2017 (5) TMI 1104 - AT - Income Tax

Dispute over Permanent Establishment & Taxability in India under DTAA

Consulting Engineers Corporation, C/o S. Ramanand Aiyar & Co Versus ADIT, Circle-1 (1), International Taxation, New Delhi

The case involved disputes over Permanent Establishment (PE) determination in India under the DTAA with the US, taxability of business profit without a ... P.E. in India - business profit accrued in India - India USA DTAA - whether the activities of Branch in India are only preparatory and auxiliary services rendered to Head Office in the US and consequently there is no PE? - Held that:- As in assessment years 2003-04, 2004-05 and 2006-07 [2014 (11) TMI 102 - ITAT DELHI ] it has throughout been held that the assessee is having a PE in India. Thus the assessee has a PE in India as per the provisions of Article 5(2)(b) and (c) of Indo-US DTAA. Therefore, ground Nos.1 to 6 are dismissed. Profits attributable to the branch in India - Held that:- In assessment year 2006-07, the Tribunal has directed the Assessing Officer to recompute the income of the assessee in the light of the decision of ITAT in the assessee’s own case for assessment year 2003-04 and 2004-05. We accordingly, set aside the impugned order and restore the matter to the file of the Assessing Officer with a direction to recompute the income of the assessee in the light of the decisions of the ITAT in the assessee’s own case for assessment years 2003-04, 2004-05 and 2006-07. Issues:1. Determination of Permanent Establishment (PE) in India under the Double Taxation Avoidance Agreement (DTAA) with the US.2. Taxability of business profit in India in the absence of a PE.3. Application of Section 92C of the Income Tax Act, 1961 to international transactions with an Associated Enterprise (AE).4. Dispute over the attribution of income to the Branch in India.5. Adjustment for functions performed, assets employed, working capital, and risks assumed.6. Charging of interest under Section 234B of the Income Tax Act.7. Assessment of the appellant's status as an individual versus a Foreign Company.Analysis:1. The primary issue in the case concerned the determination of a Permanent Establishment (PE) in India under the DTAA with the US. The appellant argued that as the activities of the Branch in India were preparatory and auxiliary, with no PE, no income should be taxed in India. However, based on previous assessments, it was established that the appellant had a PE in India, leading to the dismissal of grounds 1 to 6.2. Regarding the attribution of profits to the Branch in India, the Tribunal observed that the Indian branch contributed to development activities at lower costs, resulting in higher profits for the US Head office. The CIT(A) directed the AO to calculate the attributable profit at 50% of the figure arrived after applying the global profit rate of the US Head office. Consequently, the Tribunal directed the AO to recompute the income based on previous decisions for assessment years 2003-04, 2004-05, and 2006-07.3. The Department raised concerns about the comparables adopted by the TPO and the profit returned by the assessee exceeding the profit computable as per the directed formula. As the matter was restored to the AO for recomputation, the Department's grounds were allowed for statistical purposes.4. Grounds related to adjustment for functions performed, assets employed, working capital, and risks assumed were dismissed or not pressed. The appeal of the assessee was partly allowed, and that of the Department was allowed for statistical purposes. The order was pronounced on 05.05.2017 by the Tribunal.This detailed analysis covers the various legal issues addressed in the judgment, providing a comprehensive understanding of the Tribunal's decision in the case.