TaxTMI 
TaxTMI 
TaxTMI 
2011 (4) TMI 1469
X X X X Extracts X X X X
X X X X Extracts X X X X
....rcumstances of the case, the Dy. Director of Incometax (International Taxation)-I, Pune, ('AO') erred in proposing and the Dispute Resolution Panel ('DRP') further erred in not interfering with the conclusion f the AO that the appellant's two Indian subsidiaries constitute its 'Business Connection' in India under section 9(1)(i) of the Income-tax Act, 1961 ('the Act') or a 'Permanent Establishment' ('PE') in India under various provisions of Article 5 including Articles 5(1), 5(2), 5(5) and 5(6) of the India-Germany Tax Treaty ('Tax Treaty'). 1.2 The AO and the DRP failed to appreciate that the appellant operates entirely from outside India, has no fixed place of business in India as envisaged under section 9(1)(i) of the Act or Article 5(1) or 5(2) of the Tax Treaty directly or in the form its two Indian Subsidiaries and further Article 5(5) and 5(6) of the Tax Treaty do not apply to its case as they relate only to local Indian agents engaged in buying and selling goods in India on behalf of their Overseas Principal which is not the fact in the case of the appellant and the appellant claims relief accordingly. Ground No. 2 - No attribution of income deemed to accrue/arise in I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pport (i.e. Fee for technical Services) 8,86,69,000/- Interest income on loan 5,06,43,000/- Total 15,03,22,000/- 2. The aforesaid payments were offered to tax at 10% on gross basis under Article 11 & 12 of the Indo-German tax treaty. 3. The AO held that the subsidiary of the appellant company constitutes its Permanent Establishment under article 5 of the treaty and that therefore, the income received by the appellant is not taxable under the heads of royalty, FTS or interest income but as business profits attributable to PE under Article 7 of the treaty. Accordingly, the AO taxed the said income u/s 115A (in case of interest) and u/s 115A r.w.s. 44DA of the Act (in case of royalty and FTS) at 20% without allowing ay deduction in respect of any expenditure or allowance. 4. The Hon'ble ITAT in the appellant's own case for AY 2003-04 on identical facts accepted the stand of the appellant of offering the aforesaid incomes for tax @ 10% and held that the subsidiary of the appellant company cannot be considered as a Permanent Establishment and that no revenues earned by the appellant company could be said to be attributable to the PE. (See ACIT v EPCOS AG (2009) 120 TTJ 29 (Pun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re, the order then challenged was passed by the CIT (A) and the said order was confirmed by the Tribunal upholding the non-existence of PE. In this regard, we find it relevant to reproduce paras 39 to 41.1 of the Tribunal's order as under: "Is it necessary that the PE can only be said to exist, under the basic rule, when core business activity is carried out by the PE? 39. We quite agree with the stand of the Revenue authorities to the extent that as long as an economic activity is carried out in the fixed place of business available to foreign enterprise, whether such an activity is a core activity or a peripheral activity, it has to be concluded that the foreign enterprise has a PE in the source jurisdiction. Model Convention Commentary states that the activity carried out by the PE may not be a productive character, though the commentary does recognize that it could perhaps be argued that in the general definition, some mention should also be made to the other characteristic of the PE, namely that the establishment must have a productive character - i.e. contribute to the profits of the enterprise. However, in the present definition, this course has not been taken, Late Prof.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot lead to any taxability of income. Not only the work done in India, if at all, did not constitute significant or critical business activity, the assessee company did not earn any revenues as a result of the activities so carried out by the employees of Indian subsidiaries and, therefore, no part of the revenues actually generated by the assessee company could be said to be attributable to the PE. The question of existence of PE of the assessee company, in these circumstances, has no impact of taxability of the assessee company. 41. The requirements of exclusion clause under art. 15(5) also highlight this aspect of profit attribution. While we were examining interplay between art. 12 and art. 7, we had noticed that this exclusion clause has twin requirements of (a) existence of the PE through which business is carried out; and of (b) existence of effective connection between such a PE and the rights, properties and contracts in respect of which 'royalties' and 'fees for technical services' are paid. That would mean that only such 'royalties' and fees for technical services' are excluded from the scope of art. 12(1) and (2) as are attributable to the PE through which business is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sending the files to the Revenue. In fact it is the case of the assessee that the facts are identical vis-àvis the facts of the assessment year 2003-04. In these circumstances, we are of the opinion that the decision comprised in para 41.2 is equally relevant for the year under consideration in respect of Ground No. 1. Accordingly, Ground No. 1 raised by the assessee is allowed. 10. The issue raised in Ground No. 2 relates to non-attribution of income deemed to accrue or arise in India. "Conclusion on the second issue i.e. taxability @ 20 per cent in terms s. 44DS r/w s.115A in case PE is found to be in existence: 47. In our considered view, in terms of Indo German tax treaty provisions, it will have to be demonstrated that such royalties and fees for technical services ha e 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....