2023 (11) TMI 644 - AT - Income Tax

ITAT Ruling: No Fixed Place PE for Vadodara Project Office or BTIL, ECB Interest Taxed at 10% Due to No PE in India.

The ITAT allowed the assessee's appeals, determining that neither the Project Office at Vadodara nor Bombardier Transportation India Limited (BTIL) ... Income accrued in India - PE in India - HELD THAT:- As none of the conditions of fixed place PE as enshrined under Article 5(1) of India – Germany tax treaty stand satisfied Project Office at Vadodara does not constitute Fixed Place Permanent Establishment of the assessee company and BTIL does not constitute fixed place PE of the assessee company, is upheld and issue decided in favour of the assessee. Issues Involved:1. Assessment of income2. Fixed Place Permanent Establishment (PE) at Vadodara3. Fixed Place PE of Bombardier Transportation India Limited (BTIL)4. Attribution of profits to PE5. Disallowance of travel expenses6. Taxation of sale of sub-assemblies and intermediary services7. Gross profit vs. net profit ratio for attributing income8. Penalty u/s 271(1)(c)9. Taxation of interest income from ECBSummary:1. Assessment of Income:The assessee contested the assessment of income at INR 27,86,03,199/- against the declared income of INR 25,19,77,876/-. The ITAT upheld the assessee's grounds, noting that the facts were similar to the previous assessment year (AY 2010-11).2. Fixed Place Permanent Establishment (PE) at Vadodara:The assessee argued that the Project Office at Vadodara does not constitute a Fixed Place PE under Article 5(1) of the India-Germany DTAA. The ITAT referred to the previous year's order, which held that the Project Office did not make any profit and thus cannot be considered a PE.3. Fixed Place PE of Bombardier Transportation India Limited (BTIL):The assessee contended that BTIL does not constitute a Fixed Place PE. ITAT referred to its previous order for AY 2010-11, which held that BTIL cannot be considered a PE of the assessee in India.4. Attribution of Profits to PE:The AO attributed profits to the PE at an ad-hoc rate of 35%, relying on the Delhi High Court's decision in the case of Rolls Royce PLC. ITAT found that the facts were similar to the previous year, where it was held that no profit attribution can be made to the PE.5. Disallowance of Travel Expenses:The AO disallowed travel expenses of INR 55,947,355, alleging that 25% of the expenses relate to other contracts. ITAT found that the facts were similar to the previous year, where such disallowance was not upheld.6. Taxation of Sale of Sub-assemblies and Intermediary Services:The AO attributed revenue of INR 12,80,51,100/- from the sale of sub-assemblies and intermediary services, which was already taxed in the previous year. ITAT held that the facts were similar to the previous year, where such attribution was not upheld.7. Gross Profit vs. Net Profit Ratio for Attributing Income:The AO adopted the gross profit ratio instead of the net profit ratio for attributing income to BTIL PE. ITAT found that the facts were similar to the previous year and upheld the assessee's grounds.8. Penalty u/s 271(1)(c):The AO initiated penalty proceedings u/s 271(1)(c). ITAT did not find it necessary to adjudicate this issue separately as it was consequential to the main issues.9. Taxation of Interest Income from ECB:The AO taxed the interest income from ECB at 40%, treating it as business profit. ITAT held that since the assessee does not have a PE in India, the interest income should be taxed at 10% as declared by the assessee.Conclusion:The ITAT allowed both appeals filed by the assessee, holding that the Project Office at Vadodara and BTIL do not constitute Fixed Place PEs, and the interest income from ECB should be taxed at 10%. The order was pronounced on 15th November 2023.