2010 (5) TMI 683 - AT - Income Tax

UK company lacks Permanent Establishment in India, Tribunal remits taxability issue under India-UK DTAA for reconsideration

The Tribunal ruled that the UK-based company did not have a Permanent Establishment (PE) in India, overturning the lower authorities' decisions. ... Income deemed to accrue or arise in India - agency PE - nature of the business activities carried out by the assessee - whether assessee had a fixed place of business through which he was carrying out his business? - HELD THAT:- Undoubtedly, the consignment stock of the assessee was stored at specific physical locations but this storage was under control of the airlines and the assessee did not have any place at his disposal in the sense that he could carry out his business from that place. The existence of PE in a country cannot warrant or justify taxation of all the profits arising to a foreign enterprise in that country. The business with regard to that consignment is over when that consignment is given for standby purposes to the airline. It is thus clear that not only that the assessee did not have any right to use the location of consignment stock, such a location was also not used for the purposes of assessee’s business. There is also no projection of the assessee at this physical location in the sense that the business of the assessee is not carried out, or sought to be carried out or even projected, from these locations. When the physical locations at which consignment stock is kept do not project the assessee, it cannot be said that these locations constitute PE of the assessee. As a matter of fact, there is no sale involved in this transaction, and as such, there is no question of delivery for sale. In view of these discussions, it is clear that the revenue authorities have not been able to establish that the assessee had a PE in India. It is a settled position of law, as noted by the Special Bench of this Tribunal in the case of Motorola Inc. [2005 (6) TMI 226 - ITAT DELHI-A], that the onus is on the revenue to demonstrate that a PE of the foreign enterprise exists in India. That onus is not discharged. Having said that, we may also add that, in our considered view, the business model of the assessee-company is such that in the above arrangements, a PE in the source location does not come into existence. We are of the considered opinion that the assessee-company did not have any PE in India, and, accordingly, the entire income attributable to the India operations could not have been taxed in India. The grievances raised against quantification of income attributable to the PE, under article 7(1), are thus rendered infructuous. To that extent, we uphold the grievance of the assessee and vacate the orders of the authorities below. In the case before us, as evident from a plain reading of the consideration clause in the agreement between the parties, consideration for use of replacement components is distinct and separate and the same can perhaps be neatly segregated from the overall receipts. In this view of the matter, non-taxability under article 7 will still mean that application of article 13 is to be considered and adjudicated upon. However, since this aspect of the matter has not been heard by any the authorities below, we deem it fit and proper to remit the matter to file of the CIT(A) for limited adjudication on this aspect of the matter. We are not inclined to uphold the orders of the authorities below on the issue of existence of the PE and for quantification of taxable income. The matter is, however, remitted to the file of the CIT(A) for adjudication on the question of taxability, if any, of consideration for use, or right to use, of industrial, scientific or commercial equipment contained in the payments made by the airlines to the assessee-company. We make it clear that our above observations should not influence the decision of the CIT(A) on merits of this issue, and that the CIT(A) will decide the matter in accordance with the law, by way of a speaking order and after giving due and fair opportunity of hearing to the parties. We direct so. In the result, the appeal is allowed for statistical purposes in the manner and in the terms indicated above. Issues Involved:1. Permanent Establishment (PE) in India.2. Quantification of income by applying 10 percent as the rate of profit.Issue-Wise Detailed Analysis:1. Permanent Establishment (PE) in India:The primary question was whether the assessee had a Permanent Establishment (PE) in India. The assessee, a UK-based company, provided spares and component support for aircraft to an Indian airline. The Assessing Officer (AO) argued that the consignment stock of the assessee stored at the airline's premises constituted a PE under Article 5 of the India-UK DTAA. The AO noted that the airline's staff acted as agents of the assessee, maintaining and delivering the stock, which led to the conclusion that the assessee had a fixed place of business in India. The CIT(A) upheld this view, stating that the stock's presence and the delivery of repaired parts amounted to sales, thus constituting a PE.The Tribunal, however, disagreed with this conclusion. It noted that the consignment stock was under the control of the airline, not the assessee, and the assessee did not have any right to use the location for its business. The Tribunal emphasized that for a PE to exist, the foreign enterprise must have a fixed place of business at its disposal, which was not the case here. The Tribunal also highlighted that the business model of the assessee did not project a PE in India, as the activities related to repairs and overhauling were conducted outside India. Therefore, the Tribunal concluded that the assessee did not have a PE in India.2. Quantification of Income by Applying 10 Percent as Rate of Profit:The second issue was the quantification of income attributable to the alleged PE in India. The AO had estimated 10 percent of the gross receipts as profits liable to be taxed in India, which was upheld by the CIT(A). However, since the Tribunal concluded that the assessee did not have a PE in India, the quantification of income attributable to a PE became infructuous.The Tribunal noted that even if there was no PE, the taxability of the consideration for the use or right to use the consignment stock should be examined under Article 13 of the India-UK DTAA. The Tribunal remitted the matter to the CIT(A) for limited adjudication on this aspect, directing the CIT(A) to consider the taxability of such consideration separately and issue a speaking order after providing due opportunity to the parties.Conclusion:The Tribunal allowed the appeal for statistical purposes, vacating the orders of the authorities below regarding the existence of a PE and the quantification of taxable income. The matter was remitted to the CIT(A) for adjudication on the taxability of the consideration for the use or right to use the consignment stock under Article 13 of the India-UK DTAA.