2016 (2) TMI 705 - AT - Income Tax

Tribunal rules no Permanent Establishment in India, rejects tax on technical services.

The Tribunal allowed the appeal in part, ruling that the assessee did not have a Permanent Establishment (PE) in India. Consequently, the attribution of ... Permanent Establishment - Fixed Place Permanent Establishment - Preparatory and auxiliary activities - Attribution of business profits under Article 7 of DTAA - Fees for Technical Services - Taxability of fees for technical services - Interest under section 234B - Penalty under section 271(1)(c)Permanent Establishment - Fixed Place Permanent Establishment - Preparatory and auxiliary activities - The Liaison Office in India does not constitute a Fixed Place Permanent Establishment of the assessee. - HELD THAT: - The Tribunal examined the power of attorney and the RBI permission and found the powers in the power of attorney to be Liaison Office specific rather than granting unfettered authority to carry on core business or conclude contracts on behalf of the head office. The Assessing Officer's conclusion rested solely on his interpretation of the power of attorney and on alleged violations of RBI conditions; the Revenue produced no independent documentary evidence to rebut the voluminous records submitted by the assessee demonstrating that purchase orders, quotations and invoices were issued and executed by the head office. The Tribunal held that the AO may investigate and bring matters to RBI's notice, but it is beyond the AO's jurisdiction to adjudicate that the assessee filed false declarations before RBI; RBI had not found violation of its conditions. On the record, Revenue failed to demonstrate that the Liaison Office carried out income earning core activities amounting to a fixed place PE. Consequently ground no.1 is allowed. [Paras 11, 12]No Fixed Place Permanent Establishment in India; appeal allowed on this ground.Attribution of business profits under Article 7 of DTAA - Attribution of business profits to an alleged PE under Article 7 of the India-Japan DTAA was not adjudicated. - HELD THAT: - The question of attribution under Article 7 was consequential upon the existence of a PE. Having held that the assessee has no PE in India, the Tribunal did not decide the merits of the attribution issue and therefore did not adjudicate ground no.3. [Paras 13]Ground on attribution under Article 7 not adjudicated as it is consequential to the finding of no PE.Fees for Technical Services - Taxability of fees for technical services - The issue of taxability of Fees for Technical Services (FTS) is remitted to the Assessing Officer for fresh adjudication de novo; the AO's finding attributing FTS to the alleged PE is vacated. - HELD THAT: - The assessee conceded that the entire FTS receipts were taxable and sought relief under the DTAA rates; the Tribunal set aside the AO's assessment on FTS to the file of the AO for de novo consideration in accordance with law. In view of the finding that there is no PE, the Tribunal vacated the AO's conclusion that the FTS was attributable to a PE. The AO is directed to consider the assessee's DTAA claim and all contentions afresh. [Paras 14]FTS assessment remitted to AO for fresh adjudication de novo; AO's attribution of FTS to the alleged PE vacated.Interest under section 234B - Levy of interest under section 234B of the Act is set aside in favour of the assessee; objections to levies under sections 234A and 234C were dismissed. - HELD THAT: - The assessee contested only interest under section 234B before the Tribunal. Applying the relevant decisions of the jurisdictional High Court, the Tribunal allowed the assessee's contention as to section 234B. Grounds contesting interest under sections 234A and 234C were dismissed as not pressed or not argued. [Paras 16]Interest under section 234B disallowed in favour of assessee; objections to 234A and 234C dismissed.Penalty under section 271(1)(c) - The ground challenging initiation of penalty proceedings under section 271(1)(c) was dismissed as not pressed. - HELD THAT: - The assessee did not press its ground against initiation of penalty proceedings; the Tribunal therefore dismissed this ground without adjudication on merits. [Paras 17]Ground against initiation of penalty under section 271(1)(c) dismissed as not pressed.Final Conclusion: The appeal is allowed in part: the Tribunal holds that the Liaison Office does not constitute a Fixed Place Permanent Establishment in India (allowing the principal challenge), the attribution issue under Article 7 is not adjudicated as consequential, Fees for Technical Services assessment is remitted to the Assessing Officer for fresh adjudication de novo (and the AO's attribution of FTS to the alleged PE is vacated), interest under section 234B is set aside in favour of the assessee while objections to 234A and 234C are dismissed, and the challenge to penalty proceedings under section 271(1)(c) is dismissed as not pressed. Issues Involved:1. Permanent Establishment (PE) of the assessee in India.2. Attribution of business profits to the PE in India under Article 7 of the India-Japan DTAA.3. Taxability of fees for technical services under section 44DA of the Act.4. Attribution of profits in line with transfer pricing principles.5. Levy of interest under sections 234A, 234B, and 234C of the Act.6. Initiation of penalty proceedings under section 271(1)(c) of the Act.Detailed Analysis:1. Permanent Establishment (PE) of the Assessee in India:The core issue was whether the Liaison Office (LO) of the assessee constituted a Permanent Establishment (PE) in India. The assessee argued that the LO was only for preparatory/auxiliary activities and not for core business activities. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) based their conclusion on the interpretation of the Power of Attorney granted to the LO's representative. The Tribunal found that the powers given in the Power of Attorney were LO-specific and did not authorize core business activities. The AO did not provide any evidence to contradict the assessee's claim. Therefore, the Tribunal concluded that the assessee did not have a PE in India and allowed ground no.1 in favor of the assessee.2. Attribution of Business Profits to the PE in India:Since the Tribunal concluded that the assessee did not have a PE in India, the issue of attributing business profits to the PE under Article 7 of the India-Japan DTAA became moot. Consequently, ground no.3 was not adjudicated as it was consequential to the finding on ground no.2.3. Taxability of Fees for Technical Services:The assessee conceded that the entire fees for technical services (FTS) amounting to Rs. 65.44 crores were taxable in India. The Tribunal set aside this issue to the AO for fresh adjudication in accordance with the law. The Tribunal also vacated the AO's finding that the FTS was attributable to the PE, given the conclusion that the assessee had no PE in India. Ground no.4(c) was dismissed as not pressed.4. Attribution of Profits in Line with Transfer Pricing Principles:The assessee did not make any submissions on this ground. Therefore, ground no.5 was dismissed as not pressed.5. Levy of Interest:The assessee argued only against the levy of interest under section 234B. The Tribunal adjudicated this issue in favor of the assessee by applying the decision of the Jurisdictional High Court in the case of DIT vs. Jacobs Civil Inc. and Director of Income Tax (International Taxation) vs. G.E. Packaged Power Inc. Ground no.6 against the levy of interest under sections 234A and 234C was dismissed.6. Initiation of Penalty Proceedings:The assessee did not press this ground. Therefore, ground no.7 was dismissed as not pressed.Conclusion:The appeal of the assessee was allowed in part. The Tribunal concluded that the assessee did not have a PE in India, thus negating the need to attribute business profits to a PE. The issue of taxability of FTS was set aside for fresh adjudication, and the levy of interest under section 234B was adjudicated in favor of the assessee. Other grounds were dismissed as not pressed.