2018 (12) TMI 1899 - AT - Income Tax

ITAT Mumbai: Assessee wins on PE issue & Treaty application. TDS credit & interest to be verified further.

The ITAT Mumbai Bench ruled in favor of the assessee in a case involving the interpretation of service agreement clauses, determination of Permanent ... Existence of Permanent Establishment/Business connection in India - Taxability of business Income earned in India, by company incorporated outside India - DTAA between India and Switzerland - HELD THAT:- As decided in own case [2015 (4) TMI 905 - ITAT MUMBAI] assessee does not have any business connection in India in the light of Explanation-2 to Section 9(1) of the Act. The assessee does not have PE in India. The facts on record show that there is neither Service PE nor Agency PE in the form of SESIPL. Considering the facts in totality in the light of the relevant provisions of the law and DTAA and the judicial decisions referred to herein above, we have no hesitation in setting aside the assessment order and accordingly we direct the AO not to treat the income of the assessee as taxable under the Act. - Decided against revenue. Non-granting of credit for tax deducted at source (TDS) as claimed in the revised return of income and non-computing of interest u/s 234B - HELD THAT:- Since these matters are factual and required verification on account of non-verification of the revised return of income as well as calculation of interest in accordance with law, therefore, we set aside the finding of the AO on these issues and restored of the matter afresh before the AO to decide the matter of controversy afresh by giving an opportunity of being heard to the assessee in accordance with law. Issues:1. Interpretation of service agreement clauses between Singapore Branch and Indian company.2. Determination of Permanent Establishment (PE) of the assessee in India.3. Application of Article 5 of India Swiss Treaty.4. Non-granting of TDS credit as claimed in revised return.5. Non-computation of interest u/s 234B of the Act.Issue 1 - Interpretation of Service Agreement Clauses:The appeal involved a dispute regarding the interpretation of service agreement clauses between the Singapore Branch of the assessee and an Indian company. The Hon'ble ITAT Mumbai Bench considered the clauses of the service agreement and relevant judicial decisions. It was noted that the subsidiary in India did not constitute a PE of the holding company. The decision in E-Funds IT Services case was referenced to establish that subsidiary presence did not create a PE. The Tribunal analyzed the business connection of the assessee in India under Section 9(1) and concluded that no business connection existed. The OECD commentary was also considered, leading to the finding that the Indian entity did not qualify as a PE. The Tribunal ruled in favor of the assessee on this issue.Issue 2 - Determination of Permanent Establishment:The Tribunal examined whether the Indian entity could be considered a PE of the assessee under Article 5 of the India Swiss Treaty. It was found that the conditions for a PE were not met as the employees of the Indian entity were not providing services to the assessee as if they were its employees. The specific exclusion of reinsurance under the Treaty was highlighted. The Tribunal referred to OECD commentary to support its decision that the Indian entity did not constitute a PE. The Tribunal relied on previous case law and concluded that the assessee did not have a taxable income under the Act, deciding in favor of the assessee.Issue 3 - Application of India Swiss Treaty Article 5:The Tribunal analyzed the provisions of Article 5 of the India Swiss Treaty to determine if the Indian entity could be deemed a PE of the assessee. It was established that the Indian entity did not meet the criteria outlined in the Treaty for constituting a PE. The Tribunal considered the specific exclusion of reinsurance activities under the Treaty and found that the Indian entity did not qualify as a PE. By applying relevant legal provisions and judicial decisions, the Tribunal ruled in favor of the assessee on this issue.Issue 4 & 5 - TDS Credit and Interest Computation:Regarding the non-granting of TDS credit and non-computation of interest u/s 234B, the Tribunal found these matters to be factual and requiring further verification. The AO's findings were set aside, and the matter was remanded for fresh consideration. The AO was directed to reevaluate the issues, granting the assessee an opportunity to present their case in accordance with the law. The appeal was partially allowed in favor of the assessee.In summary, the judgment by the ITAT Mumbai Bench addressed multiple issues related to the interpretation of service agreement clauses, determination of PE, application of the India Swiss Treaty, non-granting of TDS credit, and interest computation. The Tribunal ruled in favor of the assessee on the interpretation of service agreement clauses, determination of PE, and application of the Treaty. However, the issues related to TDS credit and interest computation were remanded for further verification and fresh consideration by the Assessing Officer.