Merely giving access to a place to the enterprise for the purpose of project will not result into Permanent Establishment – ITAT Delhi

Facts of the Case:

• The Assessee (MTR Corporation Ltd.) is a non-resident corporate entity headquartered in Hong Kong and is tax resident of Hong Kong. The Assessee is engaged in the business of providing engineering and project management consultancy services. Delhi Airport Metro Express Pvt. Ltd. (DAMEPL) floated a global tender for providing engineering and project management consultancy services for the airport line of Delhi Metro and the Assessee was successful in such tender via participation mode. Accordingly, the work was entrusted to the Assessee by executing a contract on 19.05.2008.
• After execution of contract, the Assessee commenced its work and for the year under consideration received an amount of Rs. 28,51,54,304/- from DAMEPL. The Assessee treated these receipts as Fee for Technical Services (FTS) within the meaning of section 9(1)(vii) of the Income Tax Act, 1961 (the Act) thereby duly disclosed it in their return of income and hence offered it to tax on gross basis by applying the rate of 10% in terms with section 115A of the Act.
• During the course of assessment proceedings, the Assessing Officer (AO/ Revenue) noticed that 24 employees of the Assessee company have visited India during the relevant year and out of which 21 of them stayed for more than 183 days in India. Basis this fact, the AO formed view that the Assessee has a Permanent Establishment (PE) / Business Connection in India. Accordingly, the AO show caused the Assessee that why receipts from DAMEPL should not be treated as business income in hands of the Assessee u/s 44DA of the Act?
• The Assessee submitted that there is no business connection in India in terms with section 9(1)(i) of the Act and the entire burden lies on the revenue to establish how and in what manner the business connection exists? The AO was not convinced with the reply and explanation furnished by the Assessee and proposed draft assessment order against the Assessee. Against the draft assessment order, the Assessee raised objections before Dispute Resolution Panel (DRP) but without any success the DRP endorsed order of the AO. Aggrieved by such order, the Assessee is in appeal before the Hon’ble Income Tax Appellate Tribunal (ITAT).

Contention of the Assessee:

• During the course of assessment proceedings, the AO never expressed intention of invoking section 44DA of the Act. Therefore, the Assessee has no opportunity to make submission against applicability of the said provision. Further, the learned DRP has gone completely wrong by stating that there exists a Double Taxation Avoidance Agreement (DTAA) between India and Hong Kong.
• To come within the purview of section 44DA of the Act, so far as professional services are concerned, it must be provided from a fixed place of profession situated in India. Further, the expression ‘fixed place of profession’ has not been defined in the statute thus it has been submitted that since the Assessee has no fixed place of profession in India, section 44DA of the Act is not attracted.
• Without prejudice to the above contentions, it has been further submitted that principal test to ascertain, as to whether an enterprise has a fixed place of business or not is that place of business or premise has to be at the disposal of the enterprise and since the Assessee was not conducting any business in India through a fixed place of business, there can not be any PE or fixed place of profession in India thereby provision of section 44DA of the Act would not be applicable.
• Further, the Assessee also submitted that in case it is held that section 44DA of the Act is applicable, the entire expenditure incurred by the Assessee in accordance with audited financial statements should be allowed and income is to be computed accordingly. In rejoinder, the Assessee submitted that in all earlier years, Assessee’s income declared under section 115A of the Act has been duly accepted by AO.

Contention of the Revenue/AO:

• The Assessee itself has accepted that the receipts from DAMEPL are in the nature of FTS and has offered it to tax. Referring to the clause of contract reproduced in the final assessment order, the revenue further submitted that, the Assessee has been provided an office space with all other facilities in the premises of DAMEPL. Thus, the Assessee had a fixed place of business in India from where it is carrying out its business wholly or partly.
• Employees of the Assessee have regularly visited India and have stayed for more than 183 days thus, the Assessee has a fixed place of business in India and it has to be held that the Assessee has a PE in India. Once the fact that the Assessee has a PE in India is established, automatically receipt from DAMEPL, even in nature of FTS, would be treated as income from business and profession and taxed under section 44DA of the Act.
• As regards the Assessee’s alternative contention that, in case, the receipts are held to be taxable under section 44DA of the Act, the corresponding expenses should be allowed, it has been submitted by the revenue that this issue can be examined by the AO with reference to the audited accounts and other evidences furnished by the Assessee.

Issue before the Hon’ble ITAT:

• Whether the amount received by the Assessee from DAMEPL is taxable under section 44DA of the Act, as held by the departmental authorities, or under section 115A of the Act read with section 9(1)(vii) of the Act as per the Assessee?
• Whether access given to the Assessee of the office premises of the DAMEPL would constitute service PE or for that matter any other PE?

Decision of the Hon’ble ITAT:

• The Hon’ble ITAT observed that the contention of the Assessee that expression ‘fixed place of business’ has not been defined under the statute, hence it (since professional services rendered by the Assessee are not through any fixed place of profession) will not come within purview of the definition of PE under section 92F(iiia) of the Act is far fetched hence not acceptable. Thereafter, the Hon’ble ITAT mentioned that fixed place of profession is akin to fixed place of business since PE has been defined under section 92F(iiia) of the Act and it includes fixed place of business.
• The facts on record do not reveal that the space and facilities provided to the Assessee by DAMEPL can construed to be a fixed place of business from where the Assessee carries on its business wholly or partly. The Hon’ble ITAT has placed their reliance on the judgement of the Hon’ble Supreme Court of India in case of ADIT vs E-Funds IT Solution Inc. wherein it has been observed that “merely giving access to a place to the enterprise for the purpose of project will not amount to putting the premise at the disposal of the enterprise. Putting the premise at the disposal of an enterprise would mean, when the enterprise has right to use the said place and has control thereupon”. Thereafter, the Hon’ble Supreme Court held that burden is entirely on the revenue to establish that the enterprise has effective control over the premise.
• The revenue has failed to establish through corroborative evidence that the Assessee is having control over the premise. Admittedly, it is the DAMEPL, which is having control over the premise and provided certain space and facilities. No corroborative evidence has been brought on record to demonstrate that the Assessee carries on business in India wholly or partly through a fixed place of business.
• Thereafter, the Hon’ble ITAT applying the ratio laid down in the judicial precedents cited by the Assessee held that the Assessee does not have any PE in India thereby provisions of section 44DA of the Act would not be applicable. Therefore, the income offered by the Assessee under section 115A read with section 9(1)(vii) of the Act has to be accepted. Further, in the preceding years also the declared income has not been controverted by the revenue accordingly, the addition made by the AO under section 44DA of the Act has been deleted.

SW Point of View: The Hon’ble ITAT has re-affirmed the position of law which has been established by the Hon’ble Supreme Court. It has been consistently held that fixed place will need satisfaction of disposal test and mere access to the place will not give rise to permanent establishment of foreign company in India. 

In Income Tax Appellate Tribunal, (Delhi Bench D)
MTR Corporation Ltd., Kachwaha & Partners, Advocates
v.
DCIT, Circle-2(2)(1), International Taxation, New Delhi

Virendra Vikram, Tax Associate, SW India