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P.M. Jagtap, A.M.

1. This appeal by the assessee is directed against the order of learned CIT(A)-XXIX, New Delhi, dt. 1st Dec., 2005.

2. The relevant facts of the case giving rise to this appeal are as follows. The assessee in the present case is a company incorporated in United States of America. It is in the business of supply of engineering design and process technology to the petroleum refining, petrochemical, gas processing and chemical related industries. The services incidental to the said supply right from the setting up of the unit as well as its start up and initial phase of operation to achieve the performance to UOP specifications are also rendered by it to the customers as an integral part of transfer of process technology as well as supply of engineering design. During the year under consideration, the assessee had supplied engineering design as well as process technology and had also rendered all the services incidental thereto as indicated above to the Indian customers, viz., Indian Oil Corporation, Reliance Petroleum Limited, Nagarjuna Oil Corporation Ltd. and Tamil Nadu Petro Products Limited as per the agreements entered into with them. The amount received as consideration from the Indian customers under the said agreements aggregating to Rs. 104,98,05,305 was declared by the assessee company in its return of income as 'royalty' and 'fees for included services' liable to tax at the rate of 15 per cent in India as per the Indo-American tax treaty on the basis that it was not having any permanent establishment (PE) in India during the year under consideration. Besides the supply of engineering design and process technology, the assessee company had also supplied equipment directly to the Indian customers and the profit arising from such sale being the commercial/business profit was claimed to be not taxable in India as per Article 7 of the DTAA between India and USA. During the course of assessment proceedings, it was noticed by the AO that there was another entity of UOP group operating in India, viz., UOP India (P) Ltd., which was stated to be principally formed with the object of rendering technical and engineering services to the Indian customers on its own. It was also stated that the said entity is also engaged in the business of procuring and selling the UOP proprietary equipment to the Indian customers on its own account. It was further found by the AO that there has been one more entity of the UOP group in India, viz., UOP Asia Limited which was claimed to be operating only its liaison office duly approved by the RBI for the entire UOP group in India. It was also noticed by the AO that the agreement entered into by the assessee company with Indian Oil Corporation on 16th May., 2000 has been signed by Mr. Nigel J.D. Orchard, director, UOP Ltd. on behalf of the assessee. During the course of assessment proceedings, a statement of Mr. Keith J. Aspray, managing director of UOP India (P) Ltd. was recorded by the AO on oath and relying on the depositions made by him in the said statement especially while replying question Nos. 3 and 11, it was inferred by the AO that the entities of UOP group based in India were interacting, negotiating and finalizing the contracts with the Indian customers within the terms and conditions and guidelines provided by the assessee and only after finalizing the said contracts, the same were sent to the assessee for signatures. He also held that both these entities, viz., UOP Asia Limited and UOP India (P) Ltd. were working wholly and exclusively for the assessee in India and they were habitually negotiating and finalizing all the terms and conditions of the contract with the Indian customers including the negotiation of the contract price. Taking note of these findings recorded by him as well as relying on the relevant portion of the commentaries from OECD and Klaus Vogel reproduced in his assessment order, the AO held that both these entities i.e., UOP Asia Ltd. and UOP India (P) Ltd. were working as dependent agent PE of the assessee in India within the meaning given in para 4 of Article 5 of the DTAA between India and USA. He, therefore, held that the royalty income and business income earned by the assessee in India were chargeable to tax in India as per the provisions of IT Act, 1961 by virtue of Article 12(6) r/w Article 7(3) of the DTAA between India and USA. Accordingly, he worked out the tax payable by the assessee on the income from royalties and fees for included services amounting to Rs. 104,98,05,305 at the rate of 20 per cent relying on the provisions of Section 44D r/w Section 115A. As regards the supply of equipment by the assessee directly to the Indian customers of the value of Rs. 2,49,34,953, the AO found that similar equipments were supplied by the assessee to the Indian customers even through UOP India (P) Ltd. allowing a profit margin of 17.62 per cent to the said Indian company. He, therefore, found it reasonable to adopt a net profit of 15 per cent on such supply and worked out the income of the assessee liable to tax in India from the supply of equipment directly to the Indian customers at Rs. 37,40,243 with a tax payable at the rate of 48 per cent thereon. Accordingly, the total tax payable by the assessee company in India was worked out by the AO at Rs. 21,17,56,377 in the assessment completed under Section 143(3) as against Rs. 1,57,47,076 shown by the assessee in its return of income.

3. Aggrieved by the aforesaid order of the AO passed under Section 143(3), the assessee company preferred an appeal before the learned CIT(A) and it was submitted on its behalf before him at the outset that UOPIPL was a separate legal entity and the statement recorded by the AO of Mr. Aspray, managing director of the said company, being a third party evidence, was not of much evidentiary value to draw any adverse inference against the assessee. It was submitted that the said deponent was neither authorized by the assessee company to make any statement on its behalf nor was he competent to comment on the affairs of the assessee company. It was also submitted that it was incumbent upon the AO to provide an opportunity to the assessee to cross-examine Mr. Aspray before relying on his statement and having failed to give such opportunity, his statement could not be admitted and relied upon to draw any adverse inference against the assessee. It was further submitted that the engineering design and technology were supplied by the assessee company as per the contracts directly entered into with the Indian customers and there was no interface or solicitation required in this regard since the technology possessed by the assessee is one of the best in the world. It was also submitted that once the technology is made available to the customer, he is free to get the required equipment designed and manufactured from a third party or he can get the equipment designed by the assessee company and manufactured by a third party. It was submitted that when the customer goes for the second option, UOPIPL comes into picture and either it gets the equipment fabricated in India based on the design provided by the assessee company or it procures such equipment from the appellant for further supply to the customers. It was emphasized that the UOPIPL thus never comes into picture at all with regard to the provision of technology by the assessee company to the Indian customers. Its role is limited only in respect of supply of equipment and that too, independently on its own as per the arrangement or agreement with the Indian customers. It was contended that the deposition made by Mr. Aspray thus was limited only in respect of the equipment supply and the same was misconstrued by the AO to cover the supply of technology part also. It was also contended that the interfacing did by the UOPIPL was limited to the supply of equipment only and the same could not be extended for supply of technology. It was further submitted on behalf of the assessee that there are three features which must be prevalent in the arrangement so as to treat a person as a dependent agent within the meaning of Article 5(4) of the Indo-American DTAA and since none of these three elements was present in the arrangement between the assessee company and UOPIPL, the AO was patently wrong in holding UOPIPL as the dependent agency PE of the assessee in India. Reliance was placed on behalf of the assessee on the decision of Authority for Advance Rulings in the case of TVM Ltd., In re (1999) 151 CTR (AAR) 492 : (1999) 102 Taxman 578 (AAR) to contend that neither the UOPIPL nor the UOP Asia Limited having carried out any activity which could be construed of creating a dependent agency PE of the assessee in India, the AO was not justified in holding that the assessee company had a dependent agency PE in India and in working out its tax liability in India by applying the provisions of Section 115A r/w Section 44D. All the relevant details of the visits of assessee's employees to India and their participation in the negotiation meetings with the Indian customers were also furnished on behalf of the assessee company before the learned CIT(A) in an attempt to show that the persons who participated in the negotiations and approved/signed the contracts were its own employees and not the employees of UOPIPL. It was also brought to the notice of the learned CIT(A) by the assessee that Mr. Aspray whose statement was relied upon by the AO had joined UOPIPL only on 4th Oct., 2002 i.e., much after the period in which the relevant agreements/contracts were entered into by the assessee company with the Indian customers.

8. The main issue involved in this appeal is whether the assessee company could be said to have a PE in India during the year under consideration. The other issues relating to attribution of profits to the PE and the ascertainment of the liability of the assessee company on account of tax payable in India as well as interest payable under Section 234B thereon are mainly consequential to the main issue.

9. In connection with the main issue relating to PE, the Department has sought to file additional evidence before the Tribunal. In this regard, it has moved an application dt. 9th May, 2006 under Rule 29 of Income-tax (Appellate Tribunal) Rules, 1963 for admission of additional evidence comprising of pp. 1A to 3 of Annex.-A, pp. 12 to 24 of Annex.-B, pp. 28 to 80 of Annex.-C and pp. 81 to 84 of Annex.-D. While supporting the said application, the learned CIT-Departmental Representative submitted that the nature of additional evidence sought to be produced by the Department does not give rise to any new principle and by filing the same, the Department is not seeking to make any fresh line of enquiry. He submitted that the said additional evidence merely supports the case of the Revenue further and thus, would be of help to enable the Tribunal to adjudicate the issue relating to PE involved in the present appeal.

Annex. -B (Pages 12 to 24)

39. These are the copies of various e-mails exchanged between employees of the UOP group including the assessee company and employees of UOPIPL and UOP Asia Limited (LO). One of such e-mails placed at p. 12 was sent by Keith J. Aspray, managing director of UOPIPL to the assessee company forwarding a draft agreement for approval by Norm and then by Carlos suggesting that the same is what is required for consultant agreements prior to sending execution copies to them. It was also mentioned by Mr. Aspray in the footnote that he would be sending a note to Norm and Carlos giving his input before the agreement comes their way. In another e-mail dt. 24th Feb., 2005 received by Mr. Aspray placed at p. 13 of Annex.-B, the pre-IPL position was discussed stating finally that the tax people of the UOP group had some PE concerns with the said arrangement. It was also mentioned that since now IPL exists, the Indian portion is bought from IPL and the second option of having one PO on NV was not being practiced because of PE/tax concern. The approach of Mr. Aspray to ask for separate orders on NV and IPL thus was stated to be approved in the said letter. This e-mail was received by Keith Aspray in response to his original message sent on 23rd Feb., 2005 informing that he has given two options to the customers, viz., all INR via IPL or one PO on NV with split Euros/INR components. It was also mentioned by him that option 2 could be given only because of having a local entity i.e., UOPIPL that does work in this area. It was stated that the acceptance of option two, however, would be difficult for UOP as the same could create a PE/tax issue for NV in India if the INR order is placed on UOPIPL. Although this communication was pertaining to NV, another entity belonging to UOP group and not to the assessee company as pointed out by the learned Counsel for the assessee, the modus operandi being followed to split the contracts between the different entities belonging to UOP group apparently to avoid PE issue was reflected therein and the same, therefore, seems to be relevant to decide a similar issue relating to PE involved in the case of the assessee. This aspect of arrangement/adjustments between the various entities belonging to UOP group to serve the desired purpose was also reflected in the copy of another e-mail received by Keith Aspray on 28th Sept., 2005 which is placed at p. 15 of Annex.-B along with the original message sent by Mr. Aspray wherein it was mentioned that the UOPIPL had in the past taken low to zero margins on several projects to the benefit of UOP on a global basis. There are other communications also between Keith Aspray of UOPIPL and employees of UOP group of companies including the assessee company sent through e-mail placed at pp. 16 to 21 giving feedback about the various meetings held with the Indian customers from time to time in connection with execution of their project by the assessee company. Document placed at pp. 22 to 24 of Annex.-B is the draft of minutes of meeting of IOC/UOP Steering Committee and as mentioned therein, Keith J. Aspray, managing director of UOPIPL and Mr. P. Nair, general manager of UOP Asia Limited, New Delhi were members of UOP Steering Committee with remaining two members of the said committee being the employees of the assessee company.