2026 (1) TMI 414 - AT - Income Tax

Offshore supply receipts under India-China DTAA: seconded staff and subsidiary assembly site held not to create a PE

Taxability of offshore supply receipts under the India-China DTAA turned on whether the non-resident had a PE in India. On supervisory PE, the AO relied ... Addition on supply of goods by the assessee to its subsidiary - income attributable to the PE of the assessee in India - attribution of profits on offshore supply - Action of the Assessing Officer in determining Permanent Establishment (PE) of the Assessee in India by way of supervisory PE and Fixed Place PE - assessee SAIC Motor Corporation Limited is a tax resident of the Republic of China engaged in the business of research, production and sale of passenger cars and commercial vehicles. It is engaged in Automobile business under the brand 'MG' - AO in the DAO held that the receipts from offshore supply are taxable in India as per the provisions of the Act and as per the provisions of the India- China DTAA - DRP held that the sales conducted by the assessee were offshore sales wherein the title and risk of the goods sold were transferred outside India and held that the findings of the AO in respect of the assessee not having conducted the offshore sales are contrary to facts. Supervisory PE in India - seconded employees arrangement - secondment of employees which may consist of technically trained personnel or persons with experience - HELD THAT:- AO referred to the employment agreement wherein the job profile assigns “supervisory responsibilities” but did not bring on record any material/ findings of the search conducted by the Investigation Wing to show that the seconded employees were engaged in the supervisory activity by the assessee company. The evidence on record does not show that the activities carried out by the six seconded employees were such nature to establish the supervisory PE of the Assessee.Thus, we hold that the assessee does not have a supervisory PE in India. Ground No. 6 to 6.1 of the Appeal are allowed. AO in view of the facts stated in DAO held that the Assessee had a Fixed Place PE of the assessee in India in the assembly unit owned by MFIPL - In this case, the assessee company supplied the goods in KD condition which is assembled/manufactured in India and sold to the Indian customers. This is an arrangement which generally speaking is followed by all the multinationals who set up their shop/subsidiary companies to sell their products in India. Again, generally speaking, these multinationals start manufacturing their products in India by procuring materials locally. Thus, it is an arrangement which is followed by a multinational to set-up its base in a country where it sells its products in India and / or export it to other countries. Such an arrangement cannot be termed as ‘Fixed Place PE’ unless it is established by the Revenue that the assessee has a fixed place of business in India which is at disposal where the assessee has the right to use the said place and has control thereupon. No such evidence has been brought on record either by the Assessing Officer or in the Ld. DRP proceedings that the assessee satisfied the said conditions as held in the case of One World Championship Ltd [Formula One World Championship Ltd vs CIT(International Taxation) [2017 (4) TMI 1109 - SUPREME COURT] (a) existence of fixed place of business and ; (b) through that place business of an enterprise is wholly or partly carried out As already held by us that the assessee has no Supervisory PE in India through the six seconded employees. Therefore, the submissions of the Ld. CIT(DR), that Fixed Place PE of the case of the assessee is linked to Supervisory PE through its personnel and the Assessee Company through its six seconded employees got access to the office premises of MGMIPL is not acceptable. In view of these facts, the decision relied by the Ld. CIT(DR) does not support the case of the assessee. Merely the fact that the manufacturing activity of KD products by its subsidiary cannot amount to Fixed Place PE without satisfying the above two conditions. No evidence was brought on record by the Revenue that the Assessee had an access to it i.e., business premises of MGMIPL from where the business of the assessee company was carried out. DRP in its order had taken note that an affidavit was also submitted by the Deputy Managing Director of MGMIPL on a Non-Judicial Stamp Paper that even though, the agreement provided for the procedure of inspection of the KD Parts there were no employees or other personnel of the SMCL present in India for the FY 2021-22 and hence no inspection was conducted by any employee/personnel of the SMCL during the subject year. Therefore, this fact does not support the case of the Assessing Officer that designated personnel of the assessee company will have a permanent place in the office in Gurgaon to fulfil his duties in India as described above because without which the contracts could not get competed because no such inspection by the assessee company was carried out during the year. We are afraid that if the view of the revenue that the assessee company earns income, when the car is assembled in India to establish a Fixed Place PE is acceptable, then, it will create huge disruptions in the taxability of the incomes of the parent/subsidiary set-up in a multinational set-up driven economies in the entire world wherein such an arrangement like in the case of the assessee is the norm. We hold that the assessee company does not have a Fixed Place PE in India as held by the Assessing Officer and confirmed by the Ld. DRP. Ground No. 7 to 7.4 of the appeal are allowed. Also, we hold that there is no permanent establishment of the assessee in India either by way of Supervisory PE or Fixed Place PE. Hence, Ground No. 5 of the Appeal is also allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the supply of KD parts to the Indian subsidiary constituted offshore sales, with transfer of title, risk and rewards outside India, as against inshore sales alleged by the tax authorities. (ii) Whether the assessee had a Supervisory Permanent Establishment in India under Article 5(3)(a) of the India-China DTAA on the basis of seconded/expatriate personnel and alleged supervisory activities connected with manufacturing/assembly. (iii) Whether the assessee had a Fixed Place Permanent Establishment in India under Article 5(1) (read with relevant sub-clauses discussed) of the India-China DTAA by reason of the Indian subsidiary's manufacturing/assembly premises allegedly being at the disposal of, and used for carrying on the assessee's business in India. (iv) Whether, in the absence of any PE in India, the addition made on account of income attributed to the alleged PE in respect of KD parts supply could survive. 2. ISSUE-WISE DETAILED ANALYSIS A. Offshore nature of KD parts sales (transfer of title/risk outside India) Legal framework: The Court proceeded on the factual determination of where title, risk and rewards transferred in the KD parts transactions, examining transactional documents (invoices, shipping documents, insurance) as relied upon in the order. Interpretation and reasoning: The Tribunal accepted the findings that the tax authorities' rejection of offshore sales merely from contractual clauses (including inspection-related clauses) was insufficient without examination of actual transaction documents. The record considered (including invoices, seaway bill/bill of lading, insurance documents, and the affidavit regarding inspection) supported that sales were concluded offshore. The Tribunal agreed that inspection clauses, in themselves, did not convert the sales into inshore sales, particularly where evidence showed transfer of title and risk outside India and where it was found that no inspection by the assessee's personnel occurred in India during the relevant year. Conclusions: The KD parts sales were held to be offshore sales and the title, risk and rewards were transferred outside India. This finding supported the assessee's challenge to profit attribution on such sales once the PE issue was decided in assessee's favour. B. Supervisory PE based on seconded employees and alleged supervision of manufacturing/assembly Legal framework: Article 5(3)(a) of the India-China DTAA (as discussed) covers a building site/construction/installation/assembly project or supervisory activities in connection therewith, subject to the duration threshold. The Tribunal tested whether the evidence demonstrated that the assessee carried out supervisory activities in India through seconded personnel so as to constitute a supervisory PE. Interpretation and reasoning: The Tribunal found that the available material (including the emails relied upon by the tax authorities and the described roles of the seconded personnel) did not establish that the assessee carried on its own business in India or exercised operational control over the Indian subsidiary's business so as to amount to supervisory activities 'in connection with' an assembly/installation project for Article 5(3)(a) purposes. The Tribunal emphasised that reporting/information sharing by employees in a group structure, and communications keeping the parent informed, did not by themselves demonstrate that the parent controlled or directed how the subsidiary conducted its business. The Tribunal also relied on the documented secondment terms showing that, during secondment, employees worked under the complete control, direction and supervision of the Indian entity and not on behalf of the foreign enterprise, and noted the absence of documentary evidence showing the alleged 'facade' or operational domination asserted by the tax authorities. Conclusions: The Tribunal held that the evidence did not show supervisory activities by the assessee in India through the seconded employees and therefore no Supervisory PE existed in India. C. Fixed Place PE alleged through the Indian subsidiary's manufacturing/assembly premises Legal framework: Article 5(1) of the India-China DTAA (as discussed) requires a fixed place of business through which the business of the enterprise is wholly or partly carried on. The Tribunal applied the criteria expressly discussed in the order, including the requirement of a fixed place being at the disposal of the foreign enterprise and used for carrying on the foreign enterprise's business. Interpretation and reasoning: The Tribunal rejected the view that the subsidiary's manufacturing/assembly activity, merely because it contributed to the overall group business model (KD supplies and royalty), automatically created a fixed place PE for the foreign parent. It held that such multinational arrangements are common and cannot, without more, satisfy the tests for a fixed place PE. The Tribunal found no evidence that the assessee had a place of business in India at its disposal, or that it had a right to use and control the subsidiary's premises to carry on its own business. The allegation that designated personnel of the assessee had a permanent presence at the subsidiary's premises to fulfil inspection obligations was undermined by the accepted affidavit that there were no assessee personnel in India for inspection during the relevant year. The Tribunal further held that, having already concluded that there was no supervisory PE through seconded employees, the asserted linkage between the alleged fixed place PE and personnel-based access/control also failed. Conclusions: The Tribunal held that the assessee did not have a Fixed Place PE in India through the subsidiary's premises. D. Sustainability of profit attribution/addition in absence of PE Legal framework: The addition was premised on income attributable to an alleged PE in India arising from KD parts supply. Interpretation and reasoning: Once the Tribunal held that (i) the KD parts sales were offshore with transfer of title/risk outside India, and (ii) there was no PE in India either by way of supervisory PE or fixed place PE, the foundational basis for attributing profits to India and sustaining the addition collapsed. Conclusions: The Tribunal deleted the addition made on the basis of profits attributed to the alleged PE, holding that there was no permanent establishment in India and therefore no basis to tax the attributed income on KD parts supply in India. Issues concerning attribution methodology were treated as academic and kept open.