* IN THE HIGH COURT OF DELHI AT NEW DELHI
\nReserved on: 24.05.2018
\nPronounced on: 21.12.2018
\n+ ITA 621\/2017; ITA 627\/2017; ITA 628\/2017; ITA 629\/2017; ITA
\n671\/2017; ITA 674\/2017, C.M. APPL.29470\/2017; ITA
\n675\/2017, C.M. APPL.29471; ITA 677\/2017
\nGE ENERGY PARTS INC. …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 643\/2017; ITA 646\/2017; ITA 655\/2017; ITA 669\/2017 &
\nITA 685\/2017
\nGE GENBACHER GMBH & CO. …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 644\/2017; ITA 652\/2017, C.M. APPL.29312\/2017; ITA
\n653\/2017; ITA 666\/2017 & ITA 837\/2017
\nGE ENGINE SERVICES MALAYSIA SDN BHD……. Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 645\/2017; ITA 654\/2017; ITA 657\/2017; ITA 668\/2017; ITA
\n684\/2017 & ITA 688\/2017
\nGE PACKAGED POWER INC. …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 647\/2017; ITA 670\/2017; ITA 686\/2017 & ITA 687\/2017
\nGE TRANSPORTATION PARTS LLC …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. RespondentsITA 621\/2017 & connected matters Page 2 of 85
\n+ ITA 648\/2017; ITA 649\/2017; ITA 660\/2017; ITA 661\/2017; ITA
\n678\/2017; ITA 679\/2017 & ITA 836\/2017
\nGE ENGINE SERVICES DISTRIBUTION LLC …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 650\/2017; ITA 651\/2017; ITA 662\/2017; ITA 663\/2017; ITA
\n664\/2017; ITA 680\/2017; ITA 681\/2017 & ITA 682\/2017
\nGE ENGINE SERVICES INC. …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 656\/2017; ITA 665\/2017; ITA 683\/2017 & ITA 838\/2017
\nGE JAPAN LTD. …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 828\/2017, C.M. APPL.35327\/2017
\nGE ELECTRIC CANADA COMPANY …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 839\/2017
\nGE AIRCRAFT ENGINE SERVICES LTD……. Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 840\/2017; ITA 841\/2017 & ITA 842\/2017
\nGE AVIATION SERVICE OPERATION LLP …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. RespondentsITA 621\/2017 & connected matters Page 3 of 85
\n+ ITA 843\/2017; ITA 844\/2017; ITA 845\/2017; ITA 846\/2017; ITA
\n847\/2017; ITA 848\/2017; ITA 849\/2017 & ITA 850\/2017
\nGE AVIATION MATERIALS LP …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 851\/2017
\nGE CALEDONIAN LTD. …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 852\/2017
\nGE ELECTRIC POWER SYSTEMS INC. …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 853\/2017; ITA 854\/2017; ITA 855\/2017; ITA 856\/2017 &
\nITA 857\/2017;
\nGENERAL ELECTRIC CANADA COMPANY …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 858\/2017& ITA 859\/2017
\nGE MULTILIN …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. Respondents
\n+ ITA 860\/2017; ITA 861\/2017; ITA 862\/2017; ITA 863\/2017 &
\nITA 864\/2017;
\nGE PACIFIC PVT. LTD. …… Appellant
\nVersus
\nCOMMISSIONER OF INCOME TAX (INTERNATIONAL
\nTAXATION), DELHI-I ….. RespondentITA 621\/2017 & connected matters Page 4 of 85
\nThrough: Mr. Sachit Jolly and Mr. Siddharth
\nJoshi, Advocates, for appellants.
\nMr. Ruchir Bhatia, Sr. Standing Counsel, for the
\nrespondent.
\nCORAM:
\nHON’BLE MR. JUSTICE S. RAVINDRA BHAT
\nHON’BLE MR. JUSTICE A.K. CHAWLA
\nMR. JUSTICE S. RAVINDRA BHAT
\n%
\n1. The present statutory appeals, under Section 260A of the Income
\nTax Act, 1961 (hereafter \u201cthe Act\u201d) are directed against the order dated
\n27.01.2017 (hereafter \u201cimpugned order\u201d) passed by the Income Tax
\nAppellate Tribunal (hereafter \u201cITAT\u201d) in ITA No. 67\/DEL\/2011 for the
\nAY 2001-2002 whereby the ITAT held that the GE Energy Parts Inc.
\n(hereafter \u201cAppellant\u201d) had a fixed place Permanent Establishment
\n(hereafter \u201cPE\u201d) and DAPE in India under the DTAA.
\n2. The appellants in these groups of appeals under Section 260A of the
\nAct comprise the General Electric group of companies: GE Energy Parts
\nInc (\u201cGEP\u201d hereafter); General Electric International Operations
\nCompany Inc. (\u201cGEIOC\u201d hereafter); GE India Industrial Pvt. Ltd and
\n(GEIIPL). All challenge a common order of the Income Tax Appellate
\nTribunal (\u201cITAT\u201d) which concluded that the appellant PE in India and
\nwere, therefore, liable to file income tax returns in the country.
\n3. GE Energy Parts Inc (GEP) is incorporated in and is a tax resident
\nof the USA. It is engaged in the business of manufacture and offshore sale
\nof highly sophisticated equipments such as gas turbine parts and subITA 621\/2017 & connected matters Page 5 of 85
\nassemblies. GEP and the other appellant\/assessees are hereby collectively
\nreferred to as \u201cGE\u201d or \u201cthe assessees\u201d, as the context demands. GE sells
\nits products offshore on a principal to principal basis to customers all over
\nthe world, including to customers located in India, whereby the title to the
\ngoods sold to Indian customers passes from it outside India. GEIOC,
\nanother US incorporated company, set up a liaison office (LO) in 1991 in
\nNew Delhi with permission of the Reserve Bank of India (\u201cRBI\u201d
\nhereafter) only to act as a communication channel and not carry on any
\nbusiness activity. GEIIPL is an India incorporated company and is party to
\nthe Global Service Agreement (GSA) with GEIOC, for providing limited
\nmarket support services to GE and its affiliates (including GEPI.). In
\nexchange, it was remunerated on a cost-plus basis. It was assessed to
\nincome tax and also subjected to arms\u201f length price (ALP) determination
\nby a Transfer Pricing Officer (hereafter \u201cTPO\u201d) who held that the
\ntransaction with its associated enterprise (AE) was at arm\u201fs length. The
\nGSA forbids GEIIPL from:
\n(a) entering into any contract on behalf of GE Group
\ncompanies (GEIOC and affiliates);
\n(b) from acting as an agent for any GE Group company
\n(GEIOC and affiliates).
\n4. GE International Inc, i.e GEII is a U.S. incorporated entity; it
\nassumes and performs payroll responsibility for expatriates who work in
\nIndia to support various businesses of the GE Group. GEIOC had on its
\npayroll more than 50 employees and the designation of such employees
\nwas mostly as Head India Operations. These assessees contended that
\nemployees are deputed to various GE companies and they work as theirITA 621\/2017 & connected matters Page 6 of 85
\nemployees and they remain on the payroll of GEIOC till their transfer to
\nother entities. In terms of the application made to RBI and permission
\nobtained, the liaison office was to act as a communication channel
\nbetween the head office and the customers in India. The assessees did not
\nfile returns of income for any year.
\n5. A survey under Section 133A of the Act was conducted on
\n02.03.2007 in the premises of GEIOC at its AIFACS, 1 Rafi Marg, New
\nDelhi and it was concluded that GEIOC\u201fs liaison office (‘LO”) started
\noperating in India from July 01, 1987. It was set up to undertake liaison
\nactivities. From the information available, it is seen that GEIOC has
\nemployed various persons and is sending these employees on assignments
\nto GE entities located worldwide. From these premises, other entities,
\nincorporated in India as well as non-resident entities of the GE group were
\nalso operating. During the course of survey statement of Shri Rupak Saha,
\nwho is employed with GE Capital Services, India as Tax Manager, but
\nhaving extended responsibilities of tax matters relating to all companies of
\nGE Group in India was recorded. Statement of Shri Chandan Jain,
\nworking with GEIOC, who provides interface between GE, USA and
\nGE,India, was also recorded. During the course of survey, photocopies of
\nvarious documents were obtained and the same were inventoried as
\nAnnexures ‘A’ to ‘G’.
\n6. The GE group was asked to furnish various information by
\nsummons under Section 131 of the Act. The assessee furnished the
\ninformation through its representative – RSM & Co.\/Pricewaterhouse
\nCoopers Pvt. Ltd. vide letters dated 16.03.2007, 09.04.2007, 27.02.2008,ITA 621\/2017 & connected matters Page 7 of 85
\n24.03.2008 and 26.03.2008. The GE Group is a diversified technology,
\nmedia and financial services company with products and services ranging
\nfrom aircraft engines, power generation, water processing and security
\ntechnology to medical imaging, business and consumer financing, media
\ncontent and advanced materials. GE serves customers in more than 100
\ncountries and employs more than 300,000 people worldwide. GE had been
\nin India since 1902. Its global businesses had a presence in India and the
\ngroup had become a significant participant in a wide range of key
\nservices, technology and manufacturing industries. Employment across
\nIndia exceeds 12,000. Over 1 billion dollar of exports from India support
\nGE’s global business operations around the world. It has sourced products,
\nservices and intellectual talent from India for its global businesses. It
\npioneered the concept of software sourcing from India and was one of the
\nlargest customers for the IT service industry of India.
\n7. Based on these observations, the AO continued the reassessment
\nproceedings. The assessees resisted the move to assess them, contending
\nthat they were not subjected to income tax laws of India as they had no
\npermanent establishment. The AO by order dated 31.12.2008 held that the
\nappellant has a fixed place PE and DAPE in India. Further, the AO also
\ndeemed 10% of the value of supplies made to the clients in India as the
\nprofits arising from such supplies and attributed 35% of such profit to the
\nAppellant\u201fs PE in India. These findings were appealed against by the
\nassessees, to the Commissioner of Income Tax [CIT (A)].
\n8. The CIT(A) upheld the order of the AO with respect to the initiation
\nof proceedings under Section 147\/148 of the Act and existence of PE andITA 621\/2017 & connected matters Page 8 of 85
\nattribution of income but allowed appeal on the issue of levy of interest
\nunder Section 234B of the Act. Aggrieved by the order dated 30.09.2010,
\nthe appellants preferred an appeal before the ITAT.
\nGE Group submission to the ITAT
\n9. The Appellant submitted that the technology and not marketing
\nenabled it to be successful in their business \u2013 since products are so
\nsophisticated, marketing is a minimal component of the sale. All strategy
\ndecisions reside with the applicant outside India \u2013 work in India is only
\nlimited to providing market inputs and interface. In this case, the LO is
\nonly collecting information about potential customers in India and passing
\non this information to its non-resident businesses; and creating awareness
\nof the business products.
\n10. Further, the Appellant submitted that mere participation in
\nnegotiations or even negotiation of some terms of the contract by
\nemployees of non-resident tax payer does not result in a PE unless all
\nterms of the contract are negotiated and finalized by such employees. The
\nOECD Commentary goes on to state that mere attendance\/participation in
\nnegotiations is regarded as a preparatory and auxiliary activity and,
\ntherefore, cannot by itself create a Fixed Place PE. It also urged that no
\ninferences could be drawn with respect to negotiating and finalizing the
\ncritical terms of the contract. GE placed reliance on the case of U.A.E.
\nExchange Centre Ltd. vs. Union of India and Ors. (2009) 313 ITR 94
\n(Del) 10 and submitted that subsidiary activities do not count \u2013 even if
\nsuch activities are necessary for the completion of the contract. It was
\nurged that such a reading would render the core purpose of the clause nullITA 621\/2017 & connected matters Page 9 of 85
\nand void. Similar reliance is placed on National Petroleum Construction
\nCompany vs. Director of Income Tax (International Taxation) 2016 (383)
\nITR 648 (Del). where it is held that mere participation in negotiations is
\nnot sufficient \u2013 it is necessary to actually be responsible for the conclusion
\nof negotiations.
\nImpugned findings by ITAT
\n11. On appeal, before the ITAT, the assessee-GE\u201fs contentions were
\nnegatived. The ITAT considered the Indo-US Double Tax Avoidance
\nAgreement (\u201eDTAA\u201f) to examine the provisions concerning of ‘Fixed
\nPlace PE\u201f (Article 5.1 to 5.3) and observed that on a conjoint reading of
\nthe relevant parts of Article 5, a PE meant a fixed place of business
\nthrough which the business of an enterprise is wholly or partly carried on
\nand such fixed place is not maintained for activities of a preparatory or
\nauxiliary character. Based upon its analysis of the facts, the ITAT held
\nthat GEII\u201fs expatriates permanently used its liaison office at the premises.
\nIt was also held that those expats and GEIIPL employees working under
\nexpats were so working and the same was never denied by the assessee. It
\nfurther stated that the primary, specific and original proven material in the
\nform of survey documents, self-appraisals, manager assessment, etc., and
\nshowed that GE overseas concerns were selling its products in India and
\nthe core activities in regard to sale, namely, pre-sale, during-sale and postsale were being carried out in India by GE India.
\n12. The ITAT held that all conditions for constituting a fixed place PE
\nin 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
\nbuilding was a \u201cfixed place\u201d from which business of GE overseas entities
\nwas partly carried on in India and the activities carried out from such fixed
\nplace are not of preparatory or auxiliary character. It was also held that
\nArticle 5 (4) stated that where a person, other than an agent of
\nindependent status to whom Article 5 (5) applies, and fulfils the
\nconditions as set out in the Article 5(4), that person will constitute a PE of
\nthe enterprise. It was furthermore held that the first part of Para 5 refers to
\nan agent of independent status and the second part of that para refers to an
\nagent of independent status who is not considered an agent of independent
\nstatus because of the conditions set out in the said paragraph. Thus, it
\nfollows, that the \u201eperson\u201f referred to in para 4 refers to an agent of
\ndependent status and also an agent of an independent status who is
\ncovered in part 2 of para 5. Exception to the first part of para 5 created in
\npart 2 is restricted only to ‘an agent of independent status\u201f. On the other
\nhand, if there is an agent of dependent status per se whose activities are
\ndevoted to one or multiple related enterprises, he will be directly covered
\nwithin the scope of para 4 of Article 5 of the DTAA. Therefore, ITAT
\nobserved that the nature of activities done by GE India, were of a core
\nnature, and they demonstrated its authority to conclude contracts on behalf
\nof GE overseas entities. The ITAT held, therefore, that GE India
\nconstituted agency PE of all the GE overseas entities in India.
\n13. The ITAT observed that the AO was correct in its approach in
\nestimating total income at 10% of sales made in India due to
\nunavailability of year-wise, and entity-wise profits of GE overseas entities
\nfor the operations carried out in India. Further, the impugned order heldITA 621\/2017 & connected matters Page 11 of 85
\nthat GE India conducted core activities and the extent of activities by GE
\nOverseas in making sales in India is roughly one fourth of the total
\nmarketing effort. It, therefore, estimated that the 26% of total profit (i.e.
\n10% of sales) in India, as attributable to the operations carried out by the
\nPE in India, instead of 35% estimated by the AO.
\n14. The following questions of law were framed for consideration, in
\nall these appeals:
\n(1) Did ITAT fall into error in its findings with respect to
\nexistence of a fixed place Permanent Establishment (PE) of the
\nassessee in India?
\n(2) Did ITAT fall into error in concluding that the
\nassessee\/appellants separately had an independent agent PE,
\nlocated in India; and,
\n(3) Whether on the facts and the circumstances of the case and
\nthe law, the ITAT was justified in attributing as high as 35% of
\nthe profits to the alleged marketing activities and thereafter,
\nattributing 75% of such 35% profits to the alleged PE of the
\nAppellant in India
\nSubmission of parties
\n15. It is argued that GE is incorporated in the United States of America
\n(“USA”) and its tax resident for the purposes of the DTAA between India
\nand USA. The Appellant is engaged in the business of manufacture and
\nsupply of highly sophisticated components and sub-assemblies of gas
\nturbines to various clients all over the world. Similarly, other entities, part
\nof the present batch of appeals are engaged in manufacture and supply of
\nvarious equipments in the oil and gas, aviation and energy sector. SomeITA 621\/2017 & connected matters Page 12 of 85
\nentities are also engaged in rendering offshore services to various clients
\nacross the world.
\n16. Mr. Sachit Jolly, arguing for GE, states that it is an undisputed
\nposition that research and development, design, fabrication and
\nmanufacture of all equipments are done outside India. It is also undisputed
\nthat title to the goods passes outside India. It is also not the allegation or
\nfinding by any of the lower authorities that any marketing activity is
\nundertaken by any of the appellants in India. However, the AO found [and
\nthe CIT confirmed- as did the Dispute Resolution Panel (“DRP”)] and
\nlater, the ITAT that a part of the sales function is done in India through
\nexpatriates, which are deputed by the appellants along with a team of
\nemployees of GEIIPL and, therefore, the office space occupied by such
\nexpatriates along with the employees of GEIIPL constitute a fixed place
\nPE. The lower authorities also held that such expatriates along with
\nGEIIPL\u201fs employees had authority to conclude contracts on behalf of the
\nappellants and, therefore, constituted Dependent Agent PE (“DAPE”).
\n17. Counsel stated that to conclude the existence of a fixed place (PE)
\nand DAPE, the ITAT relied upon three sets of documents: (a) Appraisal
\nReports of the expatriates and the employees of GEIIPL; (b) Certain emails collected during survey conducted at the liaison office of GE
\nInternational Operations Company (“GEIOC”) in India and statements
\nrecorded during survey; and (c) submissions dated 14.11.2008 filed by the
\nappellant before the AO. GE urges that ITAT\u201fs findings are incorrect,
\nboth on law and facts. As to fixed place PE, it is submitted that in terms of
\nArticle 5(1) of the DTAA, a fixed place (PE) is said to exist when aITA 621\/2017 & connected matters Page 13 of 85
\nforeign enterprise has a fixed place at its disposal in India and carries on
\nbusiness through such fixed place in India. However, in terms of Article
\n5(3)(e) of the India-US DTAA, activities that have a preparatory or
\nauxiliary character for the foreign enterprise as a whole do not constitute a
\nfixed place PE. Therefore, notwithstanding the presence of a fixed place,
\nif the activity carried on through such place of business is preparatory and
\nauxiliary for the foreign enterprise then no PE can be said to exist. In other
\nwords, in order to constitute a fixed place PE, both the disposal test and
\nthe business function test must be cumulatively specified. In this regard,
\nreliance is placed on Formula One World Championship v Commissioner
\nof Income Tax [2017] 390 ITR 199 [affirmed in Formula One World
\nChampionship v Commissioner of Income Tax CIT 2017 (394) ITR 80
\n(SC)]; Director of Income Tax v. E-Funds IT Solution 2014 (364) ITR 256
\n[affirmed in Additional Director International Taxation v. E-Funds IT
\nSolutions Inc. 2017 (399) ITR 34 (SC) and National Petroleum
\nConstruction Company v. DIT 2016 (383) ITR 648].
\n18. It is argued that the expatriates and employees of GEIIPL, no doubt,
\nparticipated in the negotiation for conclusion of contracts, but never had
\nthe authority, whether expressed or implied, to finalize any contract on
\ntheir own volition. These personnel, even though highly qualified did not
\nhave any authority to bind the foreign enterprises. Due to the complex
\nequipment being supplied by the appellants, to understand the technical
\nspecifications of the product, issues pertaining to warranty, pricing, time
\nof delivery, etc., technically qualified personnel were required in India to
\nunderstand the needs of the clients.ITA 621\/2017 & connected matters Page 14 of 85
\n19. Mr. Jolly urged that it is a settled law that the onus on proving the
\nexistence of PE lies on the Revenue. [Refer E-Funds IT Solutions Inc
\n(supra)]. In the present case, the fixed place PE is alleged only in respect
\nof the sales function, which function is a small part of the overall business
\nof research and development, design, fabrication and manufacture all of
\nwhich happened outside India. Therefore, mere participation of the
\nexpatriates and employees of GEIIPL in the negotiations, (without any
\nauthority to conclude contracts) which is a small part of the sales function,
\ncannot be said to be the core business activity for the appellants. The
\nrevenue, having failed to prove that the personnel in India had the
\nauthority to close and conclude contracts on their own volition and accord,
\ncould not have proceeded to treat the existence of the personnel as
\nconstituting a PE in India.
\n20. Counsel emphasized that it is settled law that the question whether
\nan activity constitutes preparatory and auxiliary activity or core business
\nfunction is not to be judged from the viewpoint of importance of the
\nfunction but from the viewpoint of its role in the overall business of the
\nforeign enterprise. [Refer UAE Exchange Centre Ltd. v. Union of India
\n2009 (313) ITR 94 (Del). In the present case, it is undisputed that research
\nand development, design, fabrication and manufacture of equipments all
\nhappened outside India. It is also undisputed that title of the goods passes
\nof the Indian customers outside India and no marketing activity is done in
\nIndia. Therefore, if a small portion of the sales function, i.e. participation
\nin negotiation takes place inside India, no fixed place (PE) can be set to
\nexist because such activity which is performed in India has preparatoryITA 621\/2017 & connected matters Page 15 of 85
\nand auxiliary character for the business as a whole of the Appellants
\nherein. Reliance is placed on Director International Taxation v. Mitsui &
\nCo. Ltd. [2017] 399 ITR 505.
\n21. It is argued that the ITAT in this regard erred in disregarding the
\nOECD Commentary on Model Tax Convention (paragraph 33 on Article
\n5) which unambiguously states that mere participation in negotiation does
\nnot lead to either a fixed place PE or a dependent agent PE (“DAPE”). The
\nview taken by the ITAT is not only contrary to the OECD Commentary
\nbut also the UN Commentary on Model Tax Convention (paragraph 24 on
\nArticle 5) as well as settled jurisprudence under Indian Contract Law,
\nwherein it is specifically recognized that authority to negotiate is different
\nfrom authority to conclude contracts and that unless the agent is
\nauthorized to conclude all elements (or at least critical elements of the
\ncontract), he cannot be said to have the authority to bind the principal.
\nTherefore, even if the OECD Commentary was not considered relevant by
\nthe ITAT, it should have referred to the position of law under the Indian
\nContract Law to interpret and adjudicate on the existence of fixed place
\n(PE) in the present context. Reliance is placed on Black’s Law Dictionary
\n10th Edition, (Pgs 350, 1199, 1200); Major Law Lexicon P.R. Aiyar 4th
\nEdition 2010, (Pgs 1361 (Vol2), 4530 (Vol4) and Devkubai N. Mankar v.
\nRajesh Builders AIR 1997 Bom 142.
\n22. Coming next to the question of DAPE it is argued that Article 5(4)
\nof the DTAA between India and USA states that notwithstanding the
\nprovisions of paragraphs 1 & 2, where a person acts on behalf of a foreign
\nenterprise in India and he has the authority to conclude contracts on behalfITA 621\/2017 & connected matters Page 16 of 85
\nof the foreign enterprise and he habitually exercises such authority then
\nthe foreign enterprise can be set to have a DAPE in India. However, if the
\nactivities of the so-called agent in India are preparatory and auxiliary in
\ncharacter then even the authority to conclude contracts does not lead to the
\nformation of a DAPE in India. In other words, the DAPE acts as an
\nalternative to the fixed place PE, i.e., even without the existence of a place
\nat the disposal of the foreign enterprise, a PE can exist if the foreign
\nenterprise carries on core business through a dependent agent in India. In
\nsupport, Paras 31 and 32 of the OECD Model Tax Commentary on Article
\n5 are relied upon by Mr. Jolly.
\n23. It is argued that Article 5(5) further restricts Article 5(4) and states
\nthat if the agent in India is not dependent on the foreign principal and the
\nagent acts in ordinary course of business, then no DAPE can be said to
\nexist. Counsel submitted that in present case, the revenue alleges that the
\nsame set of expatriates and employees of GEIIPL render services to more
\nthan 24 foreign enterprises. This submission of the revenue that these
\nexpatriates together constitute dependent agents of 24 entities is selfdefeating. In fact, GEIIPL, apart from rendering these services, for which
\nit is compensated on arm’s length basis, has 12 different business divisions
\nand they cannot be said to be dependent, whether economical or legal, on
\nthe various appellants herein. On that ground alone, the case of the
\nrevenue, insofar as the existence of DAPE must fall. Learned counsel
\nrelied on Varian India (P) Ltd. v. Additional Director Income Tax 2013
\n(142) lTD 692 (Mum).ITA 621\/2017 & connected matters Page 17 of 85
\n24. It is urged by the appellants that in any case, the expatriates and
\nemployees of GEIIPL neither had the authority, whether expressed or
\nimplied to conclude contracts in India nor was such authority exercised
\nhabitually in India. It is urged that the expatriates and employees of
\nGEIIPL participated in negotiations for conclusion of contracts but that by
\nitself did not lead to the conclusion that the said personnel had the
\nauthority to conclude contracts in India. The authority to negotiate,
\nwithout any authority to conclude contracts, cannot be treated as fulfilling
\nthe requirements of Article 5(4)(a) of the India USA DTAA. Reference is
\nmade to Para 33 of the OECD Commentary on Article 5; Para 24 of the
\nUN Commentary on Article 5 and Protocol to the India-USA DTAA
\ninterpreting the term “secure orders”).
\n25. Referring to the appraisal reports it is urged that neither ITAT nor
\nany of the lower authorities have been able to point out a single document,
\nwhich demonstrates that the expatriates or the employees of GEIIPL had
\nany authority to close and conclude contracts in India. The ITAT has
\npurely based its conclusion on the educational qualifications and
\ndesignation of the expatriates to infer the role which they may have played
\nin the conclusion of contracts on behalf of the Appellants herein. In fact,
\nnone of the expatriates referred to by the lower authorities were in India
\nuntil AY 2005-06 and, therefore, the reliance on the appraisal sheets of
\nsuch expatriates for AY 2001-02 to AY 2004-05 is entirely misplaced.
\n26. Dealing with the material found during survey, reference is made to
\npages 175-182 of the point by point rebuttal of each e-mail made by
\nappellants before the ITAT. Counsel complains that however, the ITAT,ITA 621\/2017 & connected matters Page 18 of 85
\nin the impugned order has not even referred to those submissions.
\nReliance is placed on the detailed rebuttal made before the ITAT
\nincorporated at Pages 54-64 of the Appeal. For instance, it is urged that
\nthe e-mail at Pg.127 of the Survey Documents-1, referred to by the ITAT
\nin the impugned order clearly shows that personnel from Italy, i.e., La
\nMotta, Nicoletti and Paolo negotiated and concluded contracts with
\nprospective clients and Riccardo was merely marked on the
\ncorrespondence without any authority to negotiate or finalize contracts.
\nSimilarly, e-mail at page no.195 of the Survey Documents-I, referred to
\nby the ITAT, -if read with page no. 23 of the Survey Documents-, the
\nproposal, both technical and commercial, were sent by Danila Araniti
\ndirectly to BHEL on 28.02.2007 which is reflected in the e-mail@ page
\nno.23.Similarly, the statements of Mr. Chandan Jain or Mr. Rupak Saha
\ndo not even remotely suggest that the expatriates or the employees of
\nGEIIPL had the authority to conclude contracts on behalf of the appellants
\nherein.
\n27. It is submitted that the impugned order has obfuscated the authority
\nto negotiate and participate in negotiation, with the authority to conclude
\ncontracts. It is apparent from a bare perusal of the submissions filed by the
\nAppellant that the expatriates and the employees of GEIIPL merely
\nprovided sales support and participated in negotiation, without any
\nexpress or implied authority to conclude contracts. Therefore, the reliance
\nplaced upon the submissions dated 14.11.2018 is out of context and
\nperverse.
\n28. It was next argued that pursuant to the Global Services Agreement
\ndated 26.01.2001, GEIIPL was required to render sales support services toITA 621\/2017 & connected matters Page 19 of 85
\nGEIOC and all affiliates of GEIOC including the appellants here. It is also
\nan admitted position that for rendering such services, GEIIPL was
\nremunerated at arm’s length. In fact, transfer pricing orders were passed in
\nthe case of GEIIPL both pre and post survey and continue to be passed till
\ndate and it has never been alleged that GEIIPL has rendered services
\nbeyond the scope of GSA. Transfer Pricing orders till AY2013-14 have
\nbeen passed in the case of GEIIPL and scope of services rendered by
\nGEIIPL has never been doubted by the TPO. If that be the case, it is the
\nsubmission of the appellant that once the so-called agent is remunerated at
\narm’s length, no further attribution can be made. Counsel relies on EFunds IT Solutions Inc. (supra) and Honda Motor Company Ltd. v.
\nCommissioner of Income Tax 2018 (6) SCC 70. It is urged that the
\nundisputed position is that title to the goods passes outside India and,
\ntherefore, the profits arising from such sales which accrue outside India
\ncannot be taxed in India since admittedly the sales made to independent
\nthird parties (the clients herein like Reliance, BHEL etc.) are at arm’s
\nlength. Reference is made to Commissioner of Income Tax v. Hyundai
\nHeavy Industries Ltd.2007 (291) ITR 482 (SC).
\n29. It is submitted that ITAT erred in attributing as high as 35% of the
\nprofits to the alleged sales function performed in India. As submitted
\nearlier, research and development, design, fabrication and manufacture of
\nequipments all took place outside India. It is also undisputed that title to
\nthe goods passes of the Indian customers outside India and no marketing
\nactivity is done in India. Therefore, the ITAT erred in confirming the
\norders of the lower authorities in attributing as high as 35% of the profitsITA 621\/2017 & connected matters Page 20 of 85
\nas alleged PE in India. At best, 10-15% of the overall profits could have
\nbeen held to be attributable to the alleged PE in India. Reliance is placed
\non Director of Income Tax v. Galileo International Inc. 2011 (336) ITR
\n264 (Del); Anglo-French Textile Company Ltd. v. CIT 1954 (25) ITR 27
\n(SC). It was argued that without prejudice, even if 35% profits are to be
\nattributed to the alleged sales function, admittedly not the entire sales
\nfunction is carried on in India. A bare perusal of the e-mails which have
\nbeen relied upon by the Revenue leads to the inescapable conclusions that
\nmajority of the sales function is carried outside India. Accordingly, not
\nmore than 20% of the 35% profits attributable to the sales function can be
\nattributed to the alleged PE in India. The ITAT, therefore, erred in
\nattributing profits equivalent to 75% of the sales function to the activities
\ndone in India.
\n30. On behalf of the Revenue, Mr. Ruchir Bhatia, learned counsel
\nargued that the lower authorities correctly refused to accept the assessee\u201fs
\ncontentions that sale consideration was not taxable in India as the title in
\nrespect of the equipments was transferred outside India and the payments
\nwere also received outside India. It was pointed out that several activities
\nrelating to marketing and sales took place in India. Expatriates from GEII
\nalong with employees of GEIIPL constituting the Indian team were mostly
\ninvolved and participated in the negotiation of prices. These price
\nnegotiations took place in India. The Indian customers discussed MOD
\nterms with the Indian team. These facts, in the opinion of the AO, were
\nclear indicators of the GE India securing orders for GE Overseas. It was
\nalso argued that the revenue authorities found that GE Overseas, byITA 621\/2017 & connected matters Page 21 of 85
\nremotely sitting in foreign countries, could not make any sales, without
\nthe active involvement of GE India. This was held to be a business
\nconnection of GE Overseas in India under Section 9 of the Act. The AO,
\ntherefore, correctly held that all the profits did not accrue or arise to the
\nassessee on foreign soil, but part of such profits arising in India,
\ncorresponding to the activities carried out in India, was chargeable to tax
\nunder the Act. Considering the fact that sales were made to Indian
\ncustomers on a regular basis and the GE overseas entities were physically
\npresent in some form or the other in India and such physical presence had
\nfull role in these sales, the AO held that the business connection of GE
\nOverseas was established in India and, consequently, income accrued or
\narose to them in India. Mr. Bhatia stated that the position about the
\ntaxability under the Act has not been challenged by the assessee before us
\ninasmuch as it assailed only the existence of PE in terms of the DTAA,
\nmore particularly, the activities carried out in India, which were of
\npreparatory or auxiliary character. It was argued that all the GE overseas
\nentities had PE in India in all the years under consideration in two forms,
\nnamely, AIFACS premises of GEIOC, constituting a ‘fixed place PE’; ‘GE
\nIndia’ comprising of expatriates of GEII and employees of GEIIPL
\nconstituting ‘dependent agent PE’. The learned AR argued that none of the
\nactivities carried out by the assessee in India lead to the creation of PE.
\n31. Mr. Bhatia relied on the ITAT\u201fs findings, particularly in Para 27 to
\nsubmit that facts on record show the following, i.e. that firstly GEII\u201fs
\nexpats were highly qualified (and some even with double qualifications),
\nworked in India for different business interests of the GE group; their
\nactivities were not confined to the business of a particular entity andITA 621\/2017 & connected matters Page 22 of 85
\nsecondly, they were heading the operations of GE overseas entities in
\nIndia. From the description of their job and appraisal reports with the
\nManager assessment, wherever given, it was clear that these expats were
\nIndia \u201ccountry heads\u201d or working at the leading positions, managing
\nbusiness, securing orders and doing everything that was feasible which
\nwas needed to carry GE overseas entities\u201f India operations. It was
\nsubmitted that the assessee did not and could not deny that its business
\nmodel and GEII\u201fs expats\u201f role is similar in respect of all businesses in
\nIndia. Furthermore, the expats were not confined to a particular GE entity
\nbut working for one of its three major business lines, viz., Infrastructure,
\nIndustrial and Healthcare.
\n32. The revenue relied on the following findings and submitted that
\nthey are factual, which ought not to be disturbed:
\n\u201c27.4 Now, we will discuss the role of the employees of GEIIPL
\nin assisting the expats in Indian operations of GE overseas
\nentities, as unfolding from the survey documents.
\ni. Nalin Jain – Pages 247 and 264 of the Survey documents
\nPB contain profile of Nalin Jain duly signed by him which
\nshows his designation in India as ‘Sales Director’ of GE
\nTransportation, Aircraft engines. ‘Job description’ has been
\ngiven as ‘Market Intelligence and Support to Headquarters.’ He
\nhas indicated his ‘Reporting Manager’ as William Blair, who is
\none of the seven expats from GEII working in India for GE
\noverseas.
\nii. Pritam Kumar – Page 277 of the Survey documents PB is
\na profile of Pritam Kumar, an employee of GEIIPL with the
\ndesignation of ‘Market Strategy Manager’. He is reporting to
\nPierre Cante.ITA 621\/2017 & connected matters Page 23 of 85
\niii. Yashdeep Sule – Page 280 contains details of Yashdeep
\nSule, again an employee of GEIIPL. His job description is
\n‘Sales and Marketing for signaling and locomotives.’ His
\nreporting manager is Pritam Kumar as discussed immediately
\nhereinabove, who, in turn, is reporting to Pierre Cante.
\niv. Janak Chaudhary – Page 292 is report of Janak
\nChaudhary with designation of ‘Vice President’ and job
\ndescription of ‘Sector analysis for growth in India.’ His
\nreporting manager is again some foreign employee.
\n27.5. Above narration of the nature of jobs carried out by these
\nemployees of GEIIPL makes it amply clear that they were at the
\nhigher positions in the general administration and, more
\nspecifically, sales of GE Overseas, reporting directly to the
\nexpats, who, in turn, were India country heads or occupying the
\npeak positions in GE Overseas in India.\u201d
\n33. It was argued by the revenue that a proper application of the
\nprinciples enunciated in the authorities show that the assessee regularly
\nsold equipments to its customers in India which were documented and
\ndetailed in the course of survey and assessment proceedings. All sales
\nrelated activities sales are not carried out from outside the country; some
\nimportant sales activities took place within India. GEHPL employees are
\nintensely involved in those activities. They are involved right through the
\nnegotiation process in India. Indian customers discuss the MOU terms and
\nother items with these expats and GEHPL employees. The GE Overseas
\nentities submit their bids in India. The overseas entities would not have
\nbeen able to make any sales in India without involvement of Indian team
\nconstituted by employees of GEHPL along with expatriates heading the
\nrelevant team. It is, therefore, held that the appellant has a business
\nconnection in India in terms of the principles laid down through variousITA 621\/2017 & connected matters Page 24 of 85
\njudicial pronouncement discussed above, in view of the presence of the
\nexpatriates who are working for the business of the appellant in India
\nalong with employees of GEIIPL. The business activities carried out
\nthrough GEHPL results into a business connection of the nature referred
\nto in Explanation 2 of Section 9(1)(i) of the Act.
\n34. It was argued that the activities carried out by the expatriates and
\nthe activities of GEIOC, LO are not preparatory or auxiliary in nature as
\nclaimed by the appellant. The activities of various GE entities in India,
\ncarried out through their expatriate employees, are related to marketing
\nand sales which is a core activity and integral part of any business.
\nMarketing and sales activities of the GE entities in India contribute to the
\nincome of the concerned entity. According to the appellants GEIOC, LO
\nacts as a communication channel only and is providing support services.
\nHowever, all the employees (of the LO) are deputed to different GE
\nentities. Its office space, facilities and staff are being used by GE Overseas
\nentities for their business. The agreement for providing support services
\nby GEHPL to GEIOC and affiliates is with GEIOC which means that
\nGEIOC, LO is providing all the facilities and support in India for the
\nbusiness of GE Overseas entities. For that reason too the benefit of
\npreparatory and auxiliary clause to GEIOC, LO is not available in terms of
\npara 26 of the Commentary on Article 5 of OECD Model Tax Convention
\nas discussed in detail by the AO and affirmed by the lower appellate
\nauthorities.
\n35. It was argued that marketing and sales activities, controlled and
\nmonitored by the assessee\u201fs expats, which were on its payroll, is a coreITA 621\/2017 & connected matters Page 25 of 85
\nmanagement activity. The two premises, from where these activities were
\nundertaken, and the deep and pervasive nature of control, at every stage,
\nleading to finalization of all technical specifications in regard to supply of
\nequipments and customized machinery, its pricing and all material details
\ninvolved the active and detailed involvement of these expats. If any
\nconsultations did take place, it was only a part of the process. Therefore,
\nactivities such as scouring the market, development, market strategy
\n(which is specific to each geographic sector having regard to its
\npeculiarities) negotiations, price adjustments etc were integral to contract
\nformation. It could not be termed as mere negotiation, with the final \u201cyes\u201d
\nor approval by the overseas entity. The end of the process, i.e the formal
\napproval, might in fact be a ritualistic one, where every part of the
\nmeaningful negotiation phase took place, or significant parts of it, took
\nplace in India. Learned counsel relied upon the Allahabad High Court
\njudgment in Brown & Sharpe Inc v Commissioner of Income Tax 2014
\n(369) ITR 704 in support of his submissions. Reliance was also placed on
\nthe Division Bench judgment in Rolls Royce Plc v Director of Income Tax
\n2011 (339) ITR 147 (Del).
\n36. As regards the assessees\u201f submission with respect to agency PE it
\nwas argued that GE India is an agent of independent status and it is both
\nlegally and economically independent of the GE Overseas entities. It
\nprovided marketing support to GE Overseas entities. Further, GE India
\nperforms activities on its own account, independently and without any
\ndetailed instructions and control from GE Overseas entities. Reliance wasITA 621\/2017 & connected matters Page 26 of 85
\nalso placed on AAR ruling in the case of AI Nisr Publishing 1999 (239)
\nITR 879 (AAR).
\n37. Mr. Bhatia also refuted Mr. Jolly\u201fs submission with respect to
\nattribution and argued that the margin of 35% was correct and reasonable.
\nAnalysis and Conclusions:
\n38. The relevant provision of the DTAA, i.e the Indo-US DTAA reads
\nas follows:
\n\u201cArticle 5.1. For the purposes of this Convention, the term
\n\u201epermanent establishment’ means a fixed place of
\nbusiness through which the business of an enterprise is wholly
\nor partly carried on.
\n2. The term \u201epermanent establishment’ includes especially:
\n(a) a place of management;
\n(c) an office;
\n(d) to (l)
\n3. Notwithstanding the preceding provisions of this Article,
\nthe term \u201epermanent establishment’ shall be deemed not to
\ninclude any one or more of the following :
\n(a) to (d)
\n(e) the maintenance of a fixed place of business solely for the
\npurpose of advertising, for the supply of information, for
\nscientific research or for other activities which have
\na preparatory or auxiliary character, for the enterprise.
\n4. Notwithstanding the provisions of paragraphs 1 and 2,
\nwhere a person\u2014 other than an agent of an independent status
\nto whom paragraph 5 applies\u2014 is acting in a Contracting State
\non behalf of an enterprise of the other Contracting State, thatITA 621\/2017 & connected matters Page 27 of 85
\nenterprise shall be deemed to have a permanent establishment
\nin the first-mentioned State if :
\n(a) he has and habitually exercises in the first-mentioned
\nState an authority to conclude contracts on behalf of the
\nenterprise, unless his activities are limited to those mentioned
\nin paragraph 3 which, if exercise through a fixed place of
\nbusiness, would not make that fixed place of business a
\npermanent establishment under the provisions of that
\nparagraph;
\n(b) to (c)\u2026\u2026
\n5. An enterprise of a Contracting State shall not be deemed
\nto have a permanent establishment in the other Contracting
\nState merely because it carries on business in that other State
\nthrough a broker, general commission agent, or any other
\nagent of an independent status, provided that such persons are
\nacting in the ordinary course of their business.
\nHowever, when the activities of such an agent are
\ndevoted wholly or almost wholly on behalf of that
\nenterprise and the transactions between the agent and the
\nenterprise are not made under arm’s length conditions, he
\nshall not be considered an agent of independent status within
\nthe meaning of this paragraph.\u201d
\nRe: Question No. 1
\n39. Fixed place permanent establishments (\u201cfixed place PE\u201d) are
\ngoverned by Articles 5(1) to 5(3) of the U.S. \u2013 India Double Taxation
\nAvoidance Agreement [\u201cDTAA\u201d]. In the current context, the relevant
\narticles spell out three conditions \u2013 which were also considered by ITAT \u2013
\nfor the establishment:
\n(i) The enterprise must have a fixed place of business
\n[Article 5(1) of DTAA]
\n(ii) The business of the enterprise must be wholly or partly
\ncarried on through the fixed place [Article 5(1) of the DTAA]ITA 621\/2017 & connected matters Page 28 of 85
\n(iii) The fixed place of business must not be solely for the
\npurposes of advertising, supply of information, scientific
\nresearch or other activities which have a preparatory or
\nauxiliary character [Article 5(3)(e) of the DTAA]
\n40. GE\u201fs overseas enterprises have a place of business in India, per
\nArticle 5(1) of the DTAA. The term \u201cplace of business\u201d has been
\nunderstood to mean any premises, facilities or installations used for
\ncarrying on the business of the enterprise \u2013 does not have to be
\nexclusively used for that purpose [OECD Model Tax Convention on
\nIncome and on Capital, Commentary on Article 5 Concerning the
\nDefinition of Permanent Establishment, para. 4 (\u201cOECD MTC\u201d)], with
\neven a certain amount of space at its disposal is sufficient to cause fixed
\nplace of business.1 Moreover, having space at disposal does not require a
\nlegal right to use that place \u2013 mere continuous usage is sufficient if it
\nindicates being at disposal. (Ref Para 4.1 of OECD MTC).
\n41. In the decision in Formula One, (supra), the Supreme Court had
\noccasion to deal with what is a permanent establishment. After reviewing
\nseveral previous authorities and legal commentaries, the court stated as
\nfollows:
\n\u201cThe term \u201cplace of business\u201d is explained as covering any
\npremises, facilities or installations used for carrying on the
\nbusiness of the enterprise whether or not they are used
\nexclusively for that purpose. It is clarified that a place of
\nbusiness may also exist where no premises are available or
\n1The para reads as follows:
\n\u201c4. The term \u201cplace of business\u201d covers any premises, facilities or installations used for carrying on the business of
\nthe enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no
\npremises are available or require for carrying on the business of the enterprise and it simply has a certain amount of
\nspace at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or
\notherwise at the disposal of the enterprise\u2026.\u201dITA 621\/2017 & connected matters Page 29 of 85
\nrequired for carrying on the business of the enterprise and it
\nsimply has a certain amount of space at its disposal. Further, it
\nis immaterial whether the premises, facilities or installations
\nare owned or rented by or are otherwise at the disposal of the
\nenterprise. A certain amount of space at the disposal of the
\nenterprise which is used for business activities is sufficient to
\nconstitute a place of business. No formal legal right to use that
\nplace is required. Thus, where an enterprise illegally occupies
\na certain location where it carries on its business, that would
\nalso constitute a PE. Some of the examples where premises are
\ntreated at the disposal of the enterprise and, therefore,
\nconstitute PE are: a place of business may thus be constituted
\nby a pitch in a market place, or by a certain permanently used
\narea in a customs depot (e.g. for the storage of dutiable goods).
\nAgain the place of business may be situated in the business
\nfacilities of another enterprise. This may be the case for
\ninstance where the foreign enterprise has at its constant
\ndisposal certain premises or a part thereof owned by the other
\nenterprise. At the same time, it is also clarified that the mere
\npresence of an enterprise at a particular location does not
\nnecessarily mean that the location is at the disposal of that
\nenterprise.
\nThe OECD commentary gives as many as four examples where
\nlocation will not be treated at the disposal of the enterprise.
\nThese are:
\nThe first example is that of a salesman who regularly visits a
\nmajor customer to take orders and meets the purchasing
\ndirector in his office to do so. In that case, the customer’s
\npremises are not at the disposal of the enterprise for which the
\nsalesman is working and therefore do not constitute a fixed
\nplace of business through which the business of that enterprise
\nis carried on (depending on the circumstances, however,
\nparagraph 5 could apply to deem a permanent establishment to
\nexist). Second example is that of an employee of a company
\nwho, for a long period of time, is allowed to use an office in the
\nheadquarters of another company (e.g. a newly acquired
\nsubsidiary) in order to ensure that the latter company compliesITA 621\/2017 & connected matters Page 30 of 85
\nwith its obligations under contracts concluded with the former
\ncompany. In that case, the employee is carrying on activities
\nrelated to the business of the former company and the office
\nthat is at his disposal at the headquarters of the other company
\nwill constitute a permanent establishment of his employer,
\nprovided that the office is at his disposal for a sufficiently long
\nperiod of time so as to constitute a “fixed place of business”
\n(see paragraphs 6 to 6.3) and that the activities that are
\nperformed there go beyond the activities referred to in
\nparagraph 4 of the Article.
\nThe third example is that of a road transportation enterprise
\nwhich would use a delivery dock at a customer’s warehouse
\nevery day for a number of years for the purpose of delivering
\ngoods purchased by that customer. In that case, the presence of
\nthe road transportation enterprise at the delivery dock would be
\nso limited that that enterprise could not consider that place as
\nbeing at its disposal so as to constitute a permanent
\nestablishment of that enterprise.
\nFourth example is that of a painter, who, for two years, spends
\nthree days a week in the large office building of its main client.
\nIn that case, the presence of the painter in that office building
\nwhere he is performing the most important functions of his
\nbusiness (i.e. painting) constitute a permanent establishment of
\nthat painter.
\nIt also states that the words \u201ethrough which\u201f must be given a
\nwide meaning so as to apply to any situation where business
\nactivities are carried on at a particular location which is at the
\ndisposal of the enterprise for that purpose. For this reason, an
\nenterprise engaged in paving a road will be considered to be
\ncarrying on its business \u201ethrough\u201f the location where this
\nactivity takes place.\u201d
\n42. Applying the standard to the facts at hand, the ITAT and the lower
\nappellate authorities found that GE India \u2013 is located in the space leased
\nby GEIOC in the AIFACS building. This space was at the constantITA 621\/2017 & connected matters Page 31 of 85
\ndisposal of GEIOC as evidenced by specific chambers\/rooms and
\nsecretarial staff allotted to GE staff, and was used by GE staff for their
\nwork. GE has not made new submissions on this specific question in this
\ncase. Based on the factual record, it appears that ITAT\u201fs factual
\ndeterminations in this regard are sound and in consonance with the general
\nmeaning of the expression PE vis-\u00e0-vis continuity of space available for
\nGEIOC\u201fs activities.
\n43. GE\u201fs activities in India are wholly or partly carried on through its
\nfixed place of business. The term \u201cthrough which\u201d is to be given a wide
\nlatitude \u2013 when business is carried out at a particular location at the
\ndisposal of an enterprise, it is sufficient to say it meets the \u201cthrough
\nwhich\u201d threshold.
\n44. The ITAT found that the core of the sales activity was done from
\nthe AIFACS building (\u201cthe premises\u201d). Contrariwise, GE challenged this
\nfinding of fact, arguing that there was a difference between sales made
\nfrom the AIFACS building and the presence of GE India employees at the
\npremises. Its argument is that merely because expatriates and employees
\nwere found at the premises, could not lead to the conclusion that the sales
\nwere made from that place. GE\u201fs argument in this context is unpersuasive.
\nIf the premises were not where the relevant business activities occurred,
\nthen the location where they did would likely form the fixed place PE.
\nThe ITAT determination in this context is reasonable and sound. Insofar
\nas GE has not contested that the premises were indeed used for activities
\nof some form, it is reasonable to assume those activities occurred through
\nthe premises.ITA 621\/2017 & connected matters Page 32 of 85
\n45. The next issue is a thornier one; i.e whether the presence and
\navailability of the space at the disposal of GE in this case, and the
\nevidence relied on by the lower authorities, could lead one to conclude
\nthat it carried on business through its employees from that place. GE\u201fs
\ncontention here is that the activities fall within the description in Article 5
\n(3), that excludes applicability of Article 5 (1), i.e that the premises are
\nmaintained \u201csolely for the purpose of advertising, for the supply of
\ninformation, for scientific research or for other activities which have
\na preparatory or auxiliary character, for the enterprise.\u201d
\n46. The ITAT\u201fs finding on this aspect was that the assessee\u201fs
\narguments with respect to the activities being preparatory or auxiliary
\ncharacter were unfounded. The relevant part of the discussion, which is
\nfairly detailed after analyzing several documents and e-mails, and on the
\nbasis of survey recovered documents, reads as follows:
\n\u201c28.1. The third condition for constituting a fixed place PE, to
\nthe extent it is relevant for our purpose, is that the activities
\ncarried on from such fixed place should not be of preparatory
\nor auxiliary character. If the activities done from such fixed
\nplace fall within the purview of ‘preparatory or auxiliary’, the
\nfixed place sheds its character of a permanent establishment.
\nThe term ‘preparatory activity’ is understood in common
\nparlance as some job concerned with the preparation of the
\nmain task to be undertaken. It is pursued before the taking up of
\nthe actual activity. Black’s Law Dictionary 7th Edition at page
\n130 defines the term ‘auxiliary’ to mean as ‘aiding or
\nsupporting, subsidiary.’ An activity becomes auxiliary if it is in
\nsupport or aid of the core income generating activity. The
\nHon’ble jurisdictional High Court in U.A.E. Exchange Centre
\nLtd. vs. Union of India and Ors. (2009) 313 ITR 94 (Del)
\nconsidered a case in which the activity to be done through the
\nLiaison Office in India was of downloading the data;ITA 621\/2017 & connected matters Page 33 of 85
\npreparation of cheques for remitting the amount; and
\ndispatching the same through courier by Liaison Office. The
\nHon’ble High Court designated it as auxiliary to the main
\nactivity of the petitioner. The Hon’ble jurisdictional High Court
\nin a more recent decision in National Petroleum Construction
\nCompany vs. DIT (IT) MANU\/DE\/0223\/2016 : (2016) 383 ITR
\n648 (Del), considering the earlier decisions in Morgan Stanley
\n(supra) and UAE Exchange Centre (supra), has held that
\nactivity of preparatory or auxiliary character is remote from
\nactual realization of profits and is simply in aid or support of
\nthe main activity. In that case, the activities of the liaison office
\nin India were held not to contribute directly or indirectly to the
\nearning of profits by the assessee and the same being of
\npreparatory or auxiliary nature, did not constitute PE in terms
\nof Article 5(3)(e) of the DTAA. The Hon’ble Supreme Court in
\nMorgan Stanley (supra) held that back office functions
\nperformed in India are the activities of preparatory or auxiliary
\ncharacter, which do not constitute a fixed place PE under
\nArticle 5(1) of the DTAA.
\n28.2. It is discernible from an outline of the above judgments
\nrendered by the Hon’ble Apex Court and the Hon’ble
\njurisdictional High Court that the test for determining a
\npreparatory or auxiliary activity is not to see if the core activity
\ncan or cannot be performed without it. Rather, the test is that
\nsuch activity merely supports the core activity and does not per
\nse lead to earning of income. If the activity carried on from a
\nfixed place in India is simply in aid or support of the core
\nincome generating activity and is remote from the actual
\nrealization of profits, the same assumes the character of a
\npreparatory or auxiliary nature and falls within clause (e) of
\nArticle 5(3) to bring the case out of the ambit of a ‘permanent
\nestablishment’. One thing is clear from all the above decisions
\ncited by the ld. AR that the activities performed by those
\nassesses in India were either done by their liaison offices acting
\nas communication channel strictly as approved by the RBI or
\nwere in aid and support of the main activity, not generating any
\nincome in themselves.ITA 621\/2017 & connected matters Page 34 of 85
\n28.3. Section 2(e) of Foreign Exchange Management
\n(Establishment in India of Branch of Office or Other place of
\nbusiness) Regulations, 2000 defines ‘Liaison office’ to mean a
\nplace of business to act as a channel of communication between
\nthe principal place of business or HO and entities in India, but
\nwhich does not undertake any commercial\/trading\/industrial
\nactivity and maintains itself out of inward remittances received
\nfrom abroad through normal banking channel. From the
\ndefinition of Liaison office seen in juxtaposition to the above
\nreferred judgments, it becomes clear that acting as a
\ncommunication channel is an activity of auxiliary character
\nand hence does not constitute a PE in India.
\n28.4 Now, let us examine if the activities carried out in India by
\nthe GE overseas entities through GE India are of preparatory
\nor auxiliary character. Main focus of the ld. AR was to
\nestablish that the activities done by GE India were of
\npreparatory or auxiliary character. As per the application
\nmade to RBI and permission obtained, the LO of GEIOC was to
\nact as a communication channel between the head office and
\nthe customers in India. Thus, there remains no doubt that the
\nactivities to the extent of communication channel, as sanctioned
\nby the RBI, being of preparatory or auxiliary character, would
\nnot constitute any PE in India. However, it has been noticed
\nabove that the actual activities carried on from the fixed place
\nof AIFCAS building did not remain confined only to those of a
\ncommunication channel as was allowed by the RBI to GEIOC
\nat the time of setting up its LO in India.
\n28.5 The ld. AR harped on the assessee’s reply to the AO’s letter
\ndated 14.11.2008 submitting four stages of sales to contend that
\nthe activities carried out in India by GE India were merely
\npreparatory or auxiliary. He further relied on the roles and
\nresponsibilities of employees of GEIIPL etc. supplied by the
\nassessee to Department, pursuant to the judgment of the
\nHon’ble High Court. Based on such submissions, it was argued
\nthat all the activities carried out in India were of preparatory
\nor auxiliary nature and the core activity of earning income was
\ndone by GE Overseas outside India.ITA 621\/2017 & connected matters Page 35 of 85
\n28.6 We have gone through the aforesaid reply given by the
\nassessee which has been incorporated on page 45 onwards of
\nthe assessment order and also the role and responsibilities of
\nthe employees of GEIIPL etc. working in India, which we will
\nnow espouse for consideration. The reply briefly explains the
\nsales process in four stages, viz.,
\nStage 1-Pre-qualification;
\nStage 2-Bid\/no bid and Proposal development;
\nStage 3-Bid approval and negotiations; and Stage
\nStage 4-Final contract development and approval
\n28.7.1. The ld. AR contended that for the first stage of ‘Prequalification’, the assessee stated before the AO that GE India’s
\nrole comprises of assisting GE Overseas in identifying business
\nopportunities\/leads. GE India collects and furnishes
\ninformation pertaining to market trends, key policy changes in
\nthe industry, etc. Through these efforts, GE India is able to
\nidentify opportunities for GE Overseas. Once GE India
\nidentifies a business opportunity, it communicates the potential
\nopportunity to GE Overseas. GE India provides its marketing
\nsupport services at this stage within the broad framework and
\nstrategy formulated by GE Overseas.
\n28.7.2 It is clear from the above that the assessee admitted the
\nrole of GE India (expats of GEII and the employees of GEIIPL)
\nin identifying business opportunities, collecting and furnishing
\ninformation pertaining to market trends, key policy changes in
\nthe industry, etc.
\n28.8.1. For the second stage of ‘Bid\/no bid and Proposal
\ndevelopment’, the ld. AR contended that the assessee stated
\nduring the course of the assessment proceedings that on receipt
\nof communication from GE India regarding an identified viable
\nbusiness opportunity, GE Overseas analyses the same
\nindependently for deciding whether the same is worth pursuing.ITA 621\/2017 & connected matters Page 36 of 85
\nIn case GE Overseas requires any
\ninputs\/clarifications\/additional information (as part of its
\ndecision making process), it may request GE India to provide
\nthe same. GE Overseas examines the opportunity in detail and
\nthus arrives at an independent decision of whether to pursue
\nthe identified business opportunity or not. Entire technical and
\ncommercial evaluation of the opportunity at this stage is
\ncarried out by GE Overseas with inputs from its various
\nfunctional personnel spanning operations, finance, marketing,
\netc. In the event, GE Overseas decides to pursue the identified
\nbusiness opportunity, it commences the proposal development
\nprocess and intimates GE India in this regard. GE India (on
\nreceipt of such intimation and under the explicit instructions of
\nGE Overseas) undertakes an interaction with the prospective
\nend-customer so as to identify customer’s requirements\/which
\nare passed on to GE Overseas as inputs in the proposal
\ndevelopment process. As part of the proposal development
\nprocess, GE Overseas may seek inputs from GE India in respect
\nof various aspects such as pricing, preparation of bidding
\npackage and other supplementary information.
\n28.8.2. It is noticed that the assessee has admitted a small role
\nplayed by GE India. Claim of independent decision taken by GE
\noverseas has been rightly held by the AO as erroneous. Various
\nsurvey documents, as discussed above, abundantly show GE
\nIndia playing an important and proactive role in the
\nfinalization of the deal and the terms and conditions with
\ncustomers in India. In reality, the major activities about
\nsourcing of customers and finalizing the deals with them were
\ndone by GE India in consultation, wherever required, with GE
\nOverseas. The assessee frankly admitted in the same para that:
\n‘In some instances, the proposal development is jointly run by
\nthe GE Overseas and GE India teams.’ This is also borne out
\nfrom page 104 of the Survey documents PB-II, as discussed
\nabove, which is an e-mail from Pump Design Department to GE
\nIndia and copy to other members of GE India requesting the
\nIndian team to send the draft of MOU along with complete
\ncomments, so that the same could be incorporated in the
\noriginal MOU. Similarly, page 127 of the Survey documentsITA 621\/2017 & connected matters Page 37 of 85
\nPB-I shows that the MOU with BHEL reflected the
\nconversation what GE India and GE overseas discussed. Thus,
\nthere is not even an iota of doubt that GE India was fully
\ninvolved in proposal development.
\n28.9.1. The ld. AR submitted for the third stage of ‘Bid approval
\nand negotiations’, that the assessee stated before the AO that
\nonce the proposal\/bid\/tender have been put together as
\ndescribed in Stage 2 above, it is approved by the senior
\nmanagement during the Stage 3 and, thereafter, submitted to
\nthe end customer. Subsequently, GE Overseas may carry out
\nnegotiations with the customer, which may entail addressing
\nqueries, if any, raised by the end-customer, seeking\/providing
\nclarifications regarding work scope, pricing, etc required by
\nthe end customer. For the fourth stage of ‘Final contract
\ndevelopment and approval’, the assessee stated that GE
\nOverseas discusses the outcome of the negotiation process
\ninternally amongst its various overseas functional
\nheads\/approving authorities (operations, finance, legal, etc.) so
\nas to decide whether or not to go-ahead with the contract on
\nthe agreed terms and conditions with the customer. If the
\nnegotiated contract terms are approved and accepted both by
\nGE Overseas and the end-customer, the contract documents are
\nprepared and executed\/signed by GE Overseas. Local inputs
\nare obtained from GE India at this stage on a need basis.
\n28.9.2. Here again we find that the assessee’s submissions are
\nonly partly true. Pages 101-103 of the Survey documents PB-II,
\nas discussed above, evidence GE India finalizing MOU with the
\nIndian customer, Pump Design Department of IOC, and
\nadvising accordingly to the GE Overseas. Then, there is a mail
\nshowing that the change was permitted in the terms of MOU by
\nthe Indian team, which was conveyed by GE India to the
\ncustomer, with a copy to another member of GE India. GE
\nIndia was negotiating terms with the Indian customers is also
\nborne out from page 195 of Survey Documents PB-I as
\ndiscussed above, whereby Indian customer was requesting GE
\nIndia to revise the offer. Similarly, page 82 of Survey
\nDocuments PB-I, as discussed above, shows that GE IndiaITA 621\/2017 & connected matters Page 38 of 85
\nchanged the terms and conditions. In the like manner, pages 2
\nand 3 of Survey Documents PB-II show that the draft
\nagreement by Reliance Industries Ltd. to GE Overseas was sent
\nback to GE India to get it reviewed from aftermarket colleagues
\nin India. Pages 32 and 33 of Survey documents PB-II show that
\nwhen GE Overseas tried to contact directly with RIL, GE India
\nobjected to the same and wanted the entire consultations only
\nthrough the Indian team, which was positively responded by GE
\nOverseas. Page 39 of the Survey documents PB-II again shows
\nthat it is GE India which was negotiating with Indian customers
\nand not allowing GE Overseas even to change the terms and
\nconditions.
\n28.10. At this juncture, it is significant to note that the assessee
\nis not dealing in off the shelf goods. Sales are made on the basis
\nof a prior contract. In such cases, customer’s requirements are
\nfirst properly understood and thoroughly examined; then
\ncommercial and technical discussion meetings take place; then
\nproposals are prepared after negotiations on technical and
\ncommercial aspects taking Indian laws and regulations in
\nconsideration. These are all significant and essential parts of
\nsales activity, which have to be necessarily done in India by GE
\nIndia. Ordinarily, it is not the Indian customer, who would visit
\nGE entities overseas, but it is GE India, who has to have
\nphysical presence in India and such presence is through the GE
\nIndia team.
\n28.11. It follows from the foregoing discussion that most of the
\nwork concerning the first stage of Pre-qualification was
\nadmittedly done by GE India; for the second stage of Bid\/no bid
\nand Proposal development, albeit the assessee admitted that in
\nsome instances, the proposal development was jointly done by
\nthe GE Overseas and GE India teams, but we have noticed from
\nthe survey documents that the core activities of finding the
\ncustomers and finalizing the deals with them were done by GE
\nIndia in consultation, wherever required, with GE Overseas;
\nfor the third stage of Bid approval and negotiations and the
\nfourth stage of Final contract development and approval, again
\nwe have found that it was GE India who was finalizing andITA 621\/2017 & connected matters Page 39 of 85
\nchanging the terms and conditions of MOU with the Indian
\ncustomers and GE Overseas was not even allowed to change
\nany of the terms and conditions directly without consulting GE
\nIndia. The mere fact that the contracts were formally signed
\noutside India by GE Overseas does not in any manner
\nundermine the doing of core activity of sales by GE India. It is
\nso for the reason that GE India finds customers in India,
\nunderstands their requirements, negotiates necessary terms and
\nconditions with them, prepares or helps in preparing MOU and
\nfinalizes the deal with them. With the doing of all the above
\nactivities, when MOU is prepared in India and the Indian
\ncustomer signs it first in India and then it is sent to GE overseas
\nfor signature, for all practical purposes, it will have to be
\nconcluded that core sales activity was undertaken by GE India
\nalone.
\n28.12. Next leg of the submissions to bolster the argument of
\nthe preparatory or auxiliary services rendered by GE India was
\nreference to the Roles and responsibilities of some of the expats
\nand employees of GEIIPL etc. supplied by the assessee to
\nDepartment pursuant to the judgment of the Hon’ble High
\nCourt. Based on such details, it was argued that GE India was
\nsimply assisting GE Overseas and their role was not more than
\nthat of a support staff to GE Overseas, who, in turn, was taking
\nall the relevant decisions regarding sales in India.
\n28.13. At this point it is pertinent to mention that the
\nDepartment collected Linked in profiles of some employees of
\nGE group, who in its opinion were carrying on the operations
\nof GE overseas in India. Such details were filed before the
\nTribunal on an earlier occasion as additional evidence. The
\ntribunal passed a separate order admitting such evidence. On a
\nwrit petition, the Hon’ble High Court vide its order dated
\n21.11.2014 set aside the tribunal order but required the
\nassessee to furnish the details of :’Names, designations, roles
\nand responsibilities of the employees of G.E. Group
\nCompanies, who were working in India during the relevant
\nperiod along with their educational qualifications’. The
\nassessee filed the information, whose copy has been placedITA 621\/2017 & connected matters Page 40 of 85
\nbefore us. Thus, it is clear that this information was given by
\nthe assessee after the passing of the assessment order and no
\nIncome-tax authority had any occasion to verify its veracity.
\nThis information is about the persons engaged in Indian
\nactivities of GE overseas companies.
\n28.14. Now let us see the status of role and responsibilities of
\nsome members of GE India team as given by the assessee
\nfollowing the Hon’ble High Court judgment and what
\ntranspired from the documents found during the survey and
\npost-survey proceedings but before issuing notice u\/s. 147.
\ni. William BlairAnnexure 5 to the assessee’s letter pursuant to the Hon’ble High
\nCourt’s order explains his roles and responsibilities. It has been
\nwritten that William, inter alia,: ‘had limited involvement in a
\ntransaction as he was primarily responsible to overseeing the
\nfunctioning of his group. … He was just acting as a
\ncommunication channel and was responsible for
\ncommunicating GE overseas entity’s position to the Indian
\ncustomer and transmitting customer’s feedback to the GE
\noverseas entity for further inputs. William had no authority to
\nfinalize any deal. … All the pricing and terms and condition
\ndecisions were taken by GE overseas entity and he had no role
\nin such decision making. … William’s responsibility was to take
\nprior approval for initiating any dialogue with customers in
\nIndia. Further, he had no authority to sign or execute any
\ncontract on behalf of GE overseas entity and he never executed
\nany contract with customers in India.’ The above narration of
\nrole and responsibilities shows that William was to act as a
\nmere communication channel between the customers in India
\nand GE Overseas. In contrast, when we see his ‘Job description’
\ngiven under his own signature in the documents as discussed
\nabove, it transpires that he was to: “Organize local aviation
\nteam including commercial and military sales leaders; Conduct
\ncompliance risk assessments, audits and support training for
\naviation team members in India; Develop aviation growth
\nstrategy for India and obtain HQ support for same.” In otherITA 621\/2017 & connected matters Page 41 of 85
\nwords, he was responsible for all the activities of sales in India
\nand only the requisite support was to be taken from HQ. There
\nis an apparent contradiction between what William said in a
\ndocument signed by him and the picture of his role which the
\nassessee portrayed after the conclusion of assessment. It goes
\nwithout saying that the primary document duly signed by
\nWilliam showing his job responsibilities will have precedence
\nover what the assessee stated by way of Annexure after the
\ntermination of assessment.
\nii. Kumar PratyushAnnexure 12 to the assessee’s letter pursuant to the Hon’ble
\nHigh Court’s order explains his roles and responsibilities. It
\nhas been written that, inter alia, : ‘Pratyush was not involved in
\nany sales….. was never involved in negotiating deals, terms and
\nconditions and pricing for or on behalf of any GE overseas
\nentity. He was more involved in overall management of client
\nand government relationships including smooth functioning of
\nGE businesses in India’. In contrast, when we see his
\ndesignation in the Assignment letter as ‘Leader, GE
\nInfrastructure, Ops-India’ of GE Transportation reporting
\ndirectly to the Global CEO of GE Infrastructure and the ‘job
\ndescription’ given by him in the earlier referred documents of
\nhaving a specific role to: ‘Help GE infrastructure business
\ndevelop their strategy in India; Align GE solutions with
\ncustomer need; Help shape policy to realize opportunities; and
\nFacilitate business development discussions’, it becomes
\nmanifest that the assessee intentionally trimmed his role to
\njustify its stand, which, being contrary to the primary and
\nsource documents, cannot be accepted.
\niii. Nalin Ashfaq
\nAnnexure 18 to the assessee’s letter pursuant to the Hon’ble
\nHigh Court’s order explains his roles and responsibilities. It
\nhas been written that, inter alia,: ‘Ashfaq was responsible for
\nproviding support to the Transportation Division ….He was not
\ninvolved in any parts sales to customers in India. At theITA 621\/2017 & connected matters Page 42 of 85
\nrelevant time, he was involved in promoting the business of sale
\nof parts to Railways and developing market strategies. His role
\nwas to get into the discussion with Railways for marketing
\ndevelopment. Ashfaq had no signing authority’. This shows that
\nthough the assessee candidly admitted in the post assessment
\nletter that Ashfaq was involved in promoting the business of
\nsale of parts to Railways and developing market strategies, but
\nit also simultaneously undermined his actual role by saying that
\nhe was not involved in any actual sales. This is contrary to the
\nAppraisal report showing his job as also including to:
\n“Coordinate activities of the marketing and sales teams to
\ndevelop potential solutions…. to Evaluate the team’s
\nperformance against the business goals and objectives…..’. He
\nhas mentioned his ‘Accomplishments’ in terms of sales and
\norders in India. Then, there is the ‘Manager Assessment’ on
\npage 63, which shows that he made solid progress in ’06 with
\n‘Orders and sales’. It is discernible from the above discussion
\nthat the assessee did not properly state the role and
\nresponsibilities of Ashfaq in the letter filed post assessment, on
\nwhich the ld. AR has relied to canvass that the role played by
\nGE India was only auxiliary and preparatory.
\niv. Pierson KennethAnnexure 19 to the assessee’s letter pursuant to the Hon’ble
\nHigh Court’s order explains his role and responsibilities. It has
\nbeen written, inter alia, that,: ‘Kenneth’s profile was more of
\nlocating opportunity and providing marketing development
\nstrategies for the GE overseas entity…. Kenneth had no
\nauthority to take any decision with respect to the sale of
\nproduct\/parts in the signaling business. All prices and terms
\nand conditions were negotiated and finalized only by the GE
\noverseas entity. Kenneth being technical person did not have
\nany authority to negotiate any terms of contracts in India.’ Now
\nlet us have a look at his Assignment letter, which shows his
\nposition as ‘Sales & Marketing Manager’ of GE Transportation.
\nWe fail to comprehend as to what a ‘Sales & Marketing
\nManager’ will do without any authority to take any decision
\nw.r.t. sale. Fallacy of the assessee’s claim in the postITA 621\/2017 & connected matters Page 43 of 85
\nassessment letter is established from the Self appraisal report of
\nKenneth, which states that ‘He Led the GS team through key
\nactivities – Sales, Cross-approval, Partnership approvals,
\nMarketing and Resourcing.’ Then there is ‘Manager assessment’
\nof the self appraisal of Kenneth M. Pierson. It has been
\nmentioned that: ‘Ken is committed to growing the India
\nsignaling business, but missed the orders target for the year’.
\nThis shows that Kenneth Pierson was given sales target, which
\nhe could not achieve. Here, it is relevant to note the judgment
\nof the Hon’ble Allahabad High Court in Brown and Sharpe Inc.
\nvs. CIT & Anr. (2014) 369 ITR 704 (All) in which the Tribunal,
\nwhile affirming the order of the CIT (A), relied upon relevant
\ndocumentary material in arriving at the conclusion that the
\nactivities of the liaison office established that it was promoting
\nthe sales of the assessee in India and the Assessing Officer was
\njustified in holding that the income attributable to the liaison
\noffice was taxable in India. Upholding such a view, the Hon’ble
\nHigh Court held that: ‘the Tribunal has correctly noted that in
\nthe present case, the liaison office was promoting the sales of
\nthe goods of the assessee company through its employees, to
\nwhom a sales incentive plan was provided for achieving a sales
\ntarget and the performance of the employees was being judged
\nby the orders secured by the assessee.’ In the instant case also,
\nit is clear that the sales targets were assigned to the expats etc.
\nand Kenneth Pierson, a ‘Sales & Marketing Manager’, could
\nnot achieve the sales target given to him. Going by the ratio
\ndecidendi of Brown and Sharpe (supra), it is palpable that PE
\nof GE Overseas was established in India.
\nv. Ricardo ProcacciAnnexure 20 to the assessee’s letter pursuant to the Hon’ble
\nHigh Court’s order explains his role and responsibilities. It has
\nbeen written, inter alia, that,: ‘Riccardo’s role was to find out
\nhow India would be relevant for Oil & Gas business and also to
\ngather information on the customers in such industry. … His
\nrole was limited to understanding the needs of the customers in
\nIndia and pass such information to the GE overseas entity in
\nItaly. … At any point of time, he was not delegated any power toITA 621\/2017 & connected matters Page 44 of 85
\ntake decision on behalf of the GE overseas entity. He was
\nacting as liaison between GE overseas entity and customers in
\nIndia. His responsibility was to liaise the relationship with
\nIndian customers….Most of commercial negotiations were done
\nby the commercial operation team sitting in Italy… Riccardo
\nnever took any decision or negotiated on behalf of the GE
\noverseas entity. … and he was merely acting as channel
\nbetween the Commercial team and the Customers’. Here again,
\nthe assessee misled by stating wrong facts about the working of
\nRicardo in the post-assessment letter. His Assignment letter
\nshows his position as ‘Oil & Gas, India Country Leader’ of GE
\nEnergy. We have noticed from the survey documents above that
\nRicardo was not only negotiating and finalizing the terms and
\nconditions with customers in India but also not allowing GE
\nOverseas to alter any such terms without the consent of GE
\nIndia. The assessee did not furnish his Appraisal report and
\nManager assessment despite a specific request by the AO till
\nthe completion of assessment.
\nvi. Nalin Jain (GEIIPL)-
\nAnnexure 8 to the assessee’s letter pursuant to the Hon’ble High
\nCourt’s order explains his role and responsibilities. It has been
\nwritten, inter alia, that, : ‘Nalin’s role was to collect the market
\nintelligence and initiate a dialog with the Indian customer to
\nunderstand their requirements… His role was to pass on the
\ninformation\/queries between the overseas entity and the Indian
\ncustomer…Nalin has no authority to finalize any deal. He was
\njust acting as a communication channel…All the pricing and
\nterms and condition decisions were taken by GE overseas entity
\nand he had no role in such decision making’. Here again, we
\nfind that the assessee did not come out clean. Survey documents
\nshow his designation in India as ‘Sales Director’ of GE
\nTransportation, Aircraft engines. ‘Job description’ has been
\ngiven as ‘Market Intelligence and Support to Headquarters.’ He
\nhas indicated his ‘Reporting Manager’ as William Blair, who is
\none of the seven expats from GEII working in India for GE
\noverseas entities.ITA 621\/2017 & connected matters Page 45 of 85
\n28.15. On a holistic consideration of the entire material before
\nus, por una parte, there is primary, specific and original
\nsubstantiated material relied by the ld. DR in the form of survey
\ndocuments, Self appraisals, Manager assessment and Job
\ndescriptions given under the signature of such persons, showing
\nthe doing of core sale activity by GE India, and por otra parte,
\nthere is somewhat contrary, generalized and unsubstantiated
\nmaterial relied by the ld. AR in the form of the downplayed role
\nof GE India in four stages of sales and job responsibilities
\nstated by the assessee (not by the concerned employees) after
\nthe completion of assessment, for a claim that GE India was
\nrendering services to GE Overseas as a mere communication
\nchannel and such services were of preparatory or auxiliary
\ncharacter. It goes without saying that the specific, primary,
\noriginal and substantiated material will have primacy over the
\ngeneralized and unsubstantiated material. But for the survey
\naction unearthing the specific and primary material divulging
\nthe doing of core sale activity by GE India, the reality would
\nhave remained under the carpet and the assessee would have
\ncontinued to harp on its general submissions with downsized
\nroles and underplayed responsibilities of GE India, to avoid the
\nestablishment of PE in India.
\n28.16. Having seen that how the assessee degraded the
\ndesignations and lowered the roles and responsibilities of the
\nexpats etc. in the statement filed pursuant to the Hon’ble High
\nCourt judgment, showing as if they were mere communication
\nchannel as against the stark reality of their performing all the
\ncore functions in India relating to sales, we will now discuss the
\ndetails filed by the assessee along with the same letter about
\nsome other employees of GEIIPL who were engaged in the
\nactivities in India. Despite showing all of them as doing mainly
\nthe work of mediator, the assessee has also accepted
\ninvolvement of some of them in core activities, which is as
\nunder:-
\ni. Anand Mohan Awasthy – He is a Mechanical Engineer with
\nDiploma in Finance and is an employees of GEIIPL working
\nsince Financial year 2000-01. His designation is ‘ServiceITA 621\/2017 & connected matters Page 46 of 85
\nManager’. Annexure 1 discusses his roles and responsibilities,
\nbeing, ‘Responsible for aftermarket sales (spares) and services
\nin respect of steam turbines and generators sold by various GE
\noverseas entities in India’.
\nii. Anand Bansal-He is in Business Administration\/Management
\nand is an employees of GEIIPL working since Financial year
\n2002-03. His designation is ‘Sales Manager’. Annexure 2
\ndiscussing his roles and responsibilities provides through the
\nsecond bullet point that : ‘As a part of his job, Anand’s role was
\nto formulate marketing strategy for wind energy related
\nequipments in India, which involved, among other things,
\ndetermining a marketing strategy that helps distinguish GE
\nproducts from its competitors, assist potential customers in
\ntheir study phase and help define their needs for wind energy
\nequipments.’ Bullet point 5 also provides that : ‘From 2007
\nonwards, Anand was supporting BGGTS (Joint venture of GE
\nand BHEL), and was responsible to providing after sale and
\nmaintenance support.’
\niii. Sharmila Barathan – She is MA in Economics and also did
\nher Masters in International Business. She is an employee of
\nGEIIPL. Her designation is ‘Government Affairs’. Annexure 3
\ndiscussing her roles and responsibilities provides through the
\nsecond bullet point that : ‘She supports the team of Market
\nDevelopment and assist them through shaping government
\npolicies. Her role was to provide recommendations on the
\nintegrated energy policies and also to prepare enabling policies
\nto encourage investments in the Energy sector on behalf of GE.’
\niv. Scott Bayman – He did his masters in Management and
\nBachelors in Marketing. His designation is ‘President and
\nCEO’. Annexure 4 discussing his roles and responsibilities
\nprovides through the first bullet point that his: ‘primary role
\nwas to help set-up local support teams in India.’ The second
\nbullet point provides that he: ‘would ask for headcount from
\nHQ to create local teams. He was responsible for growth of
\nGE’s businesses in the Indian market. He was also responsible
\nfor management of local business affairs, compliance practices,ITA 621\/2017 & connected matters Page 47 of 85
\nintegrity aspects, HR and also had oversight over capital
\nbusiness’.
\nv. Sujoy Ghosh – He is an Electrical Engineer and is an
\nemployee of GEIIPL. His designation is ‘Sales Manager’.
\nAnnexure 6 discussing his roles and responsibilities provides
\nthrough bullet point five that ‘At that point of time there was a
\nrobust R Table process followed by all GE businesses. Under
\nsuch R Table process, no person sitting in India could make a
\nproposal to any customer in India without prior approval of GE
\noverseas entities nor could any person sitting in India negotiate
\nor finalize any contract in India.’ One thing is clear from the R
\nTable process that there was no blanket bar on GE group
\nemployees in India for making proposals or to negotiate or
\nfinalize any contract in India. Making a proposal envisages
\nexamining the opportunity in detail, undertaking an interaction
\nwith the prospective end-customer so as to identify his
\nrequirements, studying all the relevant aspects, finding out the
\ntechnical and financial viability, and then arriving at the
\nultimate conclusion of the supplying and pricing. The only
\ncondition set out under the R Table process on the Indian
\nemployees working for GE overseas entities in India was that
\nthe approval was required to be sought from the GE overseas
\nbefore sending the proposal to customers in India. The assessee
\nhas itself admitted through stage 2: Bid\/no bid and Proposal
\ndevelopment of the ‘Sales process’ that: ‘In some instances, the
\nproposal development is jointly run by the GE Overseas and
\nGE India teams. However, even in such cases, decision making
\nauthority continues to remain only with GE Overseas.’
\nvi. Sanjeev Kakkar – He did his masters in Mechanical
\nEngineering. His designation is ‘Sales Director’. He is an
\nemployee of GEIIPL working since 2000. Annexure 10
\ndiscussing his roles and responsibilities provides through the
\nsixth bullet point that:’ As a part of his job, Sanjeev would
\nunderstand the requirements of clients in terms of equipment
\nrequired as well as financing required and thereafter,
\ncommunicate these requirements to the overseas entities.’ There
\nis again a reference to R Table process and it has beenITA 621\/2017 & connected matters Page 48 of 85
\nmentioned that he will not sign or negotiate with any customer
\nin India without any prior approval of the overseas entities.
\nThis again shows that he was signing or negotiating with
\ncustomers in India, but with the approval of the GE overseas. It
\nhas been specifically provided in the eighth bullet point that:
\n‘Although Sanjeev and other people sitting in India were part of
\nthe negotiating team with customers, however, at no point of
\ntime could they commit to any negotiation with respect to terms
\nand conditions or discount without prior approval from the
\noverseas people listed on the R Table.’
\nvii. Alpana Khera – She did her Engineering in Instrumentation
\nand Diploma in Marketing. Her designation is ‘Sales Manager’.
\nShe is an employee of GEIIPL working since 2001. Annexure
\n11 discussing her roles and responsibilities again refers to R
\nTable process, which implies that signing or negotiating with
\ncustomers in India was allowed but with the approval of the GE
\noverseas.
\nviii. Ashish Malhotra – He did his Electrical Engineering and
\nPG Diploma in Marketing. His designation is ‘Sales Manager’.
\nHe is an employee of GEIIPL working since 2001.
\nix. Jaimin Shah – He did his Mechanical Engineering. His
\ndesignation is ‘Account Executive’. He is an employee of
\nGEIIPL working since 2002. Annexure 21 discussing his roles
\nand responsibilities provides through the first bullet point that
\nhe: ‘was responsible for the aftermarket sales services of
\nequipment’.
\nx. Vivek Venkatachalam – He did his B. Tech in Chemical
\nEngineering. His designation is ‘Executive – Business
\nOperations’. He is an employee of GEIIPL.
\n28.17. Taking above discussion into consideration, more
\nspecifically, the primary, specific and original substantiated
\nmaterial in the form of survey documents, self appraisals and
\nManager assessment etc., there remains no doubt whatsoever
\nthat GE Overseas was selling its products in India and the coreITA 621\/2017 & connected matters Page 49 of 85
\nactivities in regard to sale, namely, pre-sale, during-sale and
\npost-sale were being carried out in India by GE India.
\nNotwithstanding the fact that the AO has categorically held that
\nall the core activities regarding sales were done by GE India,
\nwhich has been confirmed by the ld. CIT(A) as well, the
\nassessee has failed to tender any evidence to show that such a
\nview canvassed by the authorities below is wrong and in fact,
\nsuch core operations were carried out in India by some other
\nmeans. Except for lip service that GE Overseas was doing core
\nsale activity and GE Overseas doing only preparatory or
\nauxiliary activities, the assessee did not place on record even
\nan iota of evidence to prove its contention. If we minutely
\nconsider the nature of activities done by GE Overseas and GE
\nIndia, it clearly surfaces that GE India was doing core
\nmarketing and sales activity and GE Overseas was doing only
\nauxiliary activities, in aid and support of the activities of the
\nmarketing activities carried out by GE India.
\n28.18. Moreover, para 26 of the OECD Commentary discussing
\nexemption under sub-para (e), being activities of preparatory
\nor auxiliary nature, clearly provides that : ‘A fixed place of
\nbusiness which renders services not only to its enterprise but
\nalso directly to other enterprises, for example to other
\ncompanies of a group to which the company owning the fixed
\nplace belongs, would not fall within the scope of subparagraph
\ne)’. This part of the Commentary explaining ‘preparatory or
\nauxiliary activities’ makes it clear that if a fixed place of
\nbusiness is used for rendering services to more than one
\ncompanies of a group, as is a case under consideration, then
\nsuch services cannot be treated as of preparatory or auxiliary
\ncharacter.\u201d
\n47. Determining whether a practice is preparatory or auxiliary requires
\nasking whether the activity undertaken at the fixed place of business is an
\nessential and significant part of the activity of the enterprise as a whole. In
\nNational Petroleum Construction Company vs. DIT (IT) (2016) 383 ITRITA 621\/2017 & connected matters Page 50 of 85
\n648 (Del), it was held that activities that are remote from the realization of
\nprofits are considered preparatory or auxiliary:
\n\u201c26. The language of sub-para (e) of paragraph 3 of Article
\n5 of the DTAA is similar to the language of sub-para (e) of
\nparagraph 4 of Article 5 of the Model Conventions framed by
\nOECD, United Nations as well as the United States of America.
\nThe rationale for excluding a fixed place of business
\nmaintained solely for the purposes of carrying on activity of a
\npreparatory or auxiliary character has been explained by
\nProfessor Dr. Klaus Vogel. In his commentary on “Double
\nTaxation Conventions, Third Edition”, he states that “It is
\nrecognised that such a place of business may well contribute to
\nthe productivity of the enterprise, but the services it performs
\nare so remote from the actual realisation of profits that it is
\ndifficult to allocate any profit to the fixed place of business in
\nquestion. Examples are fixed places of business solely for the
\npurpose of advertising or for the supply of information or for
\nscientific research or for the servicing of a patent or a knowhow contract, if such activities have a preparatory or auxiliary
\ncharacter”.
\nAccordingly, it is not simply that an activity is necessary for the
\ncompletion of a contract\u2013 it must be the case that the activities must per se
\nbe responsible for the realization of profits.
\n48. Courts have also indicated clear markers for the requisite
\ninvolvement of Liaison Offices (LO) in the context of auxiliary or
\npreparatory activities. UAE Exchange (supra) held that in the context of
\nthe transnational remit of funds, the mere processes of downloading
\ncheques and preparing the amount for remitting in India \u2013 where the
\ntransaction occurred overseas \u2013 is auxiliary and preparatory:
\n\u201cHowever, Article 5 (3) which opens with a non-obstante
\nclause, is illustrative of instances where-under the DTAAITA 621\/2017 & connected matters Page 51 of 85
\nvarious activities have been deemed as ones which would not
\nfall within the ambit of the expression \u201epermanent
\nestablishment\u201f. One such exclusionary clause is found
\nin Article 5 (3) (e) which is: maintenance of fixed place of
\nbusiness solely for the purpose of carrying on, for the
\nenterprise, any other activity of a preparatory or auxiliary
\ncharacter. The plain meaning of the word \u201cauxiliary\u201f is found
\nin Black\u201fs Law Dictionary 7th Edition at page 130 which reads
\nas “aiding or supporting, subsidiary”. The only activity of the
\nliaison offices in India is simply to download information which
\nis contained in the main servers located in UAE based on which
\ncheques are drawn on banks in India whereupon the said
\ncheques are couriered or despatched to the beneficiaries in
\nIndia, keeping in mind the instructions of the NRI remitter. Can
\nsuch an activity be anything but auxiliary in character. Plainly
\nto our minds, the instant activity is in \u201caid\u201d or \u201csupport\u201f of the
\nmain activity. The error into which, according to us, the
\nAuthority has fallen is in reading Article 5 (3) (e) as a clause
\nwhich permits making a value judgment as to whether the
\ntransaction would or would not have been complete till the role
\nplayed by liaison offices in India was fulfilled as represented by
\nthe petitioner to their NRI remitter. According to us, what has
\nbeen lost sight of, is that, by invoking the clause with regard to
\npermanent establishment, we would, by a deeming fiction tax an
\nincome which otherwise neither arose nor accrued in India –
\nwhen looked at from this point of view, the exclusionary clause
\ncontained in Article 5 (3) and in this case in particular, subclause (e) have to be given a wider and liberal play. Once an
\nactivity is construed as being subsidiary or in aid or support of
\nthe main activity it would, according to us, fall within the
\nexclusionary clause. To say that a particular activity was
\nnecessary for completion of the contract is, in a sense saying
\nthe obvious as every other activity which an enterprise
\nundertakes in earning profits is with the ultimate view of giving
\neffect to the obligations undertaken by an enterprise vis-a-vis
\nits customer. If looked at from that point of view, then, no
\nactivity could be construed as preparatory or of an \u201cauxiliary\u201f
\ncharacter.\u201dITA 621\/2017 & connected matters Page 52 of 85
\n49. E-Funds (supra) held that the mere rendering of back office support
\nto foreign entities does not constitute essential and significant part of the
\nactivities of the business as a whole.2 DIT v. Morgan Stanley 2007 (292)
\nITR 416 (SC) likewise held that back-office activities for an international
\nbank that were occurring in India were auxiliary in relation to the main
\nbusiness of the entity. However, the following observations in Morgan
\nStanley (supra) are also relevant:
\n\u201cArticle 5(2)(l) of DTAA applies in cases where MNE furnishes
\nservices within India and those services are furnished through
\nits employees. In the present case we are concerned with two
\nactivities, namely, stewardship activities and the work to be
\nperformed by deputationists in India as employees of MSAS. A
\ncustomer like MSCo who has worldwide operations is entitled
\nto insist on quality control and confidentiality from the service
\nprovider. For example in the case of software PE a server
\nstores the data which may require confidentiality. A service
\nprovider may also be required to act according to the quality
\ncontrol specifications imposed by its customer. It may be
\nrequired to maintain confidentiality. Stewardship activities
\ninvolve briefing of the MSAS staff to ensure that the output
\nmeets the requirements of MSCo. These activities include
\nmonitoring of the outsourcing operations at MSAS. The object
\nis to protect the interest of MSCo. These stewards are not
\ninvolved in day-today management or in any specific services to
\nbe undertaken by MSAS. The stewardship activity is basically to
\nprotect the interest of the customer. In the present case as held
\nhereinabove MSAS is a service PE. It is in a sense a service
\nprovider. A customer is entitled to protect its interest both in
\nterms of confidentiality and in terms of quality control. In such
\na case it cannot be said that MSCo has been rendering the
\nservices to MSAS. In our view MSCo is merely protecting its
\nown interests in the competitive world by ensuring the quality
\n2DIT vs. E-Funds IT Solutions (2014) 364 ITR 256 (Del)ITA 621\/2017 & connected matters Page 53 of 85
\nand confidentiality of MSAS services. We do not agree with the
\nruling of AAR that the stewardship activity would fall under
\nArticle 5(2)(l). To this extent we find merit in the civil appeal
\nfiled by the appellant (MSCo) and accordingly its appeal to that
\nextent stands partly allowed.
\n17. As regards the question of deputation, we are of the view
\nthat an employee of MSCo when deputed to MSAS does not
\nbecome an employee of MSAS. A deputationist has a lien on his
\nemployment with MSCo. As long as the lien remains with MSCo
\nthe said company retains control over the deputationist\u201fs terms
\nand employment. The concept of a service PE finds place in the
\nUN Convention. It is constituted if the multinational enterprise
\nrenders services through its employees in India provided the
\nservices are rendered for a specified period. In this case, it
\nextends to two years on the request of MSAS. It is important to
\nnote that where the activities of the multinational enterprise
\nentails it being responsible for the work of deputationists and
\nthe employees continue to be on the payroll of the multinational
\nenterprise or they continue to have their lien on their jobs with
\nthe multinational enterprise, a service PE can emerge.
\n18. Applying the above tests to the facts of this case we find that
\non request\/requisition from MSAS the applicant deputes its
\nstaff. The request comes from MSAS depending upon its
\nrequirement. Generally, occasions do arise when MSAS needs
\nthe expertise of the staff of MSCo. In such circumstances,
\ngenerally, MSAS makes a request to MSCo. A deputationist
\nunder such circumstances is expected to be experienced in
\nbanking and finance. On completion of his tenure he is
\nrepatriated to his parent job. He retains his lien when he comes
\nto India. He lends his experience to MSAS in India as an
\nemployee of MSCo as he retains his lien and in that sense there
\nis a service PE (MSAS) under Article 5(2)(l). We find no
\ninfirmity in the ruling of ARR on this aspect. In the above
\nsituation, MSCo is rendering services through its employees to
\nMSAS. Therefore, the Department is right in its contention that
\nunder the above situation there exists a service PE in IndiaITA 621\/2017 & connected matters Page 54 of 85
\n(MSAS). Accordingly, the civil appeal filed by the Department
\nstands partly allowed.\u201d (at pages 15-16)
\n18. It has already been seen that none of the customers of the
\nassessees are located in India or have received any services in
\nIndia. This being the case, it is clear that the very first
\ningredient contained in Article 5(2)(l) is not satisfied. However,
\nthe learned Attorney General, relying upon paragraph 42.31 of
\nthe OECD Commentary, has argued that services have to be
\nfurnished within India, which does not mean that they have to
\nbe furnished to customers in India. Para 42.31 of the OECD
\nCommentary reads as under: \u201cWhether or not the relevant
\nservices are furnished to a resident of a state does not matter:
\nwhat matters is that the services are performed in the State
\nthrough an individual present in that State.\u201d
\n50. Jebon Corporation India v. CIT 2012 Taxmann 7 (Kar) held that
\ncommercial activities including procuring orders, identifying buyers,
\nnegotiating with buyers, agreeing to the price, and requesting them to
\nplace an order with the foreign headquarters were not auxiliary or
\npreparatory in nature. The observations and findings of the High Court are
\neerily similar to the facts of this case:
\n\u201cRelying on these provisions, it is contended by the assessee
\nthat the liaison office was opened to act as a communication
\nchannel between the head office at Korea and the parties in
\nIndia. They have not undertaken any other activity of a trading
\nor commercial or industrial nature nor have they entered into
\nany business contract in their names. They have not charged
\nany commission or any remuneration and they have not earned
\nany such amount in India for liaison activities. The entire
\nexistence of the office in India is made exclusively out of the
\nfunds of the head office and they have not borrowed any money.
\nThey have not acquired any properties. They have no direct
\ncommitment with the customers and therefore, it was contendedITA 621\/2017 & connected matters Page 55 of 85
\nthat the liaison office in Bangalore cannot be considered as a
\nPE so as to attract the provisions of the Act. It is in this
\nbackground, we have to see what was unearthed in the course
\nof investigation by an investigating agency.
\n9. The liaison office of the assessee was opened in 1998. The
\noperations of the assessee at Bangalore were carried out
\npursuant to the approval by the RBI. The liaison office has five
\nemployees in all. The South Korean based company is a trader
\nin semi-conductor components manufactured by various
\ncompanies across the world. In the course of the said survey
\nand investigation, the authorities have recorded the statement
\nof one Sri V. Natarajan, the country manager. He has stated on
\noath that out of the five employees who are working in the
\nliaison office, three of them are directly related to sales
\n(including him) and two administrative assistants. They also
\nidentify new customers by way of their past experiences in the
\nfield of sales and sometimes, the customers themselves will
\nenquire with them regarding the products based on the market
\ninformation. Once this is done, they will fix an appointment
\nwith the right person in the organization and try to identify the
\nexact requirement and also to explain the availability of
\nproducts. After this, the customer will give his requirement
\nbased on the products available with them. The customer
\nexpects their sales personnel to quote within a reasonable time.
\nAfter this, the same enquiry is converted into a request for a
\nquotation format to the head office staff responsible for
\npurchase activities from their suppliers in Korea and China. As
\nsoon as they get the request for a quotation format fully filled
\nup with price, delivery and specification in Bangalore through
\ne-mail, the sales person who is responsible for generating the
\nenquiry will reply to the customer with a quotation adding the
\nsales margin. They have a thumb rule to calculate the sales
\nmargin depending upon the end-use of the product and the
\ncompetition in the market and the volumes. They get only the
\nbuying price from the head office and the margins are decided
\nby the sales team based in Bangalore on a case to case basis
\ndepending upon the merits of the case. After this, there will be a
\nnegotiation for each enquiry between the customers and theITA 621\/2017 & connected matters Page 56 of 85
\nsales personnel of the office and in some cases, they are able to
\nclose the order to the satisfaction of the customer and the head
\noffice. In other cases, if the customer is not happy with the price
\nand if he asks for more discount, the personnel at Korea will
\ndiscuss the same with the suppliers to request for more discount
\nin the price. If the supplier agrees for giving more discount,
\nthen accordingly, they quote a new discounted price to the
\ncustomers and close the deal. After this, if the deal is through
\nthey have to process the order. They fill the details in the order
\nprocessing chart and send the same to the head office through
\ne-mail as an attachment. The purchase team at the head office
\nwill process and place the order to the supplier and then wait
\nfor the goods to be ready. Once the goods are ready, they will
\nbe inspected by the quality control team at the head quarters to
\nensure that the specifications are properly met. After that the
\ngoods are packed and shipped to the freight forwarder
\nappointed by the customer. The same will be shipped directly to
\nthe customer by the first available flight or ship. The head
\noffice will send a copy of the commercial invoice, packing list
\nand airway bill\/bill of lading to the liaison office at Bangalore
\nby e-mail\/fax. They in turn send these three documents to the
\ncustomer. Then the responsibility of getting the goods cleared
\nlies with the customers. The payments will be made by the
\ncustomer through telegraphic transfer through bank to the head
\noffice account at Korea. Their work also involves following up
\nof payments from the customers and offer sales support, if
\nnecessary. He has also deposed that they have cent per cent
\nfreedom in deciding the margin or selling price provided they
\nare not incurring any loss. It was stated that the marketing man
\nis given the liberty to sell the goods on profit within a band
\nmargin of profit and in case any discount is asked then he has
\nto revert back to the head office. Hence, only in those cases
\nwhere the price quoted by the liaison office is not competitive
\nthen they have to revert back to the head office. Sri H.B.
\nRaghumaran who was working as a Senior Engineer
\n(Marketing) has stated that he enjoys full freedom in deciding
\nthe price of the material while negotiating with the customer.
\nOnce the selling price is arrived at with the customer, he doesITA 621\/2017 & connected matters Page 57 of 85
\nnot need to discuss with the head office or the organization. He
\nimmediately requests the customer to release the purchase
\norder. The annual sales target has also been fixed by the
\norganization.
\n10. It is on the basis of the aforesaid material, the Tribunal held
\nthat the activities carried on by the liaison office are not
\nconfined only to the liaison work. They are actually carrying on
\nthe commercial activities of procuring purchase orders,
\nidentifying the buyers, negotiating with the buyers, agreeing to
\nthe price, thereafter, requesting them to place a purchase order
\nand then the said purchase order is forwarded to the head
\noffice and then the material is dispatched to the customers and
\nthey follow up regarding the payments from the customers and
\nalso offer after-sales support. Therefore, it is clear that merely
\nbecause the buyers place orders directly with the head office
\nand make payment directly to the head office and it is the head
\noffice which directly sends goods to the buyers, would not be
\nsufficient to hold that the work done by the liaison office is only
\nliaison and it does not constitute a PE as defined in art. 5 of
\nDTAA. In fact, the AO has clearly set out what was discovered
\nduring the investigation and the same has been properly
\nappreciated by the Tribunal and it came to the conclusion that
\nthough the liaison office was set up in Bangalore with the
\npermission of the RBI and in spite of the conditions being
\nstipulated in the said permission preventing the liaison office
\nfrom carrying on commercial activities, they have been
\ncarrying on commercial activities.
\n11. It was further contended that the RBI has not taken any
\naction and therefore, such interference is not justified. Once the
\nmaterial on record clearly establishes that the liaison office is
\nundertaking an activity of trading and therefore entering into
\nbusiness contracts, fixing price for sale of goods and merely
\nbecause the officials of the liaison office are not signing any
\nwritten contract would not absolve them from liability. Now
\nthat the investigation has revealed the facts, we are sure that
\nthe same will be forwarded to the RBI for appropriate action in
\nthe matter in accordance with law. But merely because noITA 621\/2017 & connected matters Page 58 of 85
\naction is initiated by RBI till today would not render the
\nfindings recorded by the authorities under the IT Act as
\nerroneous or illegal.\u201d
\n51. GE contends that the business activities in India must include the
\nauthority to conclude contracts for such activities to not be auxiliary or
\npreparatory in nature. This is not necessary. The assessee\u201fs reading is
\nbased on a misapplication of the principles of Article 5(4)(a) \u2013 dealing
\nwith agency PE \u2013 in the context of Article 5(3) which deals with only
\nfixed place PE. It is indeed correct that neither a dependent agent PE nor a
\nfixed place PE can be constituted if the business activities undertaken are
\npreparatory or auxiliary. However, Article 5(3) makes no mention of the
\nauthority to conclude contracts \u2013 language that is explicitly used in Article
\n5(4)(a). Accordingly, reading the conditions as equivalent would erode a
\nkey distinction between fixed place PE and agency PE \u2013 and it is
\naccordingly recommended that GE\u201fs contention should be rejected. This
\ninterpretation also accords with the decision of the Karnataka High Court
\nin Jebon (supra).
\n52. In Browne & Sharpe Inc. v. Commissioner of Income Tax and
\nAnother 2014 (369) ITR (All), the Allahabad High Court held as follows,
\nin the context of a liaison office operating on behalf of a foreign company:
\n\u201c14. The disclosures which were made by the assessee before
\nthe Assessing Officer clearly indicate that during the year
\nprevious to the assessment year in question, the activities of the
\nliaison office were not confined only to being a channel of
\ncommunication between the Head Office in the US and
\nprospective buyers in India. The activities of the liaison office
\nincluded: (i) explaining the products to buyers in India; (ii)
\nfurnishing intimation in accordance with the requirements of
\nthe buyers; and, (iii) a discussion of commercial issuesITA 621\/2017 & connected matters Page 59 of 85
\npertaining to the contract through the technical representative,
\nafter which an order was placed by the buyer directly. Apart
\nfrom this, it is significant that the performance of the personnel
\nin India was, as disclosed by the Chief Representative Officer,
\njudged by the number of direct orders that the assessee
\nreceived and by the extent of awareness of the assessee that was
\ngenerated in India. The assessee had an incentive plan, and it is
\nnot in dispute, as was disclosed by the Chief Representative
\nOfficer, that in the sales incentive plan an employee was
\nallowed to receive upto 25% of its annual remuneration as SIP.
\nWhether or not any incentive was, in fact, paid to an employee
\nduring the year in question, is not material. What is relevant is
\nthat the nature of the incentive plan would clearly indicate that
\nthe purpose of the liaison office in India was not merely to
\nadvertise the products of the assessee or to act as a link of
\ncommunication between the assessee and a prospective buyer
\nbut involved activities which traversed the actual marketing of
\nthe products of the assessee in India because it was on the basis
\nof the orders generated that an incentive was envisaged for the
\nemployees. The assessee sought to explain away the incentive
\nplan by stating before the Assessing Officer that the incentive
\nwhich was provided for in the letters of the appointment was
\nonly “standard language of the appointment letter of the
\ncompany”, which had inadvertently not been deleted from the
\ncontract of appointment by the liaison office. Such an
\nexplanation was, to say the least, far-fetched because the
\nassessee which has a transnational business with a range of
\nadvisors cannot readily be assumed to have committed an
\ninadvertent mistake on an issue as significant as this. The
\nAssessing Officer has quite justifiably declined to accept the
\nexplanation.\u201d
\n53. Applying the above standards to the factual matrix at hand, the
\nITAT concluded that GE\u201fs activities in India were not of an auxiliary or
\npreparatory nature. Substantial reliance was placed on e-mail exchanges
\nbetween employees in India and overseas, the job description of
\nemployees in India and their appraisal reports. In the brief before thisITA 621\/2017 & connected matters Page 60 of 85
\nCourt, GE strongly disagreed with ITAT\u201fs characterization of the above
\nsources and provided a point by point rebuttal to ITAT\u201fs inferences drawn
\nfrom various e-mails.
\n54. The above factual records are too extensive to comprehensively
\ndiscuss in this section. Nonetheless, as an overall matter, GE is correct
\nthat in some instances, ITAT\u201fs characterization of certain conversations
\nappears to overstate the importance of the activities in India (for e.g. email chain on Reliance-GT Exhaust Height; e-mail chain on confirmation
\nof RIL PO No. DG8\/3389741). Nevertheless, in many other instances,
\nITAT\u201fs decision is sound, and gives rise to the inference that business
\nactivities that were not auxiliary or preparatory were taking place in India.
\n(for e.g. e-mail chain on Reliance CS-1 GE Oil & Gas).
\n55. It would be useful to recapitulate briefly that the tasks performed by
\nsome of the employees. Ricardo\u201fs Assignment letter showed him to be GE
\nEnergy\u201fs \u201cOil & Gas, India Country Leader\u201d the revenue has concurrently
\nstated that he was not merely \u201cnegotiating and finalizing the terms and
\nconditions with customers in India but also not allowing GE Overseas to
\nalter any such terms without the consent of GE India. The assessee did not
\nfurnish his Appraisal report and Manager assessment despite a specific
\nrequest by the AO till the completion of assessment.\u201d Similarly with
\nrespect to Kumar Pratyush, the findings are pertinent and decisive; he was
\ndesignated as ‘Leader, GE Infrastructure, Ops-India\u201f \u201cof GE
\nTransportation \u201creporting directly to the Global CEO of GE
\nInfrastructure and the ‘job description’ given by him in the earlier referred
\ndocuments of having a specific role to: ‘Help GE infrastructure businessITA 621\/2017 & connected matters Page 61 of 85
\ndevelop their strategy in India; Align GE solutions with customer need;
\nHelp shape policy to realize opportunities; and Facilitate business
\ndevelopment discussions’, it becomes manifest that the assessee
\nintentionally trimmed his role to justify its stand, which, being contrary to
\nthe primary and source documents, cannot be accepted.\u201d
\n56. The decision of the lower authorities reveal that the process adopted
\nfor business development involved four steps: Stage 1-Pre-qualification;
\nStage 2-Bid\/no bid and Proposal development; Stage 3-Bid approval and
\nnegotiations; and Stage 4-Final contract development and approval. The
\nfirst step is identification of a market opportunity, involving collection of
\ninformation, analysis etc. The next two steps are described elaborately as
\nfollows:
\n\u201c\u2026survey documents, as discussed above, abundantly show GE
\nIndia playing an important and proactive role in the
\nfinalization of the deal and the terms and conditions with
\ncustomers in India. In reality, the major activities about
\nsourcing of customers and finalizing the deals with them were
\ndone by GE India in consultation, wherever required, with GE
\nOverseas. The assessee frankly admitted in the same para that:
\n‘In some instances, the proposal development is jointly run by
\nthe GE Overseas and GE India teams.’ This is also borne out
\nfrom page 104 of the Survey documents PB-II, as discussed
\nabove, which is an e-mail from Pump Design Department to GE
\nIndia and copy to other members of GE India requesting the
\nIndian team to send the draft of MOU along with complete
\ncomments, so that the same could be incorporated in the
\noriginal MOU. Similarly, page 127 of the Survey documents
\nPB-I shows that the MOU with BHEL reflected the
\nconversation what GE India and GE overseas discussed. Thus,
\nthere is not even an iota of doubt that GE India was fully
\ninvolved in proposal development.ITA 621\/2017 & connected matters Page 62 of 85
\n28.9.1. The ld. AR submitted for the third stage of ‘Bid approval
\nand negotiations’, that the assessee stated before the AO that
\nonce the proposal\/bid\/tender have been put together as
\ndescribed in Stage 2 above, it is approved by the senior
\nmanagement during the Stage 3 and, thereafter, submitted to
\nthe end customer. Subsequently, GE Overseas may carry out
\nnegotiations with the customer, which may entail addressing
\nqueries, if any, raised by the end-customer, seeking\/providing
\nclarifications regarding work scope, pricing, etc required by
\nthe end customer. For the fourth stage of ‘Final contract
\ndevelopment and approval’, the assessee stated that GE
\nOverseas discusses the outcome of the negotiation process
\ninternally amongst its various overseas functional
\nheads\/approving authorities (operations, finance, legal, etc.) so
\nas to decide whether or not to go-ahead with the contract on
\nthe agreed terms and conditions with the customer. If the
\nnegotiated contract terms are approved and accepted both by
\nGE Overseas and the end-customer, the contract documents are
\nprepared and executed\/signed by GE Overseas. Local inputs
\nare obtained from GE India at this stage on a need basis.
\n28.9.2. Here again we find that the assessee’s submissions are
\nonly partly true. Pages 101-103 of the Survey documents PB-II,
\nas discussed above, evidence GE India finalizing MOU with the
\nIndian customer, Pump Design Department of IOC, and
\nadvising accordingly to the GE Overseas. Then, there is a mail
\nshowing that the change was permitted in the terms of MOU by
\nthe Indian team, which was conveyed by GE India to the
\ncustomer, with a copy to another member of GE India. GE
\nIndia was negotiating terms with the Indian customers is also
\nborne out from page 195 of Survey Documents PB-I as
\ndiscussed above, whereby Indian customer was requesting GE
\nIndia to revise the offer. Similarly, page 82 of Survey
\nDocuments PB-I, as discussed above, shows that GE India
\nchanged the terms and conditions. In the like manner, pages 2
\nand 3 of Survey Documents PB-II show that the draft
\nagreement by Reliance Industries Ltd. to GE Overseas was sent
\nback to GE India to get it reviewed from aftermarket colleagues
\nin India. Pages 32 and 33 of Survey documents PB-II show thatITA 621\/2017 & connected matters Page 63 of 85
\nwhen GE Overseas tried to contact directly with RIL, GE India
\nobjected to the same and wanted the entire consultations only
\nthrough the Indian team, which was positively responded by GE
\nOverseas. Page 39 of the Survey documents PB-II again shows
\nthat it is GE India which was negotiating with Indian customers
\nand not allowing GE Overseas even to change the terms and
\nconditions.
\n28.10. At this juncture, it is significant to note that the assessee
\nis not dealing in off the shelf goods. Sales are made on the basis
\nof a prior contract. In such cases, customer’s requirements are
\nfirst properly understood and thoroughly examined; then
\ncommercial and technical discussion meetings take place; then
\nproposals are prepared after negotiations on technical and
\ncommercial aspects taking Indian laws and regulations in
\nconsideration. These are all significant and essential parts of
\nsales activity, which have to be necessarily done in India by GE
\nIndia. Ordinarily, it is not the Indian customer, who would visit
\nGE entities overseas, but it is GE India, who has to have
\nphysical presence in India and such presence is through the GE
\nIndia team.\u201d
\n57. This court is of the opinion that the process of sales and marketing
\nof GE\u201fs product through its various group companies, in several segments
\nof the economy (gas and energy, railways, power, etc.) was not simple. As
\nnoticed by the tribunal, entering into contract with stakeholders (mainly
\nservice providers in these segments) involved a complex matrix of
\ntechnical specifications, commercial terms, financial terms and other
\npolicies of GE. To address these, GE had stationed several employees and
\nofficials: high ranking, and in middle level. At one end of the spectrum of
\ntheir activities was information gathering and analysis- which helped
\ndevelop business and commercial opportunities. At the other end was
\nintensive negotiations with respect to change of technical parameters ofITA 621\/2017 & connected matters Page 64 of 85
\nspecific goods and products, which had to be made to suit the customers.
\nStandard \u201coff the shelf\u201d goods \u2013 or even standard terms of contract, were
\ninapplicable. In this setting, a potential seller of equipment \u2013 like GE, had
\nto create intricate and nuanced platforms to address the needs of
\ncustomers identified by it, in the first instance. After the first step, of
\ngathering information, GE had to commence the process of marketing its
\nproduct, understanding the needs of Indian clients, giving them options
\nabout available technology, address queries and concerns with respect to
\ntechnical viability and cost efficacy of the products concerned andwherever necessary indicate how and to what extent it could adapt its
\nknown products, or design parameters, to suit Indian conditions as well as
\nIndian local regulations. This process was time consuming and involved a
\nseries of consultations between the client, its technical and financial
\nexperts and also its headquarters. Oftentimes the headquarters too had to
\nbe consulted on technical matters. After this consultative process ended
\nand the terms of supply were agreed to, the final affirmative to the offer,
\nto be made by the Indian customer, would be indicated by GE\u201fs
\nheadquarters.
\n58. This court is of the opinion that the facts of the present case clearly
\npoint to the fact that the assessee\u201fs employees were not merely liaisoning
\nwith clients and the headquarters office. E-mail communications and
\nchain mails indicate that with respect to clients and possible contracts of
\nGE with Reliance CS-1, GE Oil & Gas, Bongaigaon Refinery, Draft LOA
\nfor WHRU (E-mail from Andrea Alfani (GE Overseas) to Vivek
\nVenkatachalam (GEIIPL) and Riccardo Procacci (GEII) on proposed eITA 621\/2017 & connected matters Page 65 of 85
\nmail to send Reliance, including comments to RIL on the proposed letter
\nof acceptance and relevant attachments. Also, asked them whether they
\nwanted to send the e-mail themselves to RIL or for it to be sent directly.
\nThese appear to show important role for Vivek and Riccardo in the
\nnegotiating process.
\n59. The e-mail chain on \u201cCONFIDENTAL: Ad Syst\u201d contains e-mail
\nfrom Gioseppe La Moita (GE Overseas). These suggest that Gioseppe La
\nMoita, Renato Mascii (GE Overseas) and Riccardo Procacci (GEII) were
\nin India negotiating the BHEL contract. Rest of the correspondence is not
\nparticularly relevant. These suggest that substantive negotiation work on
\nthe BHEL contract was done in India by a mix of GE Overseas and GE
\nIndia team.
\n60. It is clear that in the kind of activity that GE carries out, i.e
\nmanufacture and supply of highly specialized and technically customized
\nequipment, the \u201ccore activity\u201d of developing the customer (identifying a
\nclient), approaching that customer, communicating the available options,
\ndiscussing technical and financial terms of the agreement, even price
\nnegotiations, needed a collaborative process in which the potential client
\nalong with GE\u201fs India employees and its experts, had to intensely
\nnegotiate the intricacies of the technical and commercial parameters of the
\narticles. This also involved discussing the contractual terms and the
\nassociated consideration payable, the warranty and other commercial
\nterms. No doubt, at later stages of contract negotiations, the India office
\ncould not take a final decision, but had to await the final word from
\nheadquarters. But that did not mean that the India office was just for muteITA 621\/2017 & connected matters Page 66 of 85
\ndata collection and information dissemination. The discharge of vital
\nresponsibilities relating to finalization of commercial terms, or at least a
\nprominent involvement in the contract finalization process, discussed by
\nthe revenue authorities, in the present case, clearly revealed that the GE
\ncarried on business in India through its fixed place of business (i.e the
\npremises), through the premises.
\n61. In view of the above analysis and conclusions, it is held that
\nQuestion No. 1 is answered in favour of the revenue and against the
\nassessee. They are so found.
\nQuestion No. 2
\n62. With respect to this question of law, the ITAT relied on a two-part
\nframing to see if Agency PE is met, that is para 4 of the DTAA, especially
\n4(a) lays down framework for when something is an agency PE and the
\nexception to the application of 4(a) laid out in Para 5, which says that the
\nuse of a broker, general commission agent, or any other agent of an
\nindependent status, provided that such persons are acting in the ordinary,
\ncourse of their business shall not be considered Agency PE.
\n63. Applying the standard to the facts at hand, ITAT recorded in its
\nfindings that the expats of GEII and employees of GEIIPL were rendering
\nservices to multiple entities. But also, that these expats were dealing on
\nbehalf of the major business lines of the GE Group. Accordingly, GE
\nIndia comprising of expats and other employees of GEIIPL etc., were not
\nworking for a particular enterprise, but, for multiple enterprises dealing in
\none of the three major businesses of GE group. Activities of an agent must
\nbe \u201cdevoted wholly, or almost wholly on behalf of that enterprise.\u201d On aITA 621\/2017 & connected matters Page 67 of 85
\nconjoint reading of part 2 of para 5 of Article 5 and Article 3(g), it is
\napparent that the second part of para 5 refers to an agent looking after the
\nactivities of a single enterprise and not multiple enterprises. GE relies on
\nVarian India (supra) which held in para 5 it is necessary that the activities
\nof agent must be devoted wholly or almost wholly to one enterprise. Nondisclosure of transactions are not sufficient to establish someone as agent
\nof independent status \u2013 there was needed to fulfill both conditions.
\nFurthermore, there also was the need to show that they were not at arm\u201fs
\nlength practice. Nonetheless, ITAT held that GE India counts as agency
\nPE. An agent of a foreign company is an agent of dependent status even if
\nthere is more than one company in the related group. If there are multiple
\nindependent customers \u2013 you qualify as an agent of independent status.
\nThe fact that transactions between such an agent of dependent status and
\nmultiple related enterprises are or are not at ALP, is not relevant at the
\nstage of establishment of a dependent agent PE in India, which is created
\nsolely due to the nature of activities of such an agent for the overseas
\nentity.
\n64. The ITAT opinion focuses on Article 5(4)(a) i.e. the authority to
\nconclude contracts. GE relies on Para 33 of OECD commentary to suggest
\nthe understanding of such authority – “a person who is authorized to
\nnegotiate all elements and details of a contract in a way binding on the
\nenterprise can be said to have exercised this authority\u201d and \u201cthe mere
\nfact, however, that a person has attended or even participated in
\nnegotiations . . . will not be sufficient, by itself, to conclude that the person
\nhas exercised in that State an authority to conclude contracts in the nameITA 621\/2017 & connected matters Page 68 of 85
\nof the enterprise.” The revenue responded by clarifying that India had
\nclarified its position that it does not agree with the above portions of Para
\n33 commentary. The position of India is that
\n\u201ca person has attended or participated in negotiations in a
\nState between an enterprise and a client, can, in certain
\ncircumstances, be sufficient, by itself, to conclude that the
\nperson has exercised in that State an authority to conclude
\ncontracts in the name of the enterprise; and that a person who
\nis authorized to negotiate the essential elements of contract,
\nand not necessarily all the elements, can be said to exercise the
\nauthority to conclude contracts.\u201d
\n65. The ITAT noted that India\u201fs position has a binding effect on all
\nconventions entered after the date \u2013 but does not retrospectively apply to
\nconventions entered before the date. And, therefore, the Indian
\ncommentary (which serves as a reservation) cannot modify bilateral
\ntreaties prior to 2008 such as the US-India DTAA. At the same time, it
\ncannot be said that every line of the OECD commentary is read into the
\nstatute by incorporation. ITAT notes that \u201cit is only an interpretation of
\nthe OECD Model Convention. One should take cognizance of the view
\ngiven in the Commentary on a holistic basis and not as emanating from
\nindividual and selective lines, which, at times, may turn out to be
\noverlapping in nature\u201d.
\n66. Regarding the OECD commentary this court notices that the
\nposition in Para 32.1 runs contrary to Para 33 that GE relies on. Therefore,
\nthe assessee cannot selectively quote on certain parts of the commentary \u2013
\nrather, must read the spirit of the entire commentary. The ITAT concluded
\nthat as long as the activities of the agent in concluding contracts is notITA 621\/2017 & connected matters Page 69 of 85
\nauxiliary, and at the same time, does not require concluding every single
\nelement of the contract. As Italian court noted in Ministry of Finance (Tax
\nOffice) v. Philip Morris (GmBH), Corte Suprema di Cassazione
\nNo.7682\/02 of May 25 2002:
\n\u201cthe participation of representatives or employees of a resident
\ncompany in a phase of the conclusion of a contract between a
\nforeign company and another resident entity may fall within the
\nconcept of authority to conclude contracts in the name of the
\nforeign company, even in the absence of a formal power of
\nrepresentation.\u201d
\nTherefore, GE India\u201fs activities clearly constitute activities
\nthat would establish agency PE in India
\n67. As regards the question that whether the position of Varian India v.
\nADIT 2013 (142) ITD 692 (Mumbai) is to be followed in this case, ITAT
\nchose to distinguish that decision since facts of that case are
\ndistinguishable. In that case, there were AEs and separate agreements and
\ndifferent payments\u2013 this did not occur here (was not able to find proof on
\nwhether this is the case \u2013 this is ITAT\u201fs finding of fact). As regards the
\nlevel of activity which is required for an agent to have habitually
\nexercised an authority to conclude on behalf of the enterprise, it is
\nnecessary to make a reference to the parties\u201f arguments.
\n68. Counsel on behalf of the Appellant, drawing on OECD
\ncommentary, argued that person who is authorized to negotiate all
\nelements and details of a contract which is in a way binding on the
\nenterprise can be said to have exercised this authority. Accordingly, the
\nmere fact, however, that a person has attended or even participated inITA 621\/2017 & connected matters Page 70 of 85
\nnegotiations, will not be sufficient. The revenue, on the other hand,
\nsuggested that in 2008, India had clarified its position with respect to
\nparagraph 33 of the OECD commentary \u2013 suggesting it did not agree with
\nthe above sentences. Rather, India\u201fs position was that if a person has
\nattended or participated in negotiations in a State between an enterprise
\nand a client, can, in certain circumstances, be sufficient, ipso facto, to
\nconclude that the person has exercised in that State an authority to
\nconclude contracts in the name of the enterprise; and that a person who is
\nauthorized to negotiate the essential elements of contract, and not
\nnecessarily all the elements, can be said to exercise the authority to
\nconclude contracts.
\n69. On this question of law, ITAT recorded in its finding that India\u201fs
\ncomments do not have retroactive application. Further, OECD
\ncommentary is not binding, but can only be used as a guidance, they do
\nnot form part of the treaty under doctrine of incorporation. This view finds
\nsupport in the judgment of this court in Chryscapital Investment Advisors
\nIndia (P) Ltd v DCIT 376 ITR 183. Further, the ITAT also relied on para
\n32 of the OECD commentary which says that lack of active involvement
\nby an enterprise in transactions may be indicative of a grant of authority to
\nan agent.
\n70. \u201cLack of\u201d does not mean \u201enone\u201f. The court notices that since the
\nOECD commentary appears to be contradictory across paragraphs 32 and
\n33, it cannot be relied upon wholly. The term \u201cauthority to conclude\u201d
\ndoes not mean all elements and details, since that would make other
\nportion of the clause redundant \u2013 therefore only means that the activityITA 621\/2017 & connected matters Page 71 of 85
\nneeds to be core in nature. This is the opinion in Philip Morris (supra), the
\nparticipation of representatives or employees of a resident company in a
\nphase of the conclusion of a contract between a foreign company and
\nanother resident entity may fall within the concept of authority to
\nconclude contracts in the name of the foreign company.
\n71. It would be useful to notice the facts and analysis of the law in Rolls
\nRoyce Plc (supra). The assessee had a local office (LO) in India; the AO
\ndetermined that it constituted dependent agent PE. Though the dependent
\nagent had no authority to negotiate and enter into contracts for and on
\nbehalf of the assessee, it habitually secured orders for RRIL and was its
\nPE. At the same time, this court held that Rolls Royce Plc\u201fs presence in
\nIndia was also a fixed place of the assessee constituting PE. Activity at
\nthis fixed place was no auxiliary but was a core activity of marketing,
\nselling, negotiating. RRIL was a sales office for assessee \u2013 employees
\nworked wholly and exclusively for assessee and its group. Employees of
\nassessee in India were also present in various locations in India and
\nreported to director of RRIL India. The following extracts of the judgment
\nare indicative of the approach to be adopted wherever the court has to see
\nif the entity has a PE and a dependent agent PE:
\n\u201c\u202616. After holding that the assessee had business connection
\nin India, the Tribunal adverted to the question as to whether
\nthere was any PE in India within the meaning of Article 5 of
\nthe Indo-UK DTAA. The Tribunal extracted the provisions
\nof Article 5 and stated the legal position that emerged
\ntherefrom. Thereafter, it referred to various documents in para
\n22 and narrated its effect in detail. Our purpose would beITA 621\/2017 & connected matters Page 72 of 85
\nserved by extracting para 23 of the impugned order which
\nreads as under:-
\n“23. It is also seen that the appellant has a dependent agent in
\nIndia in the form of RRIL. The fact that RRIL is totally
\ndependent upon the appellant is not denied.
\nHowever, the contention of the appellant is that even though
\nRRIL is a dependent agent and such agency is to be deemed as
\nPE, so long such dependent agent has no authority to negotiate
\nand enter into contracts, under Article 5 (4), there is no PE in
\nIndia. It is to be noted that Article 5 (4) has three clauses,
\nnamely, a, b & c. Thus, even if one has to hold that the
\ndependent agent has no authority to negotiate and enter into
\ncontracts for and on behalf of appellant, still as per clause (c)
\nof sub Article (4) , it is found that RRIL habitually secures
\norders in India for the appellant. It is a set practice that no
\ncustomers in India are directly to send orders to the appellant
\nin UK. Such orders are required to be routed only through
\nRRIL. This fact is evident from the letter of Mr. L.M. Morgan to
\nMr. Prateek Dabral and Ms. Usha. In the said letter, it is made
\nclear that even request for quotation\/extension could not be
\ncommunicated directly to the appellant but are to be routed
\nthrough the office of RRIL. This is applicable even to the
\norders. The fact is not denied that the orders are firstly received
\nby RRIL from the customers in India and only then
\ncommunicated to the appellant. Thus, as per Para 4(c)
\nof Article 5 , the dependent agent habitually secures orders
\nwholly for the enterprise itself and hence, is deemed to be a
\npermanent establishment of the appellant. The contention of
\nappellant that the role of RRIL is merely of a post office is,
\ntherefore, unacceptable in view of the facts of the case as
\nevidenced by various documents and correspondence found
\nduring the course of survey. It can, therefore be summarized
\nthat in the light of the facts as well as documents mentioned
\nabove, RRIL’s presence n India is a permanent establishment of
\nappellant because:ITA 621\/2017 & connected matters Page 73 of 85
\n(a) It is a fixed place of business at the disposal of the Rolls
\nRoyce Plc and its group companies in India through which
\ntheir business are carried on.
\n(b) The activity of this fixed place is not a preparatory or
\nauxiliary, but is a core activity of marketing, negotiating,
\nselling of the product. This is a virtual extension\/projection of
\nits customer facing business unit, who has the responsibility to
\nsell the products belonging to the group.
\n(c) RRIL acts almost like a sales office of RR Plc and its
\ngroup companies.
\n(d) RRIL and its employees work wholly and exclusively for
\nthe Rolls Royce Plc and the Group.
\n(e) RRIL and its employees are soliciting and receiving
\norders wholly and exclusively on behalf of the Rolls Royce
\nGroup.
\n(f) Employees of Rolls Royce Group are also present in
\nvarious locations in India and they report to the Director of
\nRRIL in India.
\n(g) The personnel functioning from the premises of RRIL are
\nin fact employees of Rolls Royce Plc. This has been admitted by
\nthe MD Mr. Tim Jones, GM, and can be discerned from
\nstatement of Mr. Ajit Thosar and documents like terms of
\nemployment of GMS.
\nThus, the appellant can be said to have a PE in India within the
\nmeaning of Article 5 (1) 5 (2) and 5 (4) of the Indo UK DTAA.
\nSince we have found that the appellant 496\/2008, 497\/2008,
\n498\/2008,498\/2008 584\/2008, 647\/2008, 648\/2008, 649\/2008,
\n650\/2008,663\/2008 has a business connection in India as well
\nas PE in India, the income arising from its operation in India
\nare chargeable to tax in India.”ITA 621\/2017 & connected matters Page 74 of 85
\n17. We are thus convinced that there is a detailed discussion
\nafter taking into consideration all the relevant aspects while
\nholding that RRIL constituted PE of the assessee in India. While
\nundertaking critical analysis of the material on record, the
\nTribunal kept in mind the objections filed by the assessee as
\nwell as the documents on which it wanted to rely upon. Those
\nobjections were duly met and answered.
\n18. We thus, do not find any need to remand the case back to
\nthe Tribunal for this purpose which was the plea raised by the
\nlearned Counsel for the appellant\/assessee. Agreeing with the
\nview taken by the ITAT in the impugned order as well as in the
\nMisc. Application, we answer questions no.2 & 4 against the
\nassessee. As a result, we find no merits in the appeals of the
\nassessee which are accordingly dismissed.\u201d
\n72. In Varian (supra), on the other hand, the assessee\u201fs orders were not
\nbinding on the VGCs, Varian India has no authority to negotiate or
\nconclude contracts on behalf of VGCs; Varian India did not maintain any
\ncost of analytical instruments supplied by VGCs to customers in India, or
\ntitle of goods supplied by VGCs was ever transferred to Varian India. It
\ndid not keep inventory or regularly deliver goods on behalf of foreign
\nenterprise. For the spare parts, it owns those goods and delivers on its own
\naccounts. Varian India did not secure orders on behalf of VGC \u2013 merely
\nintroduced and liaised those orders to VGC. These sales orders were not
\nbinding on VGCs until accepted by them. Therefore, it was held that it did
\nnot habitually accept orders on behalf of the enterprise. Lastly it was not
\nshown to have any authority to conclude contracts on behalf of the
\nenterprise. Interestingly Varian India was not devoted to only a single
\nenterprise \u2013 it is devoted to multiple foreign enterprises (each VGC
\ncounting as their foreign enterprise).ITA 621\/2017 & connected matters Page 75 of 85
\n73. The present case indicates an interesting intersects between the
\napplicability of both Article 5 (1) and (3) on the one hand, and the
\napplicability of the dependent agent \u2013 as defined in the treaty (DTAA)
\nprinciples. Enterprises, we note, do not necessarily organize the business
\nprinciples on which they function into neat pigeon holes that the DTAAs
\nenvision. The ingenuity and innovation of the enterprise \u2013 indeed its
\nintangible wealth is to aggregate and maximizing profits in the most
\nefficient manner possible, even while minimizing costs. The DTAAs and
\nindeed tax regimes are based on known patterns of such organizational
\nbehavior. As Cardozo remarks that at \u201cBack of precedents are the basic
\njuridical conceptions which are the postulates of judicial reasoning, and
\nfarther back are the habits of life, the institutions of society, in which
\nthose conceptions had their origin, and which, by a process of interaction,
\nthey have modified in turn\u201d. So the law, or even treaties, which are the
\nresult of compact between nations, deal with generalities based on the way
\ninstitutions behaved in the past, and the way they would presumably
\nbehave. At the same time, these general provisions do not cater to all
\nsituations, and often courts have to grapple with the kind of intersects
\nwhich this case demonstrates.
\n74. The assessee, GE has organized its affairs in such a manner \u2013 and
\none cannot quarrel with its intent, so as to minimize tax incidence in India.
\nYet, the court\u201fs task is not as easy to neatly compartmentalize the analysis
\nof whether the patterns of past decisions result in its establishments
\nconstituting fixed place PE or a dependent agent PE. The intricate nature
\nof activities it has carefully designed, where technical officials havingITA 621\/2017 & connected matters Page 76 of 85
\nvarying degree of authority involve themselves \u2013 along with local
\nmanagerial and technical employees, in contract negotiation, often into
\ncore or \u201ckey\u201d areas, modification of technical specifications and the
\nnegotiations for it, to fulfill local needs and even local regulatory
\nrequirements, the complexities of price negotiation, etc. clearly show that
\nthe assessee carries out through the PE business in India. These activities
\nalso intersect and overlap with the content of the principle of dependent
\nagent, inasmuch it is evident that these agencies work solely for the
\noverseas companies, in their core activities.
\n75. In view of the above observations it is held that the second question
\nis, therefore, answered in favour of the revenue, and against the assessee.
\nQuestion No. 3
\n76. On this question, the ITAT reasoned and held as follows:
\n\u201c54. Having held that various GE overseas entities were
\nmaking sales with the active involvement of their respective PEs
\nin India, the next question is attribution of income to such PEs,
\nwhich is chargeable to tax in India.
\n55. The AO required the assessee to make available year-wise
\nIndia specific accounts of GE Overseas. Financial statements of
\nall the entities for all the years were not submitted. An inability
\nwas expressed on the ground that in some countries the
\naccounts were not maintained and they were covered in the
\ngroup schemes. In the absence of such information of entity
\nlevel profits, the AO opined that working of actual entity-wise
\nand year-wise profit was not possible. It was observed qua the
\nthree entities for which the assessee furnished information, that
\nthere was no regular trend in the profits and even GE Japan
\nhad closed its trading business from the year 2002-03. For theITA 621\/2017 & connected matters Page 77 of 85
\nother two entities also, there were no reasons for the losses.
\nEven notes to accounts, integral part to the financial
\nstatements, were also not submitted, that could have thrown
\nsome light on the losses\/low profitability. The AO, therefore,
\ntook the view that the profitability statements of these entities
\nfor various years could not be used for attributing profits to
\nIndian PE. Having regard to Rule 10(iii), the AO came to hold
\nthat the income of non-residents was to be determined by: “any
\nsuch other manner as … may deem suitable.” Taking guidance
\nfrom sections 44BB and 44BBB, the AO estimated profit @
\n10% of sales consideration to the customers in India. Inspired
\nby the decision of the Delhi Bench of the Tribunal in Rolls
\nRoyce PLC vs. DDIT 2007-TII-32-ITAT-DEL-INTL, in which
\ncase 35% of the total profit was held to be pertaining to
\nmarketing activities, the AO applied the same percentage to
\nwork out the income chargeable to tax in India. First appeal
\ndid not allow any relief. That is how, the assessee is aggrieved
\nagainst such attribution of income.
\n56. We have heard the rival submissions and perused the
\nrelevant material on record. It is noticed that the exercise of
\nattribution of income by the AO is in two parts, viz., calculation
\nof total profit from the sales made by GE overseas entities in
\nIndia, which, in the instant case, has been worked out at 10%
\nand second, attribution of such profit to marketing activities,
\nwhich the AO has taken at 35% of 10%. As regards the first
\ncomponent, being, the estimation of profit on the sales made in
\nIndia, we find that the AO specifically required the assessee to
\nfurnish year-wise entity-wise profits of GE overseas entities for
\nthe operations carried out in India. Either such information
\nwas not given or a part of the information given did not help in
\ndeducing the correct amount of profit. In such circumstances,
\nthe AO was left with no alternative, but, to estimate income on
\nsome rational basis. He invoked the provisions of Rule 10(iii)
\nand estimated profit at 10% of sales made in India. Rate of 10%
\nwas applied by drawing strength from sections 44BB and
\n44BBB, which, in turn, are special provisions for computing
\nprofits and gains in connection with the business of exploration,
\netc. of mineral oils\/operation of aircraft in the case of nonITA 621\/2017 & connected matters Page 78 of 85
\nresidents. In our considered opinion, the approach of the AO in
\nestimating income at 10% of sales made in India, in the given
\ncircumstances, is perfectly in order and does not require any
\ninterference.
\n57. As regards the second component of the share of marketing
\nactivities in the total profit, the AO applied 35% by taking
\nassistance from the decision taken by the Delhi Bench of the
\nTribunal in the case of Rolls Royce (supra). The said order of
\nthe Tribunal stands affirmed by the Hon’ble Delhi High Court
\nin Rolls Royce PLC vs. DIT (IT) (2011) 339 ITR 147 (Del).
\nDelhi Bench of the Tribunal in ZTE Corporation vs. Addl. DIT
\n(2016) 159 ITD 696 (Del) has also attributed 35% of the profits
\nattributable to marketing activities in India. We find force in the
\narguments advanced by the ld. AR that there can be no hard
\nand fast rule of attribution of profit to marketing activities
\ncarried out in India at a particular level. In fact, attribution of
\nprofits to PE in India is fact based, depending upon the role
\nplayed by the PE in the overall generation of income. Such
\nactivities carried out by a PE in India resulting in generation of
\nincome, may vary from case to case. Attribution of income has
\nto be in line with the extent of activities of PE in India.
\n58. Adverting to the factual matrix of the case, the assessee
\ndemonstrated before the AO by way of a chart on pages 87-90
\nof the assessment order that the nature of activities done by
\nRolls Royce in India were more than those done by GE
\noverseas entities. Similar chart has also been given showing
\ndifference in the activities carried out by ZTE Corporation in
\nIndia vis-\u00e0-vis the assessee. From such a comparative analysis,
\nwe are satisfied with the contention advanced by the ld. AR that
\nthe activities carried out by Rolls Royce and ZTE Corporation
\nin India are not similar to those done by the PEs of GE
\noverseas entities in India. While discussing above the nature of
\nactivities performed by GE India in generating sales of GE
\nOverseas in India, we have elaborately taken note of the lead
\nrole played by GE India and GE overseas playing only a
\nsupporting role. In such circumstances, we cannot approve
\nattribution of whole of 35% of the profits relating to sales andITA 621\/2017 & connected matters Page 79 of 85
\nmarketing to the PE in India. Considering all the relevant facts
\nand adopting a holistic approach, we hold that GE India
\nconducted core activities and the extent of activities by GE
\nOverseas in making sales in India is roughly one fourth of the
\ntotal marketing effort. Ergo, we estimate 26% of total profit in
\nIndia as attributable to the operations carried out by the PE in
\nIndia. Therefore, as against the AO applying 3.5% to the
\namount of sales made by the assessee in India, we direct to
\napply 2.6% on the total sales for working out the profits
\nattributable to the PE in India.\u201d
\n77. The Revenue authorities carried out a two-part analysis on this
\naspect, i.e. attribution of income based upon the profits derived by the
\nassessee. By this analysis, 10% of the sales income made in India is
\nattributed as the basis of total profits of GE overseas entities in India.
\nUpon that figure, the attribution of profit to the marketing activity, which
\nthe Assessing Officer applied, was 35%. In this regard, the contentions of
\nthe assessee were that the attribution was arbitrary and high and that the
\napplication of principles in Galileo International Inc. (supra) were not
\nautomatic. Learned counsel had stressed that each case would involve an
\nintensive factual analysis to arrive at a figure that would fit in the concept
\nof total profits accruing to the overseas entities from Indian activities and
\nthat the further refinement of that into a broad percentage cannot be a
\nmatter of precedent.
\n78. This Court notices that the analysis carried out by the Revenue \u2013
\nnot merely by the ITAT but also by the AO in the assessment order, was
\nafter considering the relevant decisions \u2013 including Rolls Royce PLC \u2013
\nwhere 35% profits were attributable to marketing activities in India. The
\nAO\u201fs findings in this regard are instructive:ITA 621\/2017 & connected matters Page 80 of 85
\n\u201cIn the case of Rolls Royce, the equipments supplied were
\nhighly technical, proprietary and sophisticated, as the same
\nwere sold to Defence Department. In this case also, the items
\nare proprietary in nature and R&D has a major role to play in
\nthe manufacture of these equipments, therefore, the products in
\ncase of GE Overseas entities can be considered similar to that
\nof Rolls Royce and the ratio decision in the case of Rolls Royce
\nwill apply to this case also. As was held by Hon’ble ITAT, it is
\nheld that 35% of the profits pertain to marketing activities. As
\nthe profits earned by the assessee are not available, therefore,
\nguidance is drawn from the provisions of Sections 44BBB and
\n44B8, wherein the deemed profit is estimated @ 10% of the
\nrevenue\/ price\/ consideration. In all the cases of overseas
\nentities, it is that the assessee has earned global profit of 10%
\non the sales prices to the customers in India. As held earlier, in
\nthese cases, the ratio of decision of Hon\u201fble ITAT in the case of
\nRolls Royce is applicable; therefore, it is held that 35% of this
\nprofit of 10% is attributable to the PEs of the assessee in India.
\nDue to this, the income chargeable to tax, as attributable to the
\nPEs is computed @3.5% of the sale price.
\n16.4 The AR vide letter dated 23.12.2008 has claimed that “GE
\noverseas has adequately remunerated GE India Industrial Pvt.
\nLtd. for local marketing support provided by it. Reference in
\nthis regard can be made to remuneration paid by GE overseas
\nto third party independent agents, who provided local
\nmarketing support with regard to offshore sales into India.
\nShould you require, we can provide copies of these agreements
\nfor your reference? Therefore, even assuming, without
\nadmitting that GE overseas has a PE in India, placing reliance
\non the decision of Supreme Court in the case of DIT vs. Morgan
\nStanley (292 ITR 416) as affirmed by the Mumbai High Court
\njudgment in the case of SET Satellite (Singapore) Pte. Ltd. vs.
\nDCIT (307 ITR 205), no further profits can be either attributed
\nor taxed in hands of the alleged PE”.
\nThis contention of the assessee is not acceptable for the
\nfollowing reasons:ITA 621\/2017 & connected matters Page 81 of 85
\n(i) The service agreement between GE Power\/ GEIIPL
\nprovides for performance of very specific services and which
\ncentre around to act as a communication channel between
\ncustomers and GEIOC or its affiliates. The payment to GEIIPL
\nis on account of those specific services only. As found during
\nsurvey and discussed in this order, the scope of services of
\nemployees’ of GEIIPL far exceeds the scope provided in the
\nagreement. More than 40 employees of GEIIPL are providing
\nthe services. The assessee was asked to submit the designation
\nand the qualifications of these persons, which could have
\nsuggested that these persons are not only support persons, but
\nprovide various other type of services with regard to sales by
\noverseas entities.
\n(ii) The persons of GEIIPL are working under the control and
\ndirection of the expatriates and also report to them. Therefore,
\nGEIIPL cannot be considered as an independent person. The
\nagreement does not refer to any such type of reporting
\nstructure.
\n(iii) The agreement has continued to be the same since April,
\n2001 and the compensation to the GEIIPL is based on a
\nmarkup of 5% on cost. How could the assessee claim that the
\npayments to GEIIPL are at arm\u201fs length always? As discussed
\nin this order, some of the independent entities have operating
\nmargin of 14%. Even all the costs in providing the services may
\nnot have been captured. Therefore, it is also not acceptable that
\nthe transaction with GEIIPL was at arm’s length.
\n(iv) The GEIIPL has not been compensated by the overseas
\nentities to whom it provided the services, but by GEIOC.
\n(v) The value of international transaction between GEIDC
\nand GEIIPL during F.Y. 2004-05 was Rs.88,415,604\/- relating
\nto provision of marketing support services. The information for
\nother years was requested but not submitted. This is the
\npayment, which GEIOC has made to GEIIPL as per the service
\nagreement dated 16.01.2001.ITA 621\/2017 & connected matters Page 82 of 85
\nAs discussed in this order, the GEIIPL has been remunerated
\nfor the activities referred in the services agreement. Such
\nactivities agreed in the agreement are very limited in scope and
\nare relating to acting as a communication channel only. But in
\nthis order, it has been proved that GEIIPL was performing
\nvarious activities beyond the scope referred in the service
\nagreement. For such activities, GEIIPL have-not been
\nremunerated and such activities have led to the creation of the
\nPE of the assessee in India and such PE is required to be
\nattributed a profit. This attribution of profits in this order is not
\nonly on account of dependent agent PE, but also other types
\nPEs, discussed in this order. In this regard; reference is made
\nto the order of the Hon’ble Apex Court in the case of Morgan
\nStanley (Supra).
\n“As regards attribution of further profits to the P.E. of MSCo
\nwhere the transaction between the two are held to be at arm’s
\nlength, we hold that the ruling is correct in principle provided
\nthat an associated enterprise (that also constitutes a P.E.) is
\nremunerated on arm’s length basis taking into account all the
\nrisk-taking functions of the multinational enterprise. In such a
\ncase nothing further would be left to attribute to the P.E. The
\nsituation would be different if the transfer pricing analysis
\ndoes not adequately reflect the functions performed and the
\nrisks assumed by the enterprise, in such a case, there would be
\nneed to attribute profits to the P.E. for those functions\/risks
\nthat have not been considered. The entire exercise ultimately is
\nto’ ascertain whether the service charges payable or paid to the
\nservice provider (MSAS in this case) fully represent the value of
\nthe profit attributable to his service.
\n(Emphasis supplied)
\nReference is also made to the DECO Commentary on Article 7,
\nwhich reads as below:
\n”Where, under paragraph 5 of Article 5, a permanent
\nestablishment of an enterprise of a Contracting State is deemed
\nto exist in the other Contracting State by reason of the activitiesITA 621\/2017 & connected matters Page 83 of 85
\nof a so-called dependent agent (see paragraph 32 of the
\nCommentary on Article 5), the same principles used to attribute
\nprofits to other types of permanent establishment will apply to
\nattribute profits to that deemed permanent establishment. As a
\nfirst step, the activities that the dependent agent undertakes for
\nthe enterprise will be identified through a functional and
\nfactual analysis that will determine the functions undertaken by
\nthe dependent agent both on its own account and on behalf of
\nthe enterprise. The dependent agent and the enterprise on
\nbehalf of which it is acting constitute two separate potential
\ntaxpayers. On the one hand, the dependent agent will derive its
\nown income or profits from the activities that it performs on its
\nown account for the enterprise; if the agent is itself a resident
\nof either Contracting State, the provisions of the
\nConvention(including Article 9 if that agent is an enterprise
\nassociated to the enterprise on behalf of which it is acting) will
\nbe relevant to the taxation of such income or profits. On the
\nother hand, the deemed permanent establishment of the
\nenterprise’ will be attributed the assets and risks of the
\nenterprise relating to the functions performed by the dependent
\nagent on behalf of that enterprise(i.e. the activities that the
\ndependent agent undertakes for that enterprise),together with
\nsufficient capital to support those assets and risks. Profits will
\nthen be attributed to the deemed permanent establishment on
\nthe basis of those assets, risks and capital; these profits will be
\nseparate from, and will not include, the income or profits that
\nare properly attributable to the dependent agent itself (see
\nsection 0-5 of Part I of the Report Attribution of Profits to
\nPermanent Establishments).”
\nIn view of the above, the profit is required to be
\nattributed to the deemed PE of the assessee, as held in this
\norder, on the basis of assets, risks and capital of the enterprise
\nrelating to the functions performed by the GEIIPL (dependent
\nagent). In view of these facts and position of law, the contention
\nof the assessee regarding applicability of the decision of
\nHon’ble Bombay High Court in the case of SET Satellite
\n(Supra), is rejected, as the same is distinguishable on facts.
\nRegarding the decision of Hon’ble Apex Court in the case ofITA 621\/2017 & connected matters Page 84 of 85
\nMorgan Stanley (supra), this decision supports the position
\ntaken by this office. Without prejudice to this finding, it is also
\nstated that the overseas entities have fixed place PE (because of
\npresence of expatriates) and also construction PE in India and
\nprofits for all the PEs have been attributed by taking them
\ntogether.
\n16.5 It is stated that the assessee cannot take a plea that the
\npayments to GEIIPL, requires to be allowed as deduction from
\nthe profits worked out in this order, because the global
\nexpenses including expenses incurred in India have already
\nbeen considered while working out the profits. Once the profits
\nare worked out, the expenses cannot be allowed further,
\nbecause it will lead to double allowance of the expenses. It is
\nnot the revenue, which is attributed in this case, but the profits,
\nwhich takes care of global expenses, including Indian expenses.
\n16.6 On the basis of discussions in the order, I am satisfied
\nthat it is a fit case for initiation of penalty proceedings u\/s
\n271(1)(c) the Act.
\n17. The total sales of the assessee in India during the year
\nare ofRs.199,806,676\/-. The profit @3.5% of the same works
\nout to Rs.6,993,234\/-. This is taxable as business income.\u201d
\nAssessed u\/s 143(3) of the Act at income Rs.6,993,234\/-
\nat the applicable tax rate, surcharge and ed. cess. Charge
\ninterest u\/s 234A, 234B and 234C of the Act.
\nIssue penalty notice u\/s 271(1)(c) of the Act. Issue
\nnecessary forms.\u201d
\n79. We notice that in Galileo International Inc. (supra) as well as in
\nHukum Chand v. UOI 1976 (103) ITR 548, it was stressed that what are
\nthe proportions of profit of sales attributable to the profits carried on in a
\nnational jurisdiction is essentially where all facts are dependent upon
\ncircumstances of the case. It was further noticed in these decisions thatITA 621\/2017 & connected matters Page 85 of 85
\nabsence of statutory or other formal framework render the task dependent
\non some extent on guess work and that the endeavor will only be to
\napproximate the correct figure. The Court stated in Hukum Chand (supra)
\nthat \u201cthere cannot in the very nature of things great precision and
\nexactness in the matters. As long as the attribution fixed by the Tribunal is
\nbased upon the relevant material, it should not be disturbed.\u201d
\n80. Having regard to the conspectus of facts in this case and the
\nfindings of the lower Revenue authorities \u2013 including the AO and the
\nCIT(A), both of whom have upheld the attributability of income to the
\nextent of 10% and apportionment of 3.5% of the total values of supplies
\nmade to the customers in India as income, the Court finds no infirmity
\nwith the findings or the approach of the Tribunal in this regard. This
\nquestion too is answered against the assessee and in favor of the Revenue.
\n81. On account of the foregoing reasoning and since all questions of
\nlaw have been answered against the assessees, these appeals have to fail
\nand are consequently dismissed but without orders as to costs.
\nS. RAVINDRA BHAT
\n(JUDGE)
\nA.K. CHAWLA
\n(JUDGE)
\nDECEMBER 21, 2018<\/p>\n","protected":false},"excerpt":{"rendered":"
GE’s overseas enterprises have a place of business in India, per Article 5(1) of the DTAA. The term \u201cplace of business\u201d has been understood to mean any premises, facilities or installations used for carrying on the business of the enterprise \u2013 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 (\u201cOECD MTC\u201d)], 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 \u2013 mere continuous usage is sufficient if it indicates being at disposal. (Ref Para 4.1 of OECD MTC)<\/p>\n