2024 (10) TMI 661 - HC - Income Tax

Foreign entity avoids permanent establishment determination after Indian subsidiary receives adequate arm's length compensation for services

Commissioner of Income Tax (International Taxation) -2 Versus M/s. Krones Aktiengesellschaft

Delhi HC dismissed the revenue's appeal regarding permanent establishment determination for a foreign entity. The AO had found that the Indian subsidiary ... Fixed Place Permanent Establishment [‘PE’] in India - Dependent Agent PE [‘DAPE’] being found to exist in India - whether the AO was correct in assuming that a Fixed Place PE existed? - HELD THAT:- AO had found that for the completion of various agreements entered into by the assessee and which entailed installation and commissioning of machinery or providing after sales services, the Indian subsidiary Krones India Pvt. Ltd [‘KIPL’] had been adequately compensated at arm’s length. Since no further question of attribution would have arisen, the aforesaid findings clearly pale into insignificance. Insofar as the other findings, to which our attention was drawn by Mr. Kumar, we note that the AO had itself found that the work of Pepsico, Jainpur project was one which was awarded to KIPL and that the respondent-assessee had only affected certain supplies. On the basis of the aforesaid and bearing in mind the principles with respect to DAPE which were enunciated by us in Progress Rail Locomotive Inc [2024 (5) TMI 1417 - DELHI HIGH COURT] we find that appeal fails to raise any substantial questions of law. Issues:Validity of judgment by Income Tax Appellate Tribunal on existence of dependent PE in India, consideration of fixed place PE, attribution of commission activities to KIPL, arm's length basis, and applicability of law laid down by the Supreme Court in Morgan Stanley case.Analysis:1. The Principal Commissioner challenged the Income Tax Appellate Tribunal's judgment on the existence of a dependent PE in India and posed questions regarding the assessment of fixed place PE, attribution of commission activities to KIPL, and adherence to arm's length basis. The Commissioner of Income Tax (Appeals) held against the respondent on the grounds of a Dependent Agent PE (DAPE) existing in India, without addressing the issue of Fixed Place PE.2. The respondent appealed the CIT(A)'s order, leading to the current impugned order. The Tribunal's examination focused on DAPE, as no arguments or cross-objections regarding Fixed Place PE were presented before them, limiting the scope of the appeal to the findings related to DAPE.3. The Assessing Officer found that KIPL was adequately compensated at arm's length for activities beyond commission earnings, such as installation and commissioning of machinery. The Tribunal upheld these findings, emphasizing that no further attribution was necessary based on the arm's length compensation.4. The Tribunal concluded that KIPL did not habitually secure orders on behalf of the assessee, and its commission income was a small portion of its total revenue, indicating economic independence. The Tribunal's analysis aligned with the principles established in the Morgan Stanley case and previous case law.5. Based on the principles governing DAPE and previous legal precedents, the High Court dismissed the appeal, finding no substantial questions of law raised. The judgment upheld the Tribunal's findings on the absence of a dependent PE in India, emphasizing the arm's length compensation and economic independence of KIPL.This detailed analysis covers the issues raised in the judgment, providing a comprehensive overview of the legal reasoning and conclusions reached by the High Court.