2008 (6) TMI 288 - AT - Income Tax

Tribunal Upholds No Permanent Establishment in India for Foreign Firm; Taxed at Concessional Rate Under India-Germany DTAA.

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the taxpayer foreign company did not have a permanent establishment (PE) ... Taxability of Income u/s 115A r/w s. 44D - Permanent establishment (PE) in India or not - nature of services - business of designing, manufacturing and marketing passive electronic components - whether the entire business receipts of the taxpayer sourced from India, are to be taxed in India on gross basis @ 20 per cent in terms of the provisions of s. 115A r/w s. 44D of the IT Act, 1961 - DTAA between India-Germany - interplay between existence of a PE and taxability as 'royalties and fees for technical services' - subsidiaries in India, namely-Epcos India (P) Ltd. at Nasik and Epcos Ferrites (P) Ltd. at Kolkatta - HELD THAT:- In our considered view, the assessee company did not have any PE in India, much less a PE to which subject 'royalties' and 'fees for technical services' can be attributed. In terms of the India-Germany DTAA, India does not have right to tax these receipts as business profits under art. 7. Of course, in the light of our finding that no revenues earned by the assessee company could be said to be attributable to the PE, even if one was to come to the conclusion that a PE existed, no taxability could arise under art. 7. The assessee has offered the royalties and fees for technical services for taxability in India under art. 12, and, to that extent, admitted tax liability exists. The overzealous approach of the AO has been rightly rejected by the CIT(A). We approve and confirm the stand of the CIT(A), and decline to interfere in the matter. Taxability @ 20 per cent in terms of s. 44D r/w s. 115A in case PE is found to be in existence - we had taken note of the proposition advanced by the Revenue authorities that once art. 12(5) is invoked, all the receipts as 'royalties and fees for technical services' are taxable in India on gross basis under s. 44D, though, as per the provisions of s. 115A, at a lower rate of 20 per cent. The proposition is well settled that nobody can make profit out of self or trade deal with self or earn from self. It is so held it a series of cases, including Sir Kikabhai Premchand vs. CIT [1953 (10) TMI 5 - SUPREME COURT], Betts Hartley Huett & Co. Ltd. vs. CIT [1978 (4) TMI 58 - CALCUTTA HIGH COURT] and ABN Amro Bank NV us. Asstt. Director of IT [2005 (8) TMI 294 - ITAT CALCUTTA-E]. It is thus clear that an income of the Indian subsidiaries, on account of having rendered services to themselves, cannot be taxed. There cannot be any income in the hands of this PE, even if that be so, which can be brought to tax. In terms of the indo German tax treaty provisions, it will have to be demonstrated that such royalties and fees for technical services have a live economic nexus with the PE and only then exclusion clause under art. 12(5) as also taxability under arts. 7(1) and 7(2), will come into play. It is only after these royalties and fees for technical services are so included in the business profits attributable to the PE that the provisions of ss. 44D and 115A can be invoked. Therefore, even if we are to hold that the taxpayer had a PE in India, unless there is a categorical finding that entire receipts were attributable to that PE, entire business receipts of the taxpayer sourced from India would not have been taxable in India under art. 7. The provisions of s. 44D and s. 115A do not, therefore, come into play only because there is a PE in India. Taxability of 'royalties and fees for technical services' earned by the assessee company - No dispute that the amounts received by the assessee company on this account meet the definition of 'royalties' and of fees for technical services' under s. 44D which, in turn, refers to Expln. 2 to s. 9(2)(vi) and to s. 9(1)(vii) respectively. Accordingly, the limitation on deductions, as set out in s. 44D, does apply on the facts of the case, and entire amount is to be taxable on gross basis. However, in view of the provisions of s. 115A, the rate of tax on such income will indeed be 20 per cent. Thus, the taxability of amounts received by the assessee company on account of 'royalties' and 'fees for technical services', on the facts of this case and under the Indian IT Act, will be @ 20 per cent on gross basis, That aspect of the matter is, however, academic since we have already held that, on the facts of this case, source country does not have the right to tax income in question, except under art. 12(2) of the tax treaty and at a rate not exceeding 10 per cent. The assessee has already accepted tax liability to that extent, and there is no dispute so far as taxability under art. 12(2) is concerned. In the result, the appeal lied by the AO is dismissed. Issues Involved:1. Whether or not the taxpayer foreign company had a permanent establishment (PE) in India.2. If the taxpayer had a PE in India, whether or not the entire business receipts sourced from India are to be taxed in India on a gross basis at 20% under the provisions of Section 115A read with Section 44D of the Indian Income Tax Act, 1961.Detailed Analysis:1. Existence of Permanent Establishment (PE) in India:Arguments and Findings:- Revenue's Argument: The Revenue argued that the taxpayer had a PE in India through its subsidiaries, Epcos India Pvt. Ltd. (EIPL) and Epcos Ferrites Pvt. Ltd. (EFPL). They claimed that the taxpayer's business was conducted through these subsidiaries, which should be considered as the taxpayer's PE in India.- Taxpayer's Defense: The taxpayer contended that it did not have a PE in India as it did not have a fixed place of business in India. The services rendered to the subsidiaries were centralized and conducted from Germany. The subsidiaries' employees were not under the taxpayer's payroll and were not engaged in the taxpayer's business.- CIT(A) Findings: The CIT(A) upheld the taxpayer's contention, stating that the taxpayer did not have a PE in India. The CIT(A) noted that the e-mails and correspondence between the taxpayer and its subsidiaries were routine and did not indicate that the taxpayer had a place of management in India or conducted its business through a fixed place in India.- Tribunal's Conclusion: The Tribunal agreed with the CIT(A) and concluded that the taxpayer did not have a PE in India. It was noted that the business of the Indian subsidiaries was distinct from that of the taxpayer, and merely providing guidance and support did not constitute having a PE. The Tribunal emphasized that the taxpayer's activities were conducted from Germany, and the Indian subsidiaries' activities were separate and independent.2. Taxability of Business Receipts at 20% under Section 115A read with Section 44D:Arguments and Findings:- Revenue's Argument: The Revenue argued that if the taxpayer had a PE in India, the business receipts should be taxed at 20% on a gross basis under Section 115A read with Section 44D of the Indian Income Tax Act. They claimed that the taxpayer's receipts for royalties and fees for technical services should be taxed as business profits under Article 7 of the India-Germany DTAA.- Taxpayer's Defense: The taxpayer argued that even if it had a PE in India, the receipts were not attributable to the PE and should not be taxed under Article 7. The taxpayer contended that the receipts should only be taxed under Article 12 of the DTAA at a concessional rate of 10%.- Tribunal's Conclusion: The Tribunal held that even if the taxpayer had a PE in India, the receipts were not attributable to the PE. The Tribunal emphasized that the services rendered by the taxpayer were centralized and conducted from Germany, and the Indian subsidiaries' activities were independent. The Tribunal concluded that the receipts should be taxed under Article 12 of the DTAA at a concessional rate of 10% and not under Article 7. The Tribunal also noted that the provisions of Section 44D and Section 115A would not apply as the receipts were not attributable to the PE.Conclusion:- The Tribunal dismissed the appeal filed by the Revenue and upheld the CIT(A)'s decision that the taxpayer did not have a PE in India.- The Tribunal also concluded that the receipts should be taxed under Article 12 of the India-Germany DTAA at a concessional rate of 10% and not under Article 7. The provisions of Section 44D and Section 115A of the Indian Income Tax Act would not apply as the receipts were not attributable to the PE.