2016 (7) TMI 698 - AT - Income Tax

US Company Prevails in Tax Dispute Over Permanent Establishment in India

The Deputy Director of Income Tax (International Taxation) – 4 (1), Mumbai Versus M/s Lubrizol Corporation USA, C/o Ford, Rhodes, Parks & Co.

The Tribunal ruled in favor of the assessee, a USA resident company, in a tax dispute concerning Permanent Establishment (PE) in India under the Indo-US ... PE in India - Indo-US Treaty - addition made being a profit margin of 5% of the sale made by the assessee in India - Held that:- As decided in assessee's own case for the assessment years 2004-05, 2005-06 & 2008- 09 the assessee did not have PE in India in the year’s under consideration in terms of Article 5(1),5(2),5(4) and 5(5) of the India-US treaty and the additions made by the AO to the income of the assessee being a profit margin of 5% on the sales made by the assessee were ordered to be deleted by the Tribunal. Respectfully following the afore-stated orders of co-ordinate benches of the Tribunal in the assessee’s own case , we hold that the assessee did not have not have PE in India in the year under consideration in terms of Article 5(1), 5(2), 5(4) & 5(5) of the Indo-US Treaty and the addition made by the A.O. being a profit margin of 5% of the sale made by the assessee in India is not sustainable - Decided in favour of assessee Interest u/s 234B is not leviable in the case of non-resident - Decided in favour of assessee Issues Involved:1. Determination of Permanent Establishment (PE) in India under Article 5 of the Indo-US Treaty.2. Taxability of profits earned by the assessee on sales made in India.3. Levy of interest under Section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Determination of Permanent Establishment (PE) in India:The primary issue was whether the assessee had a Permanent Establishment (PE) in India under Article 5 of the Indo-US Treaty. The assessee, a USA resident company engaged in manufacturing high-performance chemicals, argued that it did not have a PE in India as it did not have any fixed place of business or authority to conclude contracts in India. The assessee relied on prior Tribunal decisions in its favor, which held that the Indian subsidiary, LIL, did not constitute a PE since it did not have the authority to conclude contracts on behalf of the assessee and merely assisted in the sales process. The Tribunal upheld this view, reiterating that LIL’s activities did not create a PE under Article 5(1), 5(2), 5(4), or 5(5) of the Indo-US Treaty, as LIL was acting as an independent agent and the contracts were concluded outside India.2. Taxability of Profits Earned on Sales in India:The Revenue contended that the profits from sales made by the assessee in India should be taxed in India, proposing a profit margin of 5% on the sales made. The Tribunal, however, noted that the assessee's sales were concluded outside India, and LIL’s involvement was limited to marketing and support activities. The Tribunal referenced its previous rulings, which established that in the absence of a PE, the profits from such sales were not taxable in India. Consequently, the addition of Rs. 4,07,95,524 made by the AO was deleted.3. Levy of Interest under Section 234B:The Revenue also challenged the DRP’s decision that interest under Section 234B was not leviable on the non-resident assessee. The Tribunal referred to its earlier decisions and the Bombay High Court ruling in the case of DIT v. NGC Network Asia LLC, which held that when a duty was cast on the payer to deduct tax at source, and the payer failed to do so, no interest could be imposed on the assessee. The Tribunal upheld this view, ordering the deletion of interest levied under Section 234B.Conclusion:The Tribunal dismissed the Revenue’s appeal, affirming that the assessee did not have a PE in India under the Indo-US Treaty, thus the profits from sales made in India were not taxable in India. Additionally, the Tribunal upheld that interest under Section 234B was not leviable on the non-resident assessee. The decision was consistent with prior rulings in the assessee’s own case and relevant legal precedents.