2015 (3) TMI 968 - AT - Income Tax

Tribunal affirms India service PE status for LTIL with income attribution based on Revenue's practices.

The Tribunal upheld the classification of LTIL as a service Permanent Establishment (PE) of the assessee in India, with the Revenue's acceptance of this ... Service Permanent Establishment - Attribution of Business Profits to Permanent Establishment - Business profits under Article 7 of the DTAA - Finality of Tribunal findingService Permanent Establishment - Finality of Tribunal finding - LTIL constituted a service permanent establishment of the assessee in India and not additionally a fixed place, dependent agent or installation PE. - HELD THAT: - The Tribunal in its earlier order, recorded that the assessee supplied expatriates who assisted LTIL, those employees remained in India for more than 90 days and LTIL was individually and severally responsible for completion of the turnkey contracts; consequently the Tribunal held LTIL to be a service PE as per the DTAA. The assessee's miscellaneous application attacking that finding was dismissed and the Revenue did not challenge the limited finding that LTIL was a service PE (nor seek modification), thereby rendering the Tribunal's finding final. Having accepted the Tribunal's view in the first round and not agitated that finding before the High Court, the Department cannot now expand the nature of PE to include fixed place, dependent agent or installation PE; the CIT(A) was therefore justified in holding LTIL only as a service PE. [Paras 7, 8]LTIL is a service PE of the assessee in India; the Revenue's contention for additional categories of PE is rejected as untimely and contrary to the final Tribunal finding.Attribution of Business Profits to Permanent Establishment - Business profits under Article 7 of the DTAA - Income attributable to the Indian service PE was to be determined at the rate of 2.5% of the overseas entities' sales made in India. - HELD THAT: - Article 7 permits taxation only of so much of the profits as are directly or indirectly attributable to the permanent establishment. The AO had attributed 100% of receipts to the PE which was unsustainable because supply of hardware was carried out without involvement of the service PE and the PE's role related to services of installation, commissioning and testing. The Revenue itself, in related proceedings and survey assessments in 2007, had attributed net income to PEs at 2.5% of sales by overseas entities, a methodology that was accepted by the assessee at that time. In the absence of any alternative material or mechanism produced by the Revenue to attribute profits to the PE in this assessment year, the subsequent consistent departmental attribution at 2.5% furnished a reasonable basis for adoption. The CIT(A) therefore correctly applied the 2.5% rate for attribution to the Indian PE. [Paras 10, 11]Attribution of income to the Indian PE at 2.5% of the overseas entities' sales is upheld.Final Conclusion: The appeal is dismissed: the tribunal's finding that LTIL was a service PE is final and the attribution of income to that PE at 2.5% of sales is sustained. Issues:1. Whether LTIL constituted a service PE of the assessee in IndiaRs.2. How should the income be attributed to the Indian PERs.Analysis:I. SERVICE P.E.The Revenue contested the CIT(A)'s decision regarding LTIL's classification as a service PE of the assessee in India. The Tribunal's order from the first round established LTIL as a service PE based on various factors. The Tribunal dismissed the assessee's application against this classification, solidifying LTIL's status as a service PE. The Revenue did not challenge this classification before the High Court, implying acceptance of LTIL as a service PE. Therefore, the Tribunal's decision was final, and the Revenue's attempt to alter LTIL's classification was deemed untimely. Consequently, the CIT(A)'s determination that LTIL constituted only a service PE was upheld.II. ATTRIBUTION OF INCOMEThe AO attributed the entire transaction of hardware and software supply to the Indian PE, resulting in income computation at Rs. 92.26 crore. Business profits under the DTAA are taxed based on activities conducted through a permanent establishment in another contracting state. The AO's attribution of 100% of transactions to the PE was questioned. The sale of hardware was done without involvement of a service PE, making it illogical to attribute the entire sale transaction to the service PE. The Revenue's previous profit attribution of 2.5% of sales made by overseas entities in India was accepted without challenge. This established a basis for income attribution to the PE in India. As the CIT(A) followed this approach, the Tribunal saw no reason to intervene, leading to the dismissal of the appeal.In conclusion, the Tribunal upheld LTIL's classification as a service PE and endorsed the income attribution method based on the Revenue's previous practices. The appeal was dismissed accordingly.