2005 (4) TMI 623 - AT - Income Tax

Tribunal rules no Permanent Establishment in India, business income not taxable

ROLLS ROYCE PL. Versus ASSISTANT DIRECTOR OF INCOME-TAX CIRCLE 2 (1)

The Tribunal upheld the validity of the assessment reopening under section 147 of the Income-tax Act, finding that the Assessing Officer had sufficient ... - Issues Involved:1. Validity of reopening of the assessment under section 147 of the Income-tax Act.2. Existence of a Permanent Establishment (PE) in India and the consequent taxability of income attributable to such PE.Issue-wise Detailed Analysis:1. Validity of Reopening of Assessment under Section 147:The appellant challenged the reopening of the assessment under section 147 of the Act. The appellant, a company incorporated in the UK, contended that the Assessing Officer (AO) did not have valid reasons to believe that income chargeable to tax had escaped assessment. The AO's reasons for reopening included information from Hindustan Aeronautics Ltd. (HAL) about a contract for the sale of 20 Jaguar aircraft and other spares, which the AO believed led to taxable income that had not been declared.The CIT(A) upheld the reopening, stating that the AO had reasonable belief based on proper information that income chargeable to tax had escaped assessment. The CIT(A) noted that the AO had information about the appellant supplying spare parts and accessories to HAL and other parties in India, which justified the issuance of notice under section 148.The Tribunal considered the rival submissions and concluded that the AO had sufficient information to form a prima facie belief that income chargeable to tax had escaped assessment. The Tribunal emphasized that at the time of reopening, the AO is not required to reach a final conclusion about the quantum of income that escaped assessment. The Tribunal found that the initiation of reassessment proceedings was valid and dismissed the first two grounds of the appellant.2. Existence of a Permanent Establishment (PE) in India:The appellant challenged the AO's conclusion that it had a business connection and a PE in India through Rolls Royce India Ltd. (RRIL), which would make its income attributable to such PE taxable in India. The AO had concluded that RRIL, acting on behalf of the appellant, constituted a dependent agent PE in India based on various meetings and activities performed by RRIL.The Tribunal examined the provisions of section 9 of the Income-tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the UK. Under Article 5(4) of the DTAA, a person acting on behalf of an enterprise of the other Contracting State is deemed to be a PE if they habitually exercise authority to negotiate and enter into contracts, maintain a stock of goods for delivery, or secure orders for the enterprise.The Tribunal found that RRIL's activities were limited to liaison services and did not include the authority to conclude contracts on behalf of the appellant. The Tribunal reviewed the minutes of meetings and concluded that RRIL did not have the necessary authority or habitually exercise such authority to negotiate or conclude contracts. The Tribunal also noted that RRIL's role was limited to providing information and organizing meetings, which did not constitute a PE under Article 5(4) of the DTAA.Additionally, the Tribunal considered the applicability of Article 5(2)(k) of the DTAA, which pertains to the furnishing of services. The Tribunal found that RRIL rendered services to the appellant, and it was not the case that the appellant rendered services in India. Therefore, RRIL could not be considered a PE of the appellant under Article 5(2)(k).The Tribunal concluded that the appellant did not have a PE in India, and consequently, its business income was not chargeable to tax in India. The Tribunal directed the deletion of the additions made by the AO.Conclusion:The appeal was partly allowed. The Tribunal upheld the validity of the reopening of the assessment under section 147 but concluded that the appellant did not have a PE in India, and therefore, its business income was not taxable in India. The other grounds of appeal regarding the quantum of amounts brought to tax were not adjudicated, and the appellant withdrew grounds related to the levy of interest under sections 234A and 234B of the Act.