterprise – it is devoted to multiple foreign enterprises (each VGC
counting as their foreign enterprise).ITA 621/2017 & connected matters Page 75 of 85
73. The present case indicates an interesting intersects between the
applicability of both Article 5 (1) and (3) on the one hand, and the
applicability of the dependent agent – as defined in the treaty (DTAA)
principles. Enterprises, we note, do not necessarily organize the business
principles on which they function into neat pigeon holes that the DTAAs
envision. The ingenuity and innovation of the enterprise – indeed its
intangible wealth is to aggregate and maximizing profits in the most
efficient manner possible, even while minimizing costs. The DTAAs and
indeed tax regimes are based on known patterns of such organizational
behavior. As Cardozo remarks that at “Back of precedents are the basic
juridical conceptions which are the postulates of judicial reasoning, and
farther back are the habits of life, the institutions of society, in which
those conceptions had their origin, and which, by a process of interaction,
they have modified in turn”. So the law, or even treaties, which are the
result of compact between nations, deal with generalities based on the way
institutions behaved in the past, and the way they would presumably
behave. At the same time, these general provisions do not cater to all
situations, and often courts have to grapple with the kind of intersects
which this case demonstrates.
74. The assessee, GE has organized its affairs in such a manner – and
one cannot quarrel with its intent, so as to minimize tax incidence in India.
Yet, the court‟s task is not as easy to neatly compartmentalize the analysis
of whether the patterns of past decisions result in its establishments
constituting fixed place PE or a dependent agent PE. The intricate nature
of activities it has carefully designed, where technical officials havingITA 621/2017 & connected matters Page 76 of 85
varying degree of authority involve themselves – along with local
managerial and technical employees, in contract negotiation, often into
core or “key” areas, modification of technical specifications and the
negotiations for it, to fulfill local needs and even local regulatory
requirements, the complexities of price negotiation, etc. clearly show that
the assessee carries out through the PE business in India. These activities
also intersect and overlap with the content of the principle of dependent
agent, inasmuch it is evident that these agencies work solely for the
overseas companies, in their core activities.
75. In view of the above observations it is held that the second question
is, therefore, answered in favour of the revenue, and against the assessee.
Question No. 3
76. On this question, the ITAT reasoned and held as follows:
“54. Having held that various GE overseas entities were
making sales with the active involvement of their respective PEs
in India, the next question is attribution of income to such PEs,
which is chargeable to tax in India.
55. The AO required the assessee to make available year-wise
India specific accounts of GE Overseas. Financial statements of
all the entities for all the years were not submitted. An inability
was expressed on the ground that in some countries the
accounts were not maintained and they were covered in the
group schemes. In the absence of such information of entity
level profits, the AO opined that working of actual entity-wise
and year-wise profit was not possible. It was observed qua the
three entities for which the assessee furnished information, that
there was no regular trend in the profits and even GE Japan
had closed its trading business from the year 2002-03. For theITA 621/2017 & connected matters Page 77 of 85
other two entities also, there were no reasons for the losses.
Even notes to accounts, integral part to the financial
statements, were also not submitted, that could have thrown
some light on the losses/low profitability. The AO, therefore,
took the view that the profitability statements of these entities
for various years could not be used for attributing profits to
Indian PE. Having regard to Rule 10(iii), the AO came to hold
that the income of non-residents was to be determined by: “any
such other manner as … may deem suitable.” Taking guidance
from sections 44BB and 44BBB, the AO estimated profit @
10% of sales consideration to the customers in India. Inspired
by the decision of the Delhi Bench of the Tribunal in Rolls
Royce PLC vs. DDIT 2007-TII-32-ITAT-DEL-INTL, in which
case 35% of the total profit was held to be pertaining to
marketing activities, the AO applied the same percentage to
work out the income chargeable to tax in India. First appeal
did not allow any relief. That is how, the assessee is aggrieved
against such attribution of income.
56. We have heard the rival submissions and perused the
relevant material on record. It is noticed that the exercise of
attribution of income by the AO is in two parts, viz., calculation
of total profit from the sales made by GE overseas entities in
India, which, in the instant case, has been worked out at 10%
and second, attribution of such profit to marketing activities,
which the AO has taken at 35% of 10%. As regards the first
component, being, the estimation of profit on the sales made in
India, we find that the AO specifically required the assessee to
furnish year-wise entity-wise profits of GE overseas entities for
the operations carried out in India. Either such information
was not given or a part of the information given did not help in
deducing the correct amount of profit. In such circumstances,
the AO was left with no alternative, but, to estimate income on
some rational basis. He invoked the provisions of Rule 10(iii)
and estimated profit at 10% of sales made in India. Rate of 10%
was applied by drawing strength from sections 44BB and
44BBB, which, in turn, are special provisions for computing
profits and gains in connection with the business of exploration,
etc. of mineral oils/operation of aircraft in the case of nonITA 621/2017 & connected matters Page 78 of 85
residents. In our considered opinion, the approach of the AO in
estimating income at 10% of sales made in India, in the given
circumstances, is perfectly in order and does not require any
interference.
57. As regards the second component of the share of marketing
activities in the total profit, the AO applied 35% by taking
assistance from the decision taken by the Delhi Bench of the
Tribunal in the case of Rolls Royce (supra). The said order of
the Tribunal stands affirmed by the Hon’ble Delhi High Court
in Rolls Royce PLC vs. DIT (IT) (2011) 339 ITR 147 (Del).
Delhi Bench of the Tribunal in ZTE Corporation vs. Addl. DIT
(2016) 159 ITD 696 (Del) has also attributed 35% of the profits
attributable to marketing activities in India. We find force in the
arguments advanced by the ld. AR that there can be no hard
and fast rule of attribution of profit to marketing activities
carried out in India at a particular level. In fact, attribution of
profits to PE in India is fact based, depending upon the role
played by the PE in the overall generation of income. Such
activities carried out by a PE in India resulting in generation of
income, may vary from case to case. Attribution of income has
to be in line with the extent of activities of PE in India.
58. Adverting to the factual matrix of the case, the assessee
demonstrated before the AO by way of a chart on pages 87-90
of the assessment order that the nature of activities done by
Rolls Royce in India were more than those done by GE
overseas entities. Similar chart has also been given showing
difference in the activities carried out by ZTE Corporation in
India vis-à-vis the assessee. From such a comparative analysis,
we are satisfied with the contention advanced by the ld. AR that
the activities carried out by Rolls Royce and ZTE Corporation
in India are not similar to those done by the PEs of GE
overseas entities in India. While discussing above the nature of
activities performed by GE India in generating sales of GE
Overseas in India, we have elaborately taken note of the lead
role played by GE India and GE overseas playing only a
supporting role. In such circumstances, we cannot approve
attribution of whole of 35% of the profits relating to sales andITA 621/2017 & connected matters Page 79 of 85
marketing to the PE in India. Considering all the relevant facts
and adopting a holistic approach, we hold that GE India
conducted core activities and the extent of activities by GE
Overseas in making sales in India is roughly one fourth of the
total marketing effort. Ergo, we estimate 26% of total profit in
India as attributable to the operations carried out by the PE in
India. Therefore, as against the AO applying 3.5% to the
amount of sales made by the assessee in India, we direct to
apply 2.6% on the total sales for working out the profits
attributable to the PE in India.”
77. The Revenue authorities carried out a two-part analysis on this
aspect, i.e. attribution of income based upon the profits derived by the
assessee. By this analysis, 10% of the sales income made in India is
attributed as the basis of total profits of GE overseas entities in India.
Upon that figure, the attribution of profit to the marketing activity, which
the Assessing Officer applied, was 35%. In this regard, the contentions of
the assessee were that the attribution was arbitrary and high and that the
application of principles in Galileo International Inc. (supra) were not
automatic. Learned counsel had stressed that each case would involve an
intensive factual analysis to arrive at a figure that would fit in the concept
of total profits accruing to the overseas entities from Indian activities and
that the further refinement of that into a broad percentage cannot be a
matter of precedent.
78. This Court notices that the analysis carried out by the Revenue –
not merely by the ITAT but also by the AO in the assessment order, was
after considering the relevant decisions – including Rolls Royce PLC –
where 35% profits were attributable to marketing activities in India. The
AO‟s findings in this regard are instructive:ITA 621/2017 & connected matters Page 80 of 85
“In the case of Rolls Royce, the equipments supplied were
highly technical, proprietary and sophisticated, as the same
were sold to Defence Department. In this case also, the items
are proprietary in nature and R&D has a major role to play in
the manufacture of these equipments, therefore, the products in
case of GE Overseas entities can be considered similar to that
of Rolls Royce and the ratio decision in the case of Rolls Royce
will apply to this case also. As was held by Hon’ble ITAT, it is
held that 35% of the profits pertain to marketing activities. As
the profits earned by the assessee are not available, therefore,
guidance is drawn from the provisions of Sections 44BBB and
44B8, wherein the deemed profit is estimated @ 10% of the
revenue/ price/ consideration. In all the cases of overseas
entities, it is that the assessee has earned global profit of 10%
on the sales prices to the customers in India. As held earlier, in
these cases, the ratio of decision of Hon‟ble ITAT in the case of
Rolls Royce is applicable; therefore, it is held that 35% of this
profit of 10% is attributable to the PEs of the assessee in India.
Due to this, the income chargeable to tax, as attributable to the
PEs is computed @3.5% of the sale price.
16.4 The AR vide letter dated 23.12.2008 has claimed that “GE
overseas has adequately remunerated GE India Industrial Pvt.
Ltd. for local marketing support provided by it. Reference in
this regard can be made to remuneration paid by GE overseas
to third party independent agents, who provided local
marketing support with regard to offshore sales into India.
Should you require, we can provide copies of these agreements
for your reference? Therefore, even assuming, without
admitting that GE overseas has a PE in India, placing reliance
on the decision of Supreme Court in the case of DIT vs. Morgan
Stanley (292 ITR 416) as affirmed by the Mumbai High Court
judgment in the case of SET Satellite (Singapore) Pte. Ltd. vs.
DCIT (307 ITR 205), no further profits can be either attributed
or taxed in hands of the alleged PE”.
This contention of the assessee is not acceptable for the
following reasons:ITA 621/2017 & connected matters Page 81 of 85
(i) The service agreement between GE Power/ GEIIPL
provides for performance of very specific services and which
centre around to act as a communication channel between
customers and GEIOC or its affiliates. The payment to GEIIPL
is on account of those specific services only. As found during
survey and discussed in this order, the scope of services of
employees’ of GEIIPL far exceeds the scope provided in the
agreement. More than 40 employees of GEIIPL are providing
the services. The assessee was asked to submit the designation
and the qualifications of these persons, which could have
suggested that these persons are not only support persons, but
provide various other type of services with regard to sales by
overseas entities.
(ii) The persons of GEIIPL are working under the control and
direction of the expatriates and also report to them. Therefore,
GEIIPL cannot be considered as an independent person. The
agreement does not refer to any such type of reporting
structure.
(iii) The agreement has continued to be the same since April,
2001 and the compensation to the GEIIPL is based on a
markup of 5% on cost. How could the assessee claim that the
payments to GEIIPL are at arm‟s length always? As discussed
in this order, some of the independent entities have operating
margin of 14%. Even all the costs in providing the services may
not have been captured. Therefore, it is also not acceptable that
the transaction with GEIIPL was at arm’s length.
(iv) The GEIIPL has not been compensated by the overseas
entities to whom it provided the services, but by GEIOC.
(v) The value of international transaction between GEIDC
and GEIIPL during F.Y. 2004-05 was Rs.88,415,604/- relating
to provision of marketing support services. The information for
other years was requested but not submitted. This is the
payment, which GEIOC has made to GEIIPL as per the service
agreement dated 16.01.2001.ITA 621/2017 & connected matters Page 82 of 85
As discussed in this order, the GEIIPL has been remunerated
for the activities referred in the services agreement. Such
activities agreed in the agreement are very limited in scope and
are relating to acting as a communication channel only. But in
this order, it has been proved that GEIIPL was performing
various activities beyond the scope referred in the service
agreement. For such activities, GEIIPL have-not been
remunerated and such activities have led to the creation of the
PE of the assessee in India and such PE is required to be
attributed a profit. This attribution of profits in this order is not
only on account of dependent agent PE, but also other types
PEs, discussed in this order. In this regard; reference is made
to the order of the Hon’ble Apex Court in the case of Morgan
Stanley (Supra).
“As regards attribution of further profits to the P.E. of MSCo
where the transaction between the two are held to be at arm’s
length, we hold that the ruling is correct in principle provided
that an associated enterprise (that also constitutes a P.E.) is
remunerated on arm’s length basis taking into account all the
risk-taking functions of the multinational enterprise. In such a
case nothing further would be left to attribute to the P.E. The
situation would be different if the transfer pricing analysis
does not adequately reflect the functions performed and the
risks assumed by the enterprise, in such a case, there would be
need to attribute profits to the P.E. for those functions/risks
that have not been considered. The entire exercise ultimately is
to’ ascertain whether the service charges payable or paid to the
service provider (MSAS in this case) fully represent the value of
the profit attributable to his service.
(Emphasis supplied)
Reference is also made to the DECO Commentary on Article 7,
which reads as below:
”Where, under paragraph 5 of Article 5, a permanent
establishment of an enterprise of a Contracting State is deemed
to exist in the other Contracting State by reason of the activitiesITA 621/2017 & connected matters Page 83 of 85
of a so-called dependent agent (see paragraph 32 of the
Commentary on Article 5), the same principles used to attribute
profits to other types of permanent establishment will apply to
attribute profits to that deemed permanent establishment. As a
first step, the activities that the dependent agent undertakes for
the enterprise will be identified through a functional and
factual analysis that will determine the functions undertaken by
the dependent agent both on its own account and on behalf of
the enterprise. The dependent agent and the enterprise on
behalf of which it is acting constitute two separate potential
taxpayers. On the one hand, the dependent agent will derive its
own income or profits from the activities that it performs on its
own account for the enterprise; if the agent is itself a resident
of either Contracting State, the provisions of the
Convention(including Article 9 if that agent is an enterprise
associated to the enterprise on behalf of which it is acting) will
be relevant to the taxation of such income or profits. On the
other hand, the deemed permanent establishment of the
enterprise’ will be attributed the assets and risks of the
enterprise relating to the functions performed by the dependent
agent on behalf of that enterprise(i.e. the activities that the
dependent agent undertakes for that enterprise),together with
sufficient capital to support those assets and risks. Profits will
then be attributed to the deemed permanent establishment on
the basis of those assets, risks and capital; these profits will be
separate from, and will not include, the income or profits that
are properly attributable to the dependent agent itself (see
section 0-5 of Part I of the Report Attribution of Profits to
Permanent Establishments).”
In view of the above, the profit is required to be
attributed to the deemed PE of the assessee, as held in this
order, on the basis of assets, risks and capital of the enterprise
relating to the functions performed by the GEIIPL (dependent
agent). In view of these facts and position of law, the contention
of the assessee regarding applicability of the decision of
Hon’ble Bombay High Court in the case of SET Satellite
(Supra), is rejected, as the same is distinguishable on facts.
Regarding the decision of Hon’ble Apex Court in the case ofITA 621/2017 & connected matters Page 84 of 85
Morgan Stanley (supra), this decision supports the position
taken by this office. Without prejudice to this finding, it is also
stated that the overseas entities have fixed place PE (because of
presence of expatriates) and also construction PE in India and
profits for all the PEs have been attributed by taking them
together.
16.5 It is stated that the assessee cannot take a plea that the
payments to GEIIPL, requires to be allowed as deduction from
the profits worked out in this order, because the global
expenses including expenses incurred in India have already
been considered while working out the profits. Once the profits
are worked out, the expenses cannot be allowed further,
because it will lead to double allowance of the expenses. It is
not the revenue, which is attributed in this case, but the profits,
which takes care of global expenses, including Indian expenses.
16.6 On the basis of discussions in the order, I am satisfied
that it is a fit case for initiation of penalty proceedings u/s
271(1)(c) the Act.
17. The total sales of the assessee in India during the year
are ofRs.199,806,676/-. The profit @3.5% of the same works
out to Rs.6,993,234/-. This is taxable as business income.”
Assessed u/s 143(3) of the Act at income Rs.6,993,234/-
at the applicable tax rate, surcharge and ed. cess. Charge
interest u/s 234A, 234B and 234C of the Act.
Issue penalty notice u/s 271(1)(c) of the Act. Issue
necessary forms.”
79. We notice that in Galileo International Inc. (supra) as well as in
Hukum Chand v. UOI 1976 (103) ITR 548, it was stressed that what are
the proportions of profit of sales attributable to the profits carried on in a
national jurisdiction is essentially where all facts are dependent upon
circumstances of the case. It was further noticed in these decisions thatITA 621/2017 & connected matters Page 85 of 85
absence of statutory or other formal framework render the task dependent
on some extent on guess work and that the endeavor will only be to
approximate the correct figure. The Court stated in Hukum Chand (supra)
that “there cannot in the very nature of things great precision and
exactness in the matters. As long as the attribution fixed by the Tribunal is
based upon the relevant material, it should not be disturbed.”
80. Having regard to the conspectus of facts in this case and the
findings of the lower Revenue authorities – including the AO and the
CIT(A), both of whom have upheld the attributability of income to the
extent of 10% and apportionment of 3.5% of the total values of supplies
made to the customers in India as income, the Court finds no infirmity
with the findings or the approach of the Tribunal in this regard. This
question too is answered against the assessee and in favor of the Revenue.
81. On account of the foregoing reasoning and since all questions of
law have been answered against the assessees, these appeals have to fail
and are consequently dismissed but without orders as to costs.
S. RAVINDRA BHAT
(JUDGE)
A.K. CHAWLA
(JUDGE)
DECEMBER 21, 2018