2024 (12) TMI 1058 - AT - Income Tax

USA company avoids permanent establishment status as construction activities stayed under 120-day threshold per Article 5(2)(k)

ITAT Ahmedabad held that a USA company did not establish a permanent establishment in India under Article 5(2)(k) of the India-USA Tax Treaty. The ... Taxability of payment made to company in USA[Tec] in India - Validity of order passed by CIT(A) holding that the assessee has a PE in India - Whether construction / installation permanent establishment can be said to exist looking into the facts of the instant case? - HELD THAT:- In terms of Article 5(2)(k) of the India-USA Treaty construction / installation permanent establishment would come into existence in case installation / assembly or supervisory activities in connection therewith would continue in India for a period of more than 120 days in any 12 month period. The issue for consideration is whether the period of stay of the employees exceeded this threshold provided under Article 5(2)(k) of the India-USA Tax Treaty. TEC does not have a permanent establishment in India in terms of Article 5(2)(k) of the India-USA Tax Treaty. Further, in our considered view, the details of payment by the assessee to TEC would not have any bearing on the presumed date of commencement and conclusion of the installation activities, since the payment dates may have no relevance or bearing on the date of commencement and completion of the project. Accordingly, since we have held that TEC does not have an installation PE in India in terms of Article 5(2)(k) of the India-USA Tax Treaty, the assessee did not have an obligation to withhold taxes at source of payments made to TEC. Accordingly, we hold that the assessee was not under an obligation deducted taxes at source with respect of contractual payments made to TEC, USA. Assessee appeal allowed. Issues Involved:1. Taxability of payments made to 'TEEMS ELECTRIC CO., USA' in India.2. Obligation of the appellant to deduct Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act.3. Existence of a Permanent Establishment (PE) of TEEMS Electric Co. in India under the India-USA Double Taxation Avoidance Agreement (DTAA).4. Determination of the period of stay of TEEMS Electric Co. employees in India and its impact on PE status.Detailed Analysis:1. Taxability of Payments Made to 'TEEMS ELECTRIC CO., USA' in India:The primary issue was whether the payments made by the assessee to TEEMS Electric Co., USA, were taxable in India. The lower authorities held that these payments were taxable business receipts in India, as TEEMS had a Permanent Establishment (PE) in India. The assessee argued that TEEMS was not liable for taxation in India under domestic law and the India-USA DTAA, asserting that the payments were not taxable and, consequently, there was no obligation to deduct TDS.2. Obligation of the Appellant to Deduct TDS Under Section 195:The Income Tax Act mandates withholding tax on payments to foreign entities if those payments are for services taxable in India. The TDS officer and Ld. CIT(A) held the assessee liable for failing to deduct tax at source under Section 195, treating the assessee as in default. The assessee contended that the taxability should be determined in TEEMS' assessment, not theirs, and that they had no obligation to deduct TDS as per the DTAA provisions.3. Existence of a Permanent Establishment (PE) of TEEMS Electric Co. in India Under the India-USA DTAA:The determination of whether TEEMS had a PE in India was central to the case. Ld. CIT(A) concluded that TEEMS had a PE in India due to the presence of its employees for more than 120 days, triggering taxability under Article 5(2)(k) of the India-USA DTAA. The assessee disputed this, arguing that the period of stay was miscalculated due to double counting and that TEEMS' employees did not exceed the 120-day threshold necessary to establish a PE.4. Determination of the Period of Stay of TEEMS Electric Co. Employees in India and Its Impact on PE Status:The Tribunal examined whether the period of stay of TEEMS' employees exceeded the 120-day threshold required for establishing a PE under Article 5(2)(k) of the India-USA DTAA. The Tribunal noted that the Ld. CIT(A) had presumed the work began immediately upon equipment receipt, which the assessee contested. The Tribunal found that the stay of employees should be counted cumulatively, not independently, as clarified in the Linklaters case. The Tribunal concluded that the employees' stay did not exceed 120 days in a twelve-month period, thus negating the existence of a PE.Conclusion:The Tribunal ruled in favor of the assessee, holding that TEEMS Electric Co. did not have a Permanent Establishment in India under Article 5(2)(k) of the India-USA DTAA. Consequently, the assessee was not obligated to withhold taxes at source for the payments made to TEEMS. The appeals for both assessment years were allowed, and the Tribunal's decision was pronounced in open court.