2014 (3) TMI 1110 - AT - Income Tax

Foreign Company Not Liable for Permanent Establishment Tax in India

The ITAT upheld the non-existence of a Permanent Establishment (PE) for a foreign company in India under the India-Germany DTAA. Income was held to be ... PE in India - assessee has a business connection in India u/s.9(1)(i) - income deemed to accrue or arise in India u/s.9(1)(i) - Held that:- Tribunal in assessee’s own case for A.Y. 2008-09 [2014 (4) TMI 529 - ITAT PUNE] held that the assessee did not have any PE in India, much less a PE to which subject royalties and fees for technical services could be attributed. In terms of Indian-German DTAA, India does not have right to tax these receipts as business profit under Article 7. In the light of above finding that no revenue earned by the assessee could be said to be attributable to PE, even if one was to come to the conclusion that a PE existed, no taxability could arise under Article 7. The assessee has offered the royalties and fees for technical services for taxability in India under Article 12A and to that extent, admitted tax liability exists. This approach of the Assessing Officer was rejected by the CIT(A) in A.Y. 2006-07 for the reasons discussed above. Accordingly, the issue in ground No.1 is allowed Taxability of payment received by the assessee from EIPL on account of project “MOVE” - Held that:- The Ld.CIT(A) has not gone into the details of the terms of the agreement. It is true that some mark up is there which has described as administrative surcharge to the extent of 3%. Prima-facie, it appears that the project “MOVE” undertaken by the assessee company is not as a business activity but to support the group companies worldwide to improve their efficiency. In our opinion, this issue needs fresh adjudication. We, therefore, consider it fit to restore the issue to the file of the Ld.CIT(A) for Denovo adjudication with direction that he should examine the contention of the assessee in the light of the agreement between the assessee as a pool leader and its other group companies as Pool members. Interest charged u/s.234B - Held that:- We with the consent of both the parties remit the issue of charging of interest u/s.234B to the file of the Ld.CIT(A) for fresh adjudication. Issues Involved:1. Existence of Permanent Establishment (PE) in India.2. Taxability under Double Taxation Avoidance Agreement (DTAA).3. Attribution of income to PE.4. Taxability of reimbursement of expenses under Project MOVE.5. Applicability of interest under Section 234B.Detailed Analysis:1. Existence of Permanent Establishment (PE) in India:The primary issue revolves around whether the assessee, a foreign company, had a PE in India through its wholly-owned subsidiaries (WOS). The Assessing Officer (AO) argued that the Indian subsidiaries constituted a PE due to the control and management exerted by the foreign company through email directions. The CIT(A) and ITAT, however, found that the Indian subsidiaries did not constitute a PE under Article 5 of the India-Germany DTAA. The ITAT emphasized that the Indian subsidiaries operated independently, and the foreign company's involvement was limited to providing guidance, not active supervision or management. Consequently, the business activities of the Indian subsidiaries were not deemed to be carried out by the foreign enterprise, thus negating the existence of a PE.2. Taxability under Double Taxation Avoidance Agreement (DTAA):The AO contended that the income received by the foreign company should be taxed under Article 7 of the DTAA as business profits, rather than under Articles 11 and 12, which deal with royalties and fees for technical services. The CIT(A) and ITAT upheld that the DTAA serves as an alternate taxation regime, not an exemption regime. It was concluded that the income in question, being royalties and fees for technical services, should be taxed under Article 12 of the DTAA at a rate of 10%, as opposed to the 20% rate proposed by the AO under Section 44D read with Section 115A of the Income Tax Act.3. Attribution of Income to PE:The AO argued that even if a PE existed, the income received by the foreign company should be attributed to the PE and taxed accordingly. The CIT(A) and ITAT found that the income received by the foreign company had no direct economic nexus with the alleged PE. The services rendered by the foreign company were performed outside India, and the Indian subsidiaries' activities did not contribute to the foreign company's income. Therefore, the income could not be attributed to a PE in India, and the provisions of Article 7 and Section 44D read with Section 115A were not applicable.4. Taxability of Reimbursement of Expenses under Project MOVE:The foreign company claimed that the receipts from its Indian subsidiaries under Project MOVE were merely reimbursements of expenses and not taxable income. The AO rejected this claim, treating the receipts as income for technical services rendered. The CIT(A) upheld the AO's decision, stating that the agreement between the foreign company and its subsidiaries did not conclusively prove that the receipts were reimbursements. The ITAT, however, remitted the issue back to the CIT(A) for a fresh adjudication, directing a thorough examination of the agreement to determine the nature of the receipts.5. Applicability of Interest under Section 234B:The AO levied interest under Section 234B for shortfall in advance tax payments. The assessee argued that since the income was subject to TDS, there was no liability for advance tax. The CIT(A) and ITAT did not provide a conclusive decision on this matter. The ITAT remitted the issue back to the CIT(A) for fresh adjudication, considering the arguments and evidence presented by the assessee.Conclusion:The ITAT upheld the CIT(A)'s decision on the non-existence of a PE and the applicability of Article 12 of the DTAA for taxing royalties and fees for technical services. The issue of attribution of income to the PE and the taxability of Project MOVE receipts were remitted back to the CIT(A) for fresh adjudication. The applicability of interest under Section 234B was also remitted for reconsideration. The appeals filed by the Revenue were dismissed, and the cross objections and appeals by the assessee were allowed for statistical purposes.