2023 (2) TMI 1107 - AT - Income Tax

ITAT Delhi: No Permanent Establishment under India-Japan DTAA

The Appellate Tribunal ITAT DELHI, in the judgment by SHRI G.S. PANNU and SHRI SAKTIJIT DEY, ruled in favor of the assessee. It held that the assessee did ... Permanent Establishment (PE) in India - Article 5 of Indian - Japan Double Taxation Avoidance Agreement (DTAA) - attribution of profit to the PE - assessee is a non-resident corporate entity incorporated in Japan - HELD THAT:- There cannot be any dispute that factually the impugned assessment year stands in identical footing to assessment years 2014-15 and 2015-16. [2022 (3) TMI 660 - ITAT DELHI] - This is further evident from the fact that, both, the AO and learned DRP have acknowledged that the factual position in the present assessment year is identical to the preceding assessment years. Thus, respectfully following the decision of the Coordinate Bench, as discussed above, we hold that the assessee had no PE in India in any form whatsoever. Therefore, the addition made by attributing a part of the income of the assessee to the alleged PE has to be deleted. Accordingly, we do so. Grounds are allowed. Levy of Surcharge and cess - to be computed over the rate of tax as per DTAA or not - HELD THAT:- We accept assessee’s contention that levy of surcharge and cess cannot exceed the tax rate of 10% as per India – Japan DTAA. Article 12 of India – Japan tax treaty provides that the tax to be charged on royalty and FTS shall not exceed 10% of the gross amount of royalty or FTS. Article 2 of the tax treaty defines tax in India as income tax including any surcharge thereon. Therefore, Article 12 read with Article 2 of the tax treaty makes it clear that the rate of tax at 10% would encompass surcharge and education cess as it is also in the nature of surcharge. Therefore, we hold that levy of surcharge and cess over and above the taxable rate of 10% on royalty and FTS is not permissible as per the treaty provisions. Decided in favour of assessee. Issues:1. Whether the assessee had a Permanent Establishment (PE) in India under Article 5 of Indian-Japan Double Taxation Avoidance Agreement (DTAA) and the consequent attribution of profit to the PE.2. Whether surcharge and cess can be levied over and above tax computed at the rate of 10% as per treaty provisions.Issue 1 - Permanent Establishment (PE):The assessee, a non-resident corporate entity from Japan, challenged the final assessment order concerning the assessment year 2017-18, focusing on whether it had a PE in India under the India-Japan DTAA. The Assessing Officer contended that the wholly owned subsidiary of the assessee in India constituted its PE, attributing 50% of certain income to the PE. The assessee objected before the Dispute Resolution Panel (DRP), which directed the Assessing Officer to verify the claim in line with Tribunal's orders. The Tribunal analyzed the issue by referring to previous assessment years and held that the assessee did not have a PE in India, as established in detailed observations regarding Fixed Place PE and Supervisory PE. Consequently, the addition made by attributing income to the alleged PE was deleted.Issue 2 - Surcharge and Cess:The second issue revolved around whether surcharge and cess could be levied beyond the 10% tax rate as per the India-Japan DTAA. The Tribunal accepted the assessee's argument that the levy of surcharge and cess exceeding the 10% tax rate was impermissible under the treaty provisions. Citing relevant provisions and supported by various judicial decisions, the Tribunal concluded that the tax rate of 10% encompassed surcharge and education cess. Therefore, the imposition of surcharge and cess over and above the 10% tax rate on royalty and Fee for Technical Services (FTS) was deemed impermissible.In conclusion, the Appellate Tribunal ITAT DELHI, in the judgment delivered by SHRI G.S. PANNU and SHRI SAKTIJIT DEY, ruled in favor of the assessee on both issues. The Tribunal held that the assessee did not have a Permanent Establishment in India under the India-Japan DTAA, leading to the deletion of the addition made based on the attribution of income to the alleged PE. Additionally, the Tribunal determined that the levy of surcharge and cess exceeding the 10% tax rate on royalty and FTS was not permissible under the treaty provisions, aligning with relevant legal precedents.