PROGRESS RAIL LOCOMOTIVE INC.(FORMERLY ELECTRO MOTIVEDIESEL INC.) vs DEPUTY COMMISSIONER OF INCOME-TAX( INTERNATIONAL TAXATION),CIRCLE-NOIDA & ORS.

2024-05-28 Information

* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 13 February 2024
Judgment pronounced on: 28 May 2024

+ W.P.(C) 12405/2019

PROGRESS RAIL LOCOMOTIVE INC.(FORMERLY ELECTRO MOTIVE DIESEL INC.), ….. Petitioner

Through: Mr. Arvind Datar, Sr. Adv. with Mrs. Rubal Bansal Maini and Mr. Prakhar Pandey, Advs.

versus

DEPUTY COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION), CIRCLE – NOIDA & ORS.
….. Respondents
Through: Mr. Sunil Agarwal, Sr.SC with Mr. Shivansh B. Pandya, Jr.SC along with Mr. Utkarsh Tiwari and Mr. Amaan Ahmed Khan, Advs.

+ W.P.(C) 12406/2019

PROGRESS RAIL LOCOMOTIVE INC.(FORMERLY ELECTRO MOTIVEDIESEL INC.) ….. Petitioner
Through: Mr. Arvind Datar, Sr. Adv. with Mrs. Rubal Bansal Maini and Mr. Prakhar Pandey, Advs.

versus

DEPUTY COMMISSIONER OF INCOME-TAX( INTERNATIONAL TAXATION),CIRCLE-NOIDA & ORS.
….. Respondents
Through: Mr. Sunil Agarwal, Sr.SC with Mr. Shivansh B. Pandya, Jr.SC along with Mr. Utkarsh Tiwari and Mr. Amaan Ahmed Khan, Advs.

+ W.P.(C) 12407/2019

PROGRESS RAIL LOCOMOTIVE INC. (FORMERLY ELECTRO MOTIVE DIESEL INC.), ….. Petitioner
Through: Mr. Arvind Datar, Sr. Adv. with Mrs. Rubal Bansal Maini and Mr. Prakhar Pandey, Advs.

versus

+ W.P.(C) 12408/2019

PROGRESS RAIL LOCOMOTIVE INC (FORMERLY ELECTRO MOTIVE) ….. Petitioner

Through: Mr. Arvind Datar, Sr. Adv. with Mrs. Rubal Bansal Maini and Mr. Prakhar Pandey, Advs.

versus

DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION),CIRCLE-NOIDA & ORS.
….. Respondents

Through: Mr. Sunil Agarwal, Sr.SC with Mr. Shivansh B. Pandya, Jr.SC along with Mr. Utkarsh Tiwari and Mr. Amaan Ahmed Khan, Advs.
+ W.P.(C) 12409/2019

PROGRESS RAIL LOCOMOTIVE INC. (FORMERLY ELECTRO MOTIVE DIESEL INC.), ….. Petitioner

Through: Mr. Arvind Datar, Sr. Adv. with
Mrs. Rubal Bansal Maini and Mr. Prakhar Pandey, Advs.

versus

PROGRESS RAIL LOCOMOTIVE INC. (FORMERLY ELECTRO MOTIVE DIESEL INC.), ….. Petitioner
Through: Mr. Arvind Datar, Sr. Adv. with Mrs. Rubal Bansal Maini and Mr. Prakhar Pandey, Advs.

versus

PROGRESS RAIL LOCOMOTIVE INC. (FORMERLY ELECTRO MOTIVE DIESEL INC.), ….. Petitioner
Through: Mr. Arvind Datar, Sr. Adv. with Mrs. Rubal Bansal Maini and Mr. Prakhar Pandey, Advs.

versus

CORAM:
HON’BLE MR. JUSTICE YASHWANT VARMA
HON’BLE MR. JUSTICE PURUSHAINDRA KUMAR KAURAV

J U D G M E N T

YASHWANT VARMA, J.

S. No.
Particulars
Paragraph Nos.
A.
INTRODUCTION
1-6
B.
FACTUAL NARRATIVE
7-12
C.
SUBMISSIONS OF PROGRESS RAIL LOCOMOTIVE INC.
13-16
D.
CBDT NOTIFICATION DATED 03 NOVEMBER 2014
17-21
E.
THE PE ISSUE- A BRIEF BACKGROUND
22-30
F.
THE CHALLENGE OF PROGRESS RAIL LOCOMOTIVE INC. CONTD.
31-56
G.
TAX AUTHORITYS RESPONSE
57-65
H.
PE- A BROAD OVERVIEW
66-72
I.
RESPONDENTS TAKE ON PE- A RECAP
73-77
J.
ANALYSING ARTICLE 5 OF THE INDIA-USA DTAA
78-80
K.
THE COURTS ANALYSIS
81-113
K.1
THE SERVICE PE
82-84
K.2.
THE FIXED PLACE PE
85-95
K.3.
ARTICLE 5(3)- PREPARATORY AND AUXILIARY FUNCTIONS
96-110
K.4.
ARTICLE 5(4) AND DAPE
111-113
L.
CONCLUDING OBSERVATIONS
114-138
M.
OPERATIVE DIRECTIONS
139-140

A. INTRODUCTION

1. These writ petitions impugn notices issued under Section 148 of the Income Tax Act, 19611 by the first respondent. The details of the individual writ petitions are set out hereinbelow:-
Relevant AY
Notice issued on
W.P.(C).no
2012-13
28.03.2019
12408/2019
2013-14
29.04.2019
12406/2019
2014-15
29.04.2019
12405/2019
2015-16
31.05.2019
12407/2019
2016-17
31.05.2019
12409/2019
2017-18
31.05.2019
12410/2019
2018-19
31.05.2019
12411/2019

2. The first respondent has assumed authority to initiate reassessment proceedings upon finding that the production unit of the wholly owned subsidiary of the petitioner constitutes a Fixed Place Permanent Establishment2, in the alternative a Service PE as well as a Dependent Agent Permanent Establishment3. The aforesaid conclusions are based on the provisions of the India-USA Double Taxation Avoidance Agreement4.
3. The petitioner is stated to be a foreign company registered under the laws of Delaware, in the United States of America and is a part of the Caterpillar Group. It is stated to be one of the largest integrated and diversified manufacturers of rolling stock, infrastructure solutions and engaged in providing solutions and technologies to rail customers across the globe. According to the writ petitioner, it is also engaged in supplying equipment directly to the Indian Railways including to the Diesel Locomotive Works5, Varanasi. These supplies are effected by way of imports which are made directly to the Indian Railways against Bills of Entries which are duly filed. The petitioner describes itself as being one of the largest global suppliers of new and reconditioned components for Class-1 railroads, short-lines, freight cars, freight car manufacturers and private freight car owners.
4. As per the petitioner, it has no income which can be said to accrue or arise in India under the provisions of the Act and although it has a registered office in Delhi, and has been allotted a Permanent Account Number6 falling under the jurisdiction of the Commissioner of Income Tax, International Taxation-1, Delhi – the fifth respondent herein, it has not filed any Income Tax Returns since no income accrued or arose and nor could that income be said to have deemed to have accrued or arisen in India.
5. The petitioner, however, has a wholly owned Indian subsidiary – Progress Rail Innovations Private Limited7, which was incorporated in 1996 and had a manufacturing unit at Noida and an office at Varanasi during the relevant Assessment Years8, namely AYs 2012-13 up to 2018-19. It is the case of the petitioner that in Financial Year9 2021-22, the Noida plant was shut down and the manufacturing facility was shifted to Hubli in Karnataka. The Indian subsidiary, we were apprised, is assessed to tax in New Delhi where its registered office is situate and has also been subjected to transfer pricing studies by virtue of being an Associated Enterprise10 of the petitioner. The petitioner has relied upon one such order dated 18 October 2016 pertaining to AY 2013-14 and which holds that the subsidiary provides only back office and technical support services to the petitioner.
6. The petitioner asserts that neither the said Transfer Pricing Order nor any other order made by the authorities under the Act have ever found the Indian subsidiary to constitute a PE of the petitioner despite the said entity having been duly assessed for the past 25 years. It is also the case of the petitioner that the products manufactured by the Indian subsidiary are clearly distinct from those manufactured and supplied by it, and consequently it would be found that the core business activities of the petitioner and the Indian subsidiary are completely different. They have in this regard disclosed the following distinct production activities pursued by the two entities:-

Petitioner

Subsidiary Company
i. EMD OEM components available for locomotive, marine and power generation applications.
ii. Freight and Tank Car Parts, Shortline and Industrials, Kershaw Parts, Marine and Stationary Engines.
Boards, panels, consoles, desks, cabinets and other bases for a voltage exceeding 1,000V.

We are informed that prior to 01 September 2016, the petitioner was known as Electro Motive Diesel Inc., and whereafter its corporate name was changed to Progress Rail Locomotive Inc.
B. FACTUAL NARRATIVE
7. On the basis of a survey conducted on 06 March 2019 under Section 133A of the Act, a survey report dated 11 March 2019 came to be prepared, in which it was alleged that the petitioner has an office in Noida and which was liable to be viewed as a Fixed Place PE/Service PE/ DAPE. On the basis of the aforesaid report, action was proposed to be initiated under Sections 147/148 of the Act. It is this report which led to the issuance of the impugned notices dated 28 March 2019 [W.P.(C) 12408/2019], 29 April 2019 [W.P.(C) 12405/2019, W.P.(C) 12406/2019] and 31 May 2019 [W.P.(C) 12407/2019, W.P.(C) 12409/2019, W.P.(C) 12410/2019 and W.P.(C) 12411/2019] under Section 148 of the Act.
8. For the purposes of considering the validity of the action undertaken by the first respondent, we deem it apposite to consider the broad factual matrix as obtaining in the lead petition, namely W.P.(C) 12408/2019.
9. Upon receipt of the impugned Section 148 notice dated 28 March 2019, the petitioner submitted a response dated 26 April 2019 asserting that it had not earned any income chargeable to tax and that consequently the notice was liable to be withdrawn. On 17 May 2019, the first respondent provided the reasons underlying the initiation of action under Sections 147/148 to the petitioner. As would be evident from a reading of those reasons, the first respondent principally relied upon the statements of Mr. Jeetendra Pratap Singh, Sales Executive of PRIPLs Varanasi branch, Mr. Shivanshu Narendra Kaushik, DGM, PRIPL, Noida and Mr. Phaneendra Kumar Potnuru, Director- Finance, PRIPL, Noida. Basis the aforenoted statements, the first respondent came to form the opinion that the petitioner had a virtual projection and presence in India in the form of its subsidiary – PRIPL. It was consequently held that since a PE existed, income attributable to that entity was liable to be taxed under the Act. The petitioner questioned the assumption of jurisdiction as well as the reasons so noted as would be evident from its response dated 28 May 2019. It also sought further documentation including the statements taken from the employees of PRIPL as well as a copy of all the documents/information collected by the petitioner during the course of those survey proceedings in terms of its letter dated 06 June 2019.
10. On 24 June 2019, the petitioner addressed a letter to the first respondent asserting that its duly allotted PAN was linked to the office of the fourth respondent and consequently questioned the issuance of notices by the first respondent additionally on this score. It was thus contended that the first respondent had wrongly assumed jurisdiction and the notices were thus liable to be withdrawn on this ground alone. On 26 June 2019, and faced with the fact that the petitioner had failed to submit its Return of Income11 in compliance with the notices issued, the first respondent initiated penalty proceedings referable to Section 271F read with Section 274 of the Act. In response to the said notice, the petitioner reiterated its stance that its PAN fell within the jurisdiction of the fourth respondent, and that consequently, both the Section 148 notice as well as the penalty notice issued by the first respondent were without jurisdiction. While responding to the penalty notice, the petitioner further asserted that it had not filed its returns proceeding on the assumption that its request for grant of four months to furnish the same stood granted.
11. By way of a letter dated 12 August 2019, the petitioner apprised the first respondent that the Income Tax Business Application12 did not appear to facilitate uploading of the proposed ROIs which were being sought to be submitted. In view of the above, the petitioner proceeded to forward physical copies of those returns to the said respondent under protest. The authority of the first respondent to undertake reassessment was again questioned by way of a letter dated 25 September 2019. It was further alleged that the fourth respondent purportedly acting pursuant to its powers under Section 120 of the Act had passed an order transferring the jurisdiction of the PAN of the petitioner from the fourth respondent to respondent no.1 vide its order dated 05 November 2019, and which was alleged to have been approved by the fifth respondent on 06 November 2019. Subsequently and on 13 November 2019, the petitioner discovered that its jurisdiction had been transferred from the fourth respondent to respondent no.1. It is thereafter that the instant writ petitions came to be filed.
12. While entertaining the present writ petitions, we had extended interim protection to the writ petitioner by way of an order dated 26 November 2019, and in terms of which it was provided that while it would be open for the first respondent to proceed with the assessment proceedings and conclude the same, it would be subject to further orders being passed on the writ petitions. Subsequently, on 09 September 2021, the interim relief granted to the writ petitioner was modified and the Court provided for a stay of further proceedings pursuant to Section 148 of the Act by the first respondent until the disposal of the writ petitions.
C. SUBMISSIONS OF PROGRESS RAIL LOCOMOTIVE INC.
13. Appearing for the writ petitioner, Mr. Datar, learned senior counsel, has on facts addressed the following submissions. Mr. Datar submitted that PRIPL, the wholly owned subsidiary of the petitioner was incorporated way back in 1996 and had a manufacturing unit at Noida and an office at Varanasi during the relevant AYs, namely, AYs 2012-13 to 2018-19. Mr. Datar submitted that the said subsidiary had been regularly assessed to tax in Delhi by virtue of the location of its registered office which was situate in that jurisdiction and had also been subjected to transfer pricing assessments.
14. Mr. Datar took us through the following conclusions and findings which appear in a Transfer Pricing Order dated 18 October 2016:-
1. Reference u/s 92CA was made by the DCIT, Circle 8(1), New Delhi, New Delhi for determination of Arm’s length price for the international transactions/domestic transaction undertaken by the assessee during the FY 2012-13. In response to notice Mr. Sahil Malhotra, being the authorized representatives appeared periodically. The documentations prescribed under Rule 10D of the Income Tax Rules, 1962 and other details asked for were submitted and placed on record.
2. Introduction
EMD Locomotive Technologies Pvt. Ltd. is engaged in provision of support services to EMD Group on which it is remunerated on a cost plus basis. The company provides back office support and technical support services starting from monitoring the Indian market for upcoming tenders and participating in such tender meetings to provide technical support including coordination with regard to the locomotives and spare parts / components etc. directly purchased by Indian Railways from EMD Group.
3. The international transactions entered into, by the assessee are tabulated below.
S.No.
Type of International Transaction
Method Selected

Total Value of transaction (Rs.)

MAM
PLI

i.
Provision of Technical Support Services
Transactional Net Margin Menthod
(TNMM)
Operating profit/Operating Cost (OP/OC)
110,850,531
ii.
Provision of Marketing Support Services
TNMM
OP/OC
111,464,189
iii.
Purchase of Goods
TNMM
Operating profit/Operating Sales (OP/OI)
434,372,844
iv.
Payment of repair and maintenace charges
TNMM
OP/OI
389,463
v
Issue of Equity Shares
Other Method
NA
70,391,000
vi.
Security Premium on Equity Shares alloted
Other Method
NA
413,899,080

4. Analysis of the Assessee’s approach
The international transactions that have been entered into by the assessee have been tabulated above. The main international transaction of the assessee in question is the provision of technical support services. The TP report has described the functions of the assessee and its AE and the functions of the assessee as submitted in the TP report are found to be in order.
The business of the assessee is described below:
Business of the Assessee
EMD India, incorporated on December 2, 1996, is a 99.99% subsidiary of EMD International Holdings Inc., USA. It is primarily engaged in:
* Technical Support Services
EMD India is engaged in provision of support services to EMD Group for which it is remunerated on a cost plus basis. Herein, the Company supports EMD Group on a wide range of back-office activities starting from monitoring the Indian market for upcoming tenders and participating in such tender opening meetings to providing technical support services including coordination with regard to the locomotives and spare parts/ components etc. directly purchased by Indian Railways from EMD Group.
?For these technical support services, the Assessee was remunerated on a cost plus basis. In essence, the Assessee was assured of a return on its costs and therefore insulated from majority of the business risks.
During FY 2012-13, EMD India was essentially engaged in the provision of support services to Group Companies. As part of its business operations, the Company also coordinates with Indian Railways for providing technical assistance with regard to the locomotives and spare parts/ components etc. directly purchased by it from EMD Group. In return for these services, the Company is remunerated on a cost plus basis.
The nature of the services rendered by EMD India is outlined below:
? Monitor upcoming tenders in the Indian market for locomotives and provide requisite support to EMD Group in preparation of the proposal.
? Attend tender opening meetings with Indian Railways and examine the terms and conditions based on which inputs/comments are provided to EMD Group.
? Coordinate with EMD Group for timely bid submission for tenders in the Indian market.
? Tracking LCs and shipments so as to provide updated information on the status of the consignment to Indian Railways.
? Regularly track the market situation to understand competitor movements and new business opportunities.
? Organise events and seminars and coordinate with industry associations such as CII, FICCI, AMCHAM in order to market the wide range of locomotives and diesel engines and technical expertise of EMD Group.
? Provide support to Indian Railways by detection of faults/issues on locomotives running in the field.
? Provide technical guidance to Indian Railways in taking corrective measures for replacement of part or rectification of the identified fault.
? Regularly update EMD Group on the interactions and assistance extended by EMD India to Indian Railways regarding issue of failure/ fault detected in the locomotives
? Gather technical details on the fault highlighted by Indian Railways and examine the same.
? Co-ordinate between EMD Group and Indian Railways for faulty products/parts under warranty or material replacement.

15. According to learned senior counsel, the Transfer Pricing Officer13 had examined the activities of the Indian subsidiary in minute detail and ultimately proposed various adjustments. However, it was highlighted, that neither this order nor for that matter any other adjudication that may have been undertaken under the Act had come to hold or recognize the Indian subsidiary to be a PE of the petitioner. Mr. Datar also highlighted the distinct line of products which were manufactured by the petitioner and its Indian subsidiary as well as certain cost audit reports which were drawn in the course of oral submissions. In view of the above, it was his submission that the respondents have incorrectly proceeded on the basis that the Indian subsidiary constituted a PE.
16. Learned senior counsel further submitted that the PAN which was held by the petitioner was linked to the office of the fourth respondent. It was his contention that the same was illegally and unilaterally migrated to Noida and under the jurisdiction of the first respondent on 05 November 2019. Mr. Datar submitted that although the Act embodies no provision which may envisage a transfer or migration of PAN, the respondents resorted to that device solely to enable the first respondent to clutch at jurisdiction and undertake reassessment.
D. CBDT NOTIFICATION DATED 03 NOVEMBER 2014
17. Insofar as the territorial jurisdiction of the respondents was concerned, Mr. Datar firstly placed for our consideration a Notification dated 03 November 2014 promulgated by the Central Board of Direct Taxes14, and which had inter alia delineated the areas over which the second and the fifth respondent could exercise powers of assessment. Our attention was firstly drawn to Serial No. 1 of that Notification and which sets out the areas over which the fifth respondent could exercise the powers otherwise conferred upon it under the Act. Mr. Datar then drew our attention to Serial No. 3 of that Notification, and which spelt out the areas over which the second respondent was empowered to exercise authority and which extended to areas falling within the territorial limits of the States of Uttar Pradesh and Uttarakhand.
18. It is relevant to note that in terms of the arrangement made for entities falling within the ambit of Serial No. 3, the Notification further provided that the said authority would also have the right to assess persons who may be non-residents, including foreign companies having a PE in the territories noted above. In terms of the aforesaid Notification, the Commissioner of Income Tax (International Taxation-3), Delhi, the second respondent herein, issued an order on 15 November 2014 vesting jurisdiction upon the Additional Commissioner of Income Tax15/Joint Commissioner of Income Tax16 (Range Noida) over all foreign companies having a PE in the State of Uttar Pradesh. The said authority ACIT (International Taxation), Range, Noida, in turn issued an order on the same date and proceeded to confer power upon the first respondent in respect of foreign companies having a PE within the territorial limits of the Chief Commissioner of Income Tax17, Ghaziabad falling in the State of Uttar Pradesh. It is on the basis of the aforesaid distribution of the power to assess that the first respondent appears to have issued the impugned notices.
19. It becomes pertinent to note that initially the petitioner had questioned the assumption of jurisdiction by the first respondent based upon the provisions contained in the aforenoted Notifications. However, and although we had heard parties on the aforesaid aspect alone and reserved judgment, on a careful scrutiny of those Notifications, we found that it would be expedient, in the interest of justice, if the petitioner was apprised of some of the issues which emanate therefrom. It was this which led us to reopen the hearing on the writ petitions vide order dated 25 January 2024.
20. We find from a perusal of the Notifications in question that the construction which was sought to be advocated at the behest of the writ petitioner would not sustain. It becomes pertinent to note that the Notification of 03 November 2014 broadly distributes the territorial areas amongst the Commissioners of Income Tax. That distribution is made on an area/regional basis. However, the very same Notification proceeds to empower the Commissioners, ACITs and JCITs to further delegate their powers of assessment to officers subordinate to them. It is on the basis of the aforesaid authorization made by the CBDT that the Commissioner of Income Tax (International Taxation-3), Delhi, the second respondent herein, proceeded to confer authority upon the ACIT/JCIT (Range Noida) on 15 November 2014, and who in turn and on the very same date, vested all powers relating to assessment upon respondent No. 1.
21. We thus find that the challenge as raised based upon the distribution of powers would not sustain. However, and it is necessary to so observe, undisputedly insofar as the first respondent is concerned, it could have derived authority to assess the petitioner or to subject it to proceedings under the Act, only if it had come to conclude that it had a PE within the territorial area assigned to it. It is this foundational link which joins the assumption of jurisdiction by the first respondent and the issue of PE of the petitioner in the State of Uttar Pradesh. The decision of the first respondent on the issue of PE thus emerges as being not only the central point of contestation, but also of significant import since the very foundation of the impugned reassessment action rests on the correctness of the view as taken by the said respondent in that respect.
E. THE PE ISSUE- A BRIEF BACKGROUND
22. Since learned counsels for respective sides have addressed elaborate submissions on the concept of Fixed Place PE, Service PE and DAPE, we do not find any justification to go into the issue of PAN migration and the challenge in that respect which was addressed. This, since we would have to necessarily answer the fundamental question of whether a PE could be said to have come into existence within the territorial area over which the first respondent stood empowered to exercise powers conferred by the Act and thus examine whether the Section 148 power was justifiably invoked.
23. The question of a PE existing in the State of Uttar Pradesh would have to be answered on the basis of Article 5 of the India-USA DTAA which is extracted hereinbelow:-
ARTICLE 5 – Permanent establishment-
1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term permanent establishment includes especially:
(a) a place of management ;
(b) a branch ;
(c) an office ;
(d) a factory ;
(e) a workshop ;
(f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources ;
(g) a warehouse, in relation to a person providing storage facilities for others ;
(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on ;
(i) a store or premises used as a sales outlet ;
(j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period ;
(k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period ;
(l) the furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if:
(i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period ; or
(ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)].
3. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include any one or more of the following:
(a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise ;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery ;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise.
4. Notwithstanding the provisions of paragraphs 1 and 2, where a personother than an agent of an independent status to whom paragraph 5 applies – is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if :
(a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;
(b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise ; or
(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise.
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arms length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.
6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.
24. As would be manifest from a reading of Article 5, clauses (a) to (k) of Article 5(2) spell out establishments which would be liable to be acknowledged as constituting a Fixed Place PE. While Article 5(2)(l) is concerned with a Service PE, Article 5(4) stipulates the conditions when a DAPE would have to be accepted as existing.
25. The issue of PE has been answered by the first respondent against the petitioner and is based on the following conclusions which are set out in detail in an email dated 17 May 2019 addressed to the petitioner. We deem it apposite to firstly extract the following parts of that communication and which contain the statement as made by Mr. Jeetendra Pratap Singh:
Question 4- What services are provided by you in your company and what is your role in the company?
Answer- I provide Post Tender/ Post agreement services such as taking purchase orders, taking care of delivery of goods and punctuality in the same, providing information regarding purchase orders and modifications in the same to EMD Locomotive Technology Pvt. Ltd. and Electro Locomotive Diesel Inc. USA and providing goods to Diesel Locomotive Work in Benaras within time specified by them. In reference to this, following up on behalf of D.L.W. with companies situated in Noida and USA and vice-versa, providing information regarding any type of Rejection/Modification/Rectification/Correction. Providing follow-ups on payments, etc. roles are played here in Varanasi.
xxxx xxxx xxxx
Questions 9- During the inquiry of the survey, Purchase order, Bill of lading/OPT (Overseas Transport Project), etc, were found that are related to EMD Locomotive Technology Pvt. Ltd. and Electromotive Diesel Inc USA. Kindly elaborate.
Answer- In relation to this, I would like to say that the purchase order whose information regarding their payment is in USD, is related to Electromotive Diesel Inc. USA and the purchase order whose payment is in INR is related to EMD Locomotive Technology Pvt. Ltd. Noida which is subsidiary of EMD Inc USA.
Question 10- Does the risk or responsibility involved in the delivery of goods bear with EMD Locomotive Technology Pvt. Ltd. Noida or Electromotive Diesel Inc. USA?
Answer- The risk/ responsibility with respect to supply of goods prior to May 2018 rested with Electromotive Diesel Inc. USA and the same has been rested with EMD Locomotive Technology Pvt. Ltd. Noida for supply of goods since 2018.
xxxx xxxx xxxx
Q.12. Please explain in detail the services rendered to PRL Inc. USA about tenders floated in India and submits the bid for the tenders on their behalf?
Ans. PRIPL, India commercial team gjves information/helps/guides alongwith M/s Indo Crest (Our agent) for which we have a services agreement and Indo Crest is paid directly by PRL Inc. USA.
xxxx xxxx xxxx
Q.17. I am showing you a list of employees which has 37 names with name of the employee, designation and person reporting to. In a number of cases, it is seen that the employee is reporting to persons of the foreign group companies. Please explain, why the employees of PRIPL, India are reporting to persons of the non-resident/foreign group company. For example, shivanshu Narendra Kaushik reporting to David Babnic, Avdhesh Pratap reporting to Andy Gunn, Kaushal Sansanwal reporting to Shanan Fox etc.
Ans. Most of the employees have Indian persons as their reporting manager except for functional heads who report to Indian managing director as well as foreign persons. Reporting to foreign person is kept to ensure compliance with global best practices of group companies.
Q.18 Who does the appraisal of the employees including functional heads Please specify the mode of control by your foreign associate companies on the appraisal process?
Ans. The performance evaluation is performed by the reporting managers of the employees. The same for functional heads is done by India managing director, India HR and based on feedback received from foreign managers as well.
26. As would be evident from the above, the first respondent appears to have borne in consideration the statement made by this individual to the effect that PRIPL was a subsidiary of the petitioner and the various purchase orders and Bills of Lading collected pertaining to the Indian subsidiary as well as the petitioner herein. These documents were explained by Mr. Jeetendra Pratap Singh, who is asserted to have stated, that purchase orders which carry details of payments in US Dollars18 relate to the petitioner while those where payments were expressed in INR concern the Indian subsidiary – PRIPL. The first respondent also relied upon the response of the said employee with respect to emails which were addressed to various individuals and details whereof are found in Question 15. While responding to that query, the employee is asserted to have stated that those emails were concerned with directions for procurement, modification of purchase orders, delivery of goods, refunds, sale and purchase of goods as received by the Indian subsidiary from the petitioner. The employee is also asserted to have stated that the emails so received are also reported to the petitioner from time to time through proper channels.
27. In the course of the survey operations, the first respondent also recorded the statements of Mr. Shivanshu Narendra Kaushik and Mr. Phaneendra Kumar Potnuru. The relevant extracts of the statement made by Mr. Shivanshu Kaushik is reproduced hereinbelow:-
Q7. Please tell whether your team gives design up gradation/technical inputs to only M/s PRIPL or these inputs are also utilized by M/s Progress Rail Locomotive Inc. (Previously known as M/s EMD Inc.)
Ans. As far as my knowledge is concerned there is no India specific design office in USA in M/s PRL Inc., USA. Since, 2010 we are designing the traction system to fulfill the requirement of Indian Railways. However, If we feel any difficulty as need guidance then we take support from the USA technical team. Our designs/inputs are utilized by both the companies i.e. M/s PRIPL, India as well as M/s PRL Inc., USA.
xxxx xxxx xxxx
Q9. From the job profile which you explained it seems that if no new tender is floated by Indian Railway or non new tender is granted to M/s PRIPL for some time or even if a tender is granted to M/s PRlPL but the required specifications are not changed then you have nothing to do. Please put some light over it.
Ans. In case the new tender is granted to M/s PRL Inc., USA or M/s PRIPL, India without any change in specification of the AC-AC traction system, there are still some adjustment to be made in design. We as engineering team at this premises i.e. M/s PRIPL comprise seven (7) engineers and not only work for India specific projects/designs but also we are a part of the global team of M/s PRL Inc. and as and when asked by the USA team we also work for global designs. Our primary task is India specific but we also work for design of AC-AC traction system as well as locomotives of the global tenders of M/s PRL Inc. USA.
Q10.Please state for which global projects/tenders of M/s PRL lnc., USA you or your team have worked till date?
Ans. I have worked for orders of following countries on behalf of M/s PRL Inc., USA-
Country
Order No.
Year
Congo
20118584
2011 to 2013
Botswana
20138952
2015-2016
Tanzania
20138903
2013 to 2015
Bangladesh
20159278
Currently

As far as the full team is concerned I am not aware about the exact details as everyone has expertise in different field but others have also worked for global contracts of M/s PRL Inc., USA.
Q11. Who allocate you the work for design of the component/Locomotive of foreign/global tendered how the same is communicated to you? How you submit your work to the foreign team?
Ans. The designwork is allocated by M/s PRL Inc., USA and the same is communicated through e-mail from USA. A release note is provided by e-mail in which the work allocated to me. For every such project a project head is made in USA in M/s PRL Inc. Who co-ordinates such projects and we report to him. All the team members work on common platform/ software which is accessible by all members and team Head as well. The work is automatically submitted on that platform
xxxx xxxx xxxx
Q14.When did you last work on any Indian Contract/Project?
Ans. l have not worked on any Indian project for last 4-5 years. However, at times I have given suggestions to my other colleagues working on Indian projects.
Q15. Who does your evaluation/appraisal in respect of the work done by you?
Ans. As far as annual appraisal of my work is concerned, the discipline, behavior etc. are appraised by Sh. Anand Chidambram, M. D. in M/s PRIPL but the appraisal of my technical performance is done by Mr. Dave Babnic of M/s PRL Inc., USA.
28. The statement made by Mr. Potnuru is extracted hereunder:
Q4. Please tell about Directors in EMD India and to whom they report?
Ans. Sir, There are 4 Directors in EMD India. Out of which 2 are foreign directors.
i. Sh. Balakrishnan Chindambram- Managing Director-
He reports to Mr. John Nuwman, Vice-president of EMD USA.
ii. Sh. Phaneendra Potnuru- Director Finance-
He reports to Mr. Balakrishnan Chidambram (MD India) and Mr. Ryan Vickers, International Finance Controller of EMD Inc., USA.
iii. Mr. Paul Denton, represents to EMD Inc., USA & he reports to Mr. Martin Haycraft, Head of EMD Group which also includes EMD Inc., USA & EMD India
iv. Mr. Martina Haycraft, EMD Group Head- Overall Head.
Q5. Please give details of Sales products by EMD Inc. USA in India and to whom, this sales has been made?
Ans. Sir, Sales products of EMD Inc. USA are followings:-
Locomotive components, Power assembly, Turbocharger, Cylinder Head, Liner, Piston rings, Gas Kits, Fuel Motor Pumps, Injectors etc.
These sales are 95% made to Diesel Locomotive works (DLW) Varanasi and 5% sales are made to other Indian Railways Centres.
xxxx xxxx xxxx
Q7. Please explain the work, functions of EMD India office?
Ans. Sir, work-functions of EMD India office are –
– AC-AC System supply to DLW, Varanasi directly.
-Manufacturing of AC-AC System.
-AMC Service regarding AC-AC System directly to DLW Varanasi & Railway sheds.
Sir, we also work for EMD USA, which are following:-
-Tender clarification to EMD, USA.
-Technical clarification.
-Tender Support-follow up-paperwork clearance.
-Purchase order procurement.
-Documents to agents.
-Warranty Support & Warranty claim.
-Tracking of sales to DLW.
-Product design updation- upgradation and Engineering.
-Payment follow up and its collection.
-DLW and Indian Railways says that we cannot communicate to EMD USA. So we provide communication to DLW & Indian Railways we communicate on behalf of EMD USA with them.
-Information Technology Services, etc.
Q.8 We are showing you a list of employees. Their designations and their reportings of EMD Noida in which there are some foreign persons to whom these employees are reporting. Who are these foreign persons, to which company they are relating?
Ans. Sir, These persons are from EMD Inc. USA to whom there employees of EMD India are reporting.
29. On the basis of the aforesaid, the first respondent proceeded to hold that it was evident that the petitioner had a virtual projection in India in the form of the wholly owned subsidiary and whose activities could neither be viewed as being preparatory nor auxiliary. It was on the aforesaid basis that the first respondent proceeded to hold that the petitioner had a Fixed Place PE/Service PE/ DAPE. Ultimately and upon taking into consideration the statements as well as the material which was gathered prior to and post the survey which was conducted, the first respondent came to the following basic conclusions:-
III. Brief appraisal of documents found during the survey & statements recorded :
a. Office of EMD Locomotive Technologies Pvt. Ltd. is at the disposal of EMD Inc. USA for all its activities in India including sales to DLW (Diesel Locomotive Works), Varanasi of Indian Railways. In fact, during the course of survey u/s. 133A of I.T. Act. 1961 at the office premises at Varanasi, the Rubber stamp of EMD Inc. USA (PRL Inc. USA) was found which was used as mark of identity in the statement on oath of Sales Executive of the Indian Co.
b. M/s EMD Locomotive Technologies Pvt. Ltd. was authorized to take all decisions on the tenders and performed all actions w.r.t sales to DLW by EMD Inc., USA i.e. all functions relating to tenders like submission, follow-up for release of purchase orders, acceptance of purchase order, freight forwarding, tracking of delivery to DLW, follow-up of payments on behalf of EMD Inc. USA. Further, EMD India is not doing similar activities for any other entity, whether Indian or foreign.
c. Key Officers numbering to around 13, of M/s. EMD Locomotive Technology Pvt. Ltd., an Indian entity like Managing Director, Finance Director, Head of Tech. Services & Sales Executive directly reports to M/s PRL Inc. In fact, the Finance Director of Indian Co. who was working as Business Support Manager in M/s Caterpillar Inc., USA which is the ultimate holding company of the group Cos has come on deputation basis to M/s EMD L.T. Pvt. Ltd. Further, as per organization chart of the Indian Co., there are around 13 Officers of EMD Inc. USA or other intermediary holding Cos. of the group who have authority to approve transactions of the Indian entity.
d. M/s. EMD Locomotive Technology Pvt. Ltd., INDIA has four directors out of which two are foreign directors namely Mr. Martin Haycraft (Overall EMD Group Head) and Mr. Paul Denton (who represents to EMD Inc. USA and reports to Mr. Martin Haycraft-Head of EMD Group). Rest two are Indian directors namely Mr. Balakrishnan Chidambaram (who reports to Mr. John Nuwman, Vice-President of EMD Inc. USA) and Mr. PhaneendraPotnuru (who reports to Mr. Balakrishnan Chidambaram and also to Mr. Ryan Vickers, International Finance Controller of EMD Inc. USA).
e. Salient points from the statement of Mr. Phaneendra Kumar Potnuru, Finance Director of M/s. EMD Locomotive Technology Pvt. Ltd., Noida are:
> Products of EMD Inc. USA are Locomotive components, Power assembly, Turbo charger, Cylinder head, Liner, Piston rings, Gas kits, Fuel Motor Pumps, Injectors, etc., 95% of which are to M/s Diesel Locomotive Works, Varanasi and rest 5% are to other Indian Railway Centers.
> M/s. EMD Locomotive Technology Pvt. Ltd. also work for EMD Inc. USA as under:
? Providing tender information-Assistance regarding tenders from Indian Railways.
? Tender support-follow up-paper work clearance,
? Procurement of Purchase Orders,
? Tracking of Sales to Diesel Locomotive Works-Varanasi,
? Payments collection and its follow up.
? Communication on behalf of EMD Inc. USA with DLW, Varanasi,
? Warranty claim and support, etc.
f. As per Marketing and Engineering Services Agreement dated 1-1-2011 between EMD Locomotive Technology Pvt. Ltd. India (Service Provider) and Electro Motive Diesel Inc. USA (Service Recipient), listing out various services to be provided by service provider like Marketing Support, Engineering Support, Service Support, Warehousing. Assembly and Sourcing. As per the First Amendment to this agreement warranty service on the sales effected by EMD Inc. USA to DLW of Indian Railways have been assigned. to the Indian entity Co. viz. M/s EMD L.T. P. Ltd. which includes organizing all support activities, logging of warranty claims, performing joint inspections/investigations, etc. As per Second Amendment to this agreement, overseeing Customs brokerage activities, Managing Customs & Trade related compliance matters, managing inventory, transportation & shipping functions relating to the sales effected by EMD Inc. USA to DLW, have also been assigned to the Indian Co. Thus, Indian Company’s activities cannot be termed as preparatory or auxiliary in nature.
g. Mr. Jitendra Pratap Singh, Sales Executive of M/s. EMD Locomotive Technology Pvt. Ltd., at Varanasi office has stated in his statement that this office also works for EMD Inc. USA. Before 2018, all responsibility regarding decision making of fixation of goods price/unit price of sales goods to DLW-Varanasi from EMD Inc. USA was being made by EMD Locomotive Technology Pvt. Ltd., INDIA. Print outs of Emails relating to procurements of purchase orders, correction-modification-rejection in purchase orders, delivery of goods/units, bill of lading, outstanding payments, sales and purchase of goods, etc. directions given by EMD Inc. USA to EMD Locomotive Technology Pvt. Ltd. India, were found & taken.
h. Expatriates like senior officers of EMD Inc., USA visited India regularly for holding discussions with officials of Diesel Locomotive Works, Varanasi of Indian Railways w.r.t sales effected by the said foreign company and for such activities the office & officials of Indian entity viz. M/s EMD L.T. P. Lad was fully at the disposal of the foreign company. This conclusively establishes that the Non-Resident Company viz. Mis EMD Inc., USA was doing sales activities in India through the Indian Co. viz. M/s EMD L.T. P. Ltd. which was providing its office premises for the foreign company and also acting as a dependent agent by providing all kinds of services prior to, during and also post sales. Foreign Co. had full control of the activities of Indian Co., through its key officers who were sent on deputation to the Indian Co. or Officers of Indian Co. made reportable to the Officers of the foreign company.
30. On a consideration of the above, the first respondent held as follows:-
IV. Conclusion:
a) On the basis of evidences collected & statements recorded during the course of Survey proceedings, which are discussed at length & detail herein above, it is quite evident that the Non-Resident Company M/s Electro Motive Diesel Inc. USA (now known as M/s Progress Rail Locomotive Inc. USA) has virtual projection in India, in the form of M/s EMD Locomotive Technologies Pvt. Ltd (Now known as M/s Progress Rail Innovation Pvt. Ltd.), whose activities are not merely preparatory or auxiliary w.r.t the said Non- Resident Company’s business in India especially with Indian Railways.
b) The conclusion at ‘a’ above is in line with ratio decidendi of Hon’ble Supreme Court’s judgment dated 24-04-2017 in the case of Formula One World Championship Vs. CIT (IT)-3, Delhi [reported in 394 ITR 80/295 CTR 12/248 Taxman 192 (SC)) and Hon’ble Andhra Pradesh High Court’s judgment dated 17-06-1983 in the case of CIT Vs. Vishakhapatnam Port Trust [reported in 114 ITR 146/38 CTR 1/15 Taxman 72 (AP)]
c) Therefore, the Non-Resident Company M/s Electro Motive Diesel Inc. USA (now known as M/s Progress Rail Locomotive Inc. USA) has a PE in India (Fixed Place PE/Service PE/Dependent Agent PE) in terms of Article 5 of India-USA DTAA and income attributable to this PE based on the said Non-Resident Co.’s sales in India is taxable in the hands of such PE.
d) Reason to believe that income has escaped assessment necessitating initiation of action u/s. 147/148 of the I.T. Act, 1961
As sales of the said Non-Resident Co. in India for the years 2011 & 2012 is Rs. 832.10 Crores & Rs. 1028.50 Crores, Sales of the said Co. for the period 1-4-2011 to 31-3-2012 relevant for A.Y. 2012-13 will be part of sales of the years 2011 (1-4-2011 to 31-12-2011) & 2012 (1-1-2012 to 31-3-2012) and considering the existence of PE of the said Non-Resident Co. in India, I have concrete reasons to believe that income exceeding Rs. 1 Lakh have escaped assessment for the A.Y. 2012-13 in the hands of the said Non- Resident Co. viz. M/s Electro Motive Diesel Inc. (now known as Progress Rail Locomotive Inc.), USA, especially as no Return of Income has ever been filed by the said Non-Resident Co. in India.
Hence, for initiating proceedings u/s 147/148 sanction of the Commissioner of Income Tax is hereby sought in terms of Section 151 of the I.T. Act, 1961.

F. THE CHALLENGE OF PROGRESS RAIL LOCOMOTIVE INC. CONTD.
31. Assailing the assumption of jurisdiction by the first respondent, Mr. Datar, learned senior counsel submitted that the first respondent had clearly erred in proceeding on the basis that the Noida factory constituted a Fixed Place PE of the petitioner. According to learned senior counsel, the Noida premises could have by no stretch of imagination be considered to be a virtual projection of the holding company. According to Mr. Datar, a Fixed Place PE in terms of Article 5(1) of the India-USA DTAA would come into existence either where an entity has a factory, a branch or other place in India through which its core activities are carried out. Mr. Datar submitted that the impugned notices and the reasons for initiating action under Sections 147/148 nowhere hold that any particular part of the Noida or the Varanasi establishment had been placed at the exclusive disposal of the petitioner and which, according to him has been consistently recognised as being the key element insofar as a Fixed Place PE is concerned.
32. It was his submission that even if the material which is relied upon and the various assumptions derived therefrom are accepted to be correct, they would clearly not constitute evidence of the core business activity of the petitioner being carried on at Noida or Varanasi. Mr. Datar laid emphasis on the fact that all supplies to Indian Railways are made by the petitioner directly. Learned senior counsel in this regard drew our attention to the various emails which form part of Annexure 8 of a compilation which was tendered in Court during oral submissions and in terms of which quantity and price issues were approved by the petitioner, and thereby establishing that the Indian subsidiary played no role whatsoever in relation to those activities. It was also highlighted by learned senior counsel that the core activities or business of the petitioner are not even carried out in the factory at Noida or in the office at Varanasi, and this, more so, since the products manufactured and supplied by the petitioner and the subsidiary are different. In view of the above, it was Mr. Datars submission that the view taken by the first respondent on Fixed Place PE is wholly erroneous and untenable.
33. It was Mr. Datars contention that the argument based on Article 5(2)(l)(ii) of the DTAA is equally misconceived since it was not even the first respondents case that the petitioner was discharging a service within India for a related enterprise. It was asserted that the first respondent has not based the impugned action on any material which may have established or indicated any principal function that the Indian subsidiary may have performed or discharged in relation to the execution of contracts with the Indian Railways. Mr. Datar reiterated the undisputed fact of all products having been directly supplied to the Indian Railways by the petitioner in the relevant AYs, namely, AYs 2012-13 till 2018-19.
34. Mr. Datar then questioned the opinion formed by the first respondent on the aspect of DAPE. It was contended that the factories of the Indian subsidiary, PRIPL, manufacture a completely different range of products and that the petitioner has no control or oversight over those factories or offices. It was then contended that a subsidiary which merely renders back office or technical support would not be liable to be viewed as a PE, bearing in mind the provisions contained in Article 5(3)(e) of the India-USA DTAA. Mr. Datar submitted that the aforesaid position stands settled in light of the decision of the Supreme Court in Director of Income Tax (International Taxation), Mumbai vs. Morgan Stanley & Co. Inc.19. Learned senior counsel contended that in Morgan Stanley, the Supreme Court had clearly enunciated the legal position with respect to preparatory or auxiliary services and consequently those principles are clearly attracted to the facts of the present case. It was also highlighted by Mr. Datar that the petitioner exercises no lien on the employees of the Indian subsidiary – PRIPL. All of the aforesaid factors, according to learned senior counsel, when considered cumulatively would lead one to the irresistible conclusion that no DAPE could be said to exist in India.
35. Proceeding further along these lines, Mr. Datar drew our attention to the judgments rendered by the Supreme Court in Director of Income Tax-II (International Taxation) New Delhi & Anr. vs. Samsung Heavy Industries Company Limited20 and Assistant Director of Income Tax I, New Delhi vs. E-Funds IT Solution Inc.21 It was his submission that Samsung Heavy Industries was a binding verdict for the proposition that a liaison company would not amount to a Fixed Place PE. As per Mr. Datar, Samsung Heavy Industries had also clearly identified the fundamental premise pertaining to the PE question being the existence of an establishment through which the business of an enterprise is wholly or partly carried out. Similarly, in E-Funds IT Solutions Inc., Mr. Datar submitted, the Supreme Court had clearly held that the mere existence of a wholly owned subsidiary in one of the Contracting States would not ipso facto amount to an assumption of a PE having come into existence and which is also evident from a plain reding of Article 5(6) of the India-USA DTAA. As in E-Funds IT Solutions Inc., Mr. Datar submitted that here too, the various services and functions performed by the Indian subsidiary could have by no stretch of imagination been construed as extending beyond the performance of back office services.
36. Mr. Datar submitted that insofar as interrelated transactions were concerned, those were conducted at arms length and had also been independently assessed and examined in transfer pricing studies. The petitioner had in this regard also placed reliance upon the observations as appearing in the TPOs report dated 18 October 2016 and relevant parts whereof have been extracted hereinabove. It was Mr. Datars submission that the services performed by the Indian subsidiary were identical to those which were noticed by the Supreme Court in E-Funds IT Solutions Inc., and thus the first respondent has illegally assumed jurisdiction by invoking Sections 147/148 of the Act.
37. Mr. Datar then questioned the impugned notices on the ground that a reading thereof would establish that no prima facie view was either formed or reasons recorded in support of the charge of income having escaped assessment. It was his contention that the entire action was based solely on a survey carried out in the factory and office premises of the Indian subsidiary located at Noida and Varanasi respectively. As per Mr. Datar, the first respondent has not even expressed a prima facie view with respect to the petitioner having a PE in India and consequently a Section 148 action could have at best only been issued by the jurisdictional AO, namely, the fourth respondent.
38. Mr. Datar then questioned the fairness of the action impugned on the ground that the statements have been selectively extracted and taken into consideration in order to initiate reassessment proceedings against the petitioner. It was his submission that none of the complete statements have been noticed or holistically examined prior to the formation of opinion. It was also submitted that the partial statements which have been extracted in the reasons to believe for initiating action under Sections 147/148 of the Act would also not sustain the reassessment action as initiated. He had in this regard referred to the following material which had been tendered separately in Court during the course of his oral submissions:-
(a) Emails exchanged between the Petitioners employees and PRIPLs employees regarding furnishing a bank guarantee to DLW for supplying goods to DLW;
(b) Letters exchanged between the petitioner and the Indian Railways regarding delivery of products to DLW, Varanasi by the petitioner;
(c) Copies of purchase orders directly raised by the Indian Railways in favour of the petitioner;
(d) Cost Audit Report of the Indian subsidiary PRIPL for FY 2017-18;
(e) Financial Statements of the Indian subsidiary PRIPL for FY 2021-22.
39. Without prejudice to the aforesaid submissions, Mr. Datar, on instructions, stated that even if it were to be assumed for the sake of argument that the Indian subsidiary is a PE of the petitioner, since its registered office is in New Delhi, it would be the appropriate Assessing Officer22 in the Delhi jurisdiction who alone would have the jurisdiction to initiate reassessment proceedings under Section 148 of the Act.
40. Mr. Datar then drew our attention to an opinion rendered by the Authority for Advanced Ruling in In re., Speciality Magazines P. Ltd23, and more particularly to the following passages of that decision:
26. .. The terms “wholly” and “almost wholly” are not technical terms or terms of art. They must receive their ordinary meaning as understood by English speaking people. The word “wholly” means entirely, completely, fully, totally ; “almost wholly” would mean very near to wholly, a little less than whole. In terms of percentage “almost wholly” would mean anything less than 90 per cent. It is shown that though SMPL has other clients, the fact remains that the activities of SMPL for TENL yield 75 per cent, to 80 per cent, of its income and income from other clients is between 22 per cent, to 25 percent., so it cannot be said that the activities of the SMPL are carried out wholly or almost wholly for TENL. It follows that SMPL does not fall in the second part of para. 5 of article 5 of the Treaty.
41. The said decision was cited by Mr. Datar in the context of the phrase wholly or almost wholly for the enterprise as occurring in Article 5(4)(c) of the India-USA DTAA and to therefore contend that the activities of the Indian subsidiary could not be said to fall within the ambit of that provision. In this backdrop, our attention was also drawn to the following chart which sets out details of the income derived by the Indian subsidiary from transactions with the petitioner between FYs 2011-12 to 2017-18 and which is extracted hereinbelow:-

S.No

Service Income received
from US Co.
Other
income
Total income

Percentage of total income received from US Co.
1.
2011-12

9,832,370

3,760,831

13,593,201

72.33%

2.
2012-13
222,314,720

200,160,033
422,474,753
52.62%
3.
2013-14
241,513,441
2,436,970,440
2,678,483,881
9.02%

4.
2014-15
325,496,881

1,732,056,593
2,057,553,474

15.82%

5.
2015-16
290,187,274

1,111,341,569
1,401,528,843
20.71%

6.
2016-17
221,431,732

2,040,244,440
2,261,676,172

9.79%

7.
2017-18
157,000,000

2,507,000,000
2,664,000,000

5.89%

42. According to Mr. Datar, the aforesaid chart would establish the minuscule percentage of income which the Indian subsidiary earned from transactions entered into with the petitioner when compared to its total income, and all of which would establish that it was less than 75%, a threshold which was recognized in the decision in Speciality Magazines. For this reason also, according to Mr. Datar, the opinion as formed by the first respondent is clearly rendered unsustainable and the action for reassessment liable to be quashed.
43. While closing submissions, Mr. Datar also relied upon the decision of the Supreme Court in Union of India vs. UAE Exchange Centre24 and had also placed for our consideration a comparative chart in support of his submission that the said judgment along with the decision in Morgan Stanley & Co. came to be rendered in similar factual scenarios. The commonality of the factual features in the context of which those judgments were rendered was highlighted by way of the following comparative table:
Particulars

Union of India vs. UAE Exchange Centre
(2020) 425 ITR 30 (SC)

DIT vs. Morgan Stanley and Co. (2007) 292 ITR 416 (SC)

Progress Rail Locomotive Inc.

Applicable DTAA

India-UAE DTAA

India-USA DTAA

India-USA DTAA
Article 5(3) of DTAA provides that- notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include the maintenance of a fixed place of business solely for the purpose of other activities which have a “preparatory or auxiliary character”, for the enterprise (under Article 5(3)(e) of DTAA).
Main business activities of the respective Assessee company

Providing remittance services for transfer of monies from the UAE to various places in India.

Providing financial advisory services, corporate lending and underwriting.
Providers of rolling stock and infrastructure solutions and technologies for global rail securities customers.

Back office support services, liaison office – held to be activities which have ‘preparatory or auxiliary character’ – thus, the Indian Subsidiary/Office providing these activities cannot be treated as a “PE” of the foreign company [Article 5(3)(e)]
Ancillary Services provided by the Indian Office/Subsidiary of the respective Assessee company to the Assessee Company.
Indian company operated a liaison of the UAE Exchange Centre in India – carried out activities like dispensing the remittances to beneficiaries in India, downloading of information from the main server of the parent company in respect of transfer of monies and printing and preparing cheques/drafts and sending the same to the beneficiaries in India.

The Indian Subsidiary was providing support services like – supporting the front office functions of parent company in fixed income and equity research, providing IT enabled services such as data processing support