Article 7 of India-Germany DTAA – In absence of common link in terms of contracts / projects, expats, nature of activities, location, or contracting parties, income from activities in India, though similar to activities of PE, could not be attributed to PE by invoking Force of Attraction rule

9. TS-630-ITAT-2019 (Del.) M/s Lahmeyer International vs. ACIT ITA No.: 4960/Del/2004 A.Y.: 2001-02 Date of order: 9^th October, 2019

Article 7 of India-Germany DTAA – In
absence of common link in terms of contracts / projects, expats, nature of
activities, location, or contracting parties, income from activities in India,
though similar to activities of PE, could not be attributed to PE by invoking
Force of Attraction rule

FACTS

The assessee was a
company incorporated in, and tax resident of, Germany. It was engaged in the
business of engineering consulting. During the relevant assessment year the
assessee rendered consultancy services in relation to ten power projects in
India and received Fees for Technical Services (FTS).

According to the
assessee, only one of the projects constituted a PE in India. Hence, on FTS
received from that project the assessee paid tax u/s 115A of the Act @ 20% on
gross basis; on the other projects it paid tax @ 10% under Article 12 of the
India-Germany DTAA.

The AO observed
that the contracts were artificially split by the assessee to avoid tax and,
applying the force of attraction (FOA) rule, concluded that the entire income
was attributable to PE and chargeable to tax @ 20%.

After the CIT(A)
upheld the order of the AO, the aggrieved assessee filed an appeal before the
Tribunal.

HELD

(1)    FOA rule under India-Germany DTAA provides
that profits derived from business activities which are of the same kind as
those effected through a PE can be attributed to the PE, if the following
conditions are satisfied cumulatively:

(a) The transaction
was resorted to in order to avoid tax in PE state;

(b)    In some way, PE is involved in such
transaction;

(2)    Considering the following factors, the
Tribunal held that the FOA rule could not be applied as PE was not involved in
other projects:

(i)     All the projects undertaken by the assessee
were independent contracts with unrelated parties and the scope of work,
liabilities and risk involved in each of the contracts was independent of each
other;

(ii)     Specific sets of activities were performed
under each project as per the terms of the contracts and such activities were
not interlinked with each other;

(iii)    The projects were carried out using different
teams at a given point of time;

(iv)    RBI regulations stipulated a separate project
office for each project. Funds of each project could be used only for the
specific project for which approval was granted and could not be used for any
other project;

(v)    Each project had a different location. The
work was carried out either from the project site of the client or from the
head office outside India. This demonstrates that owing to the different
geographical location where each project was executed in India, there was no
possibility of the PE to play a part or be involved in the other projects in
India.

(3)    For applying the FOA rule there should be
some common link to every contract / project, such as common expats, common
nature of contract / project, common location, common contracting parties, etc.
Such commonality was absent in the case of the assessee. Hence, the FOA rule
could not be applied.

(4)    Accordingly, the FTS received by the assessee
under other contracts could not be attributed to a PE in India. Hence, such FTS
was taxable @ 10%.