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2014 (3) TMI 1110
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....read as under : "1) On the facts and in the circumstance of the case, the CIT (A)-l, Pune erred in holding that assessee does not have a permanent establishment (PE) in India dehors the finding of the A.O. that the functions of EPCOS AG are performed through the Indian Subsidiaries by issuance of directions through email etc. and the entire spectrum of activities of the Indian Subsidiaries are monitored by the assessee, thus having control and management of Indian Subsidiaries and thereby constituting a PE in India. 2) On the facts and in the circumstances of the case, the CIT (A)-l, Pune erred in law by concluding that a Double Taxation Avoidance Agreement [DTAA) is an alternative taxation regime and not an exemption regime and that DTAA is for the purpose of shifting onus on the department to prove to the contrary in respect of the exemption claimed by the assessee." 2.1 Facts of the case, in brief, are that the assessee company, Epcos AG, Germany is a foreign, non resident, multi-national company having its headquarter at Munich, St. Martin Street 53, Germany. It is a tax resident of Germany. The assessee is engaged in designing, manufacturing and marketing of electroni....
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....greement made relating to Project MOVE effective from 1.4.2002. Therefore, in addition to the receipts made as indicated in the table above amounting to Rs. 18,32,15,432, the assessee company also received a sum of Rs. 24,38,72,088 claimed as reimbursement of cost for project MOVE. The assessee claimed that this income was not offered to tax in the return as it was only for reimbursement of the expenses incurred on their behalf by the assessee company as a team leader. Therefore, it can be seen that the assessee actually received the following India source income during the year under consideration from its WOSs situated in India. Nature of Income Amount (INR) i. Royalty 99,55,167 ii. IT, Marketing and Sales support 11,51,71,963 iii. Technical Services 2,65,75,812 iv. Interest on loan 3,15,12,490 v. Reimbursement of costs Project MOVE 24,38,72,088 Total 42,70,87,520 2.4 The Assessing Officer following his order for A.Y.2003-04 and directions received u/s.144A completed the assessment u/s 143(3) of the IT. Act on 29.12.2006. In the directions issued u/s.144A it was held that the assessee has a ....
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....CIT(A) accepted the claim of the assessee that the assessee does not have a PE in India. He further held that DTAA is an alternate taxation regime and not an exemption regime and that DTAA is for the purpose of shifting onus on the department to prove the contrary in respect of exemption claimed by the assessee. The relevant observations of Ld.CIT(A) are as under : "4.3. The relevant portion of the finding given by CIT(A)-II, Nashik in appeal No. NSK/ACIT/Cir.2/179/06-07 dated 22.12.2006 for A.Y. 2003- 04, relating to the above ground and relied upon by appellant were considered and it was found that the Ld. (A)-ll, Nasik has held the following in para 14 to 23 of his order: i. The Indian WOSs do not constitute Place of Management PE of the Appellant under Article 5(2)(a) of the India-Germany DTAA: In Para 14 and 15 of his appellate order, the CIT(A) has held that performance of business activities or ownership does not qualify as place of management and the AO seems to have got confused with consumption of services with carrying out of business. ii. The Indian WOSs are not Branch PE of the Appellant under Article 5(2)(b) of the India-Germany DTAA: In Para 16 o....
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....ence, the relevant portion of the said order of the Hon'ble ITAT is also quoted below : "35. The case of the Assessing Officer, as evident from his observations at page 25 of the assessment order, is that since the taxpayer has accepted that "based on guidance of our product marketing team, activities relating to decisions of sale, production, dispatch, cost computation and other relevant activities for effecting the sale are carried out by the El PL and EFPL" and that "based on guidance and support of our central IT team, local activities such as solving day-to-day problems, monitoring the network, etc. are carried out by the employees of EIPL and EFPL. It is clear that the taxpayer company is rendering services through the employees of EIPL and EFPL. On this basis, the AO has inferred that the taxpayer company has used its Indian subsidiaries, and particularly employees of its Indian subsidiaries, to earn the monies by way of fees for product marketing services, sales support services and information technology services. The AO's case thus is that the assesses has a fixed place of business, in the form of Indian subsidiaries, that the employees of these Indian su....
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....ensuring an effective information technology support service. Just because employees of Indian subsidiaries are also engaged in marketing activities and information technology support activities, it would not mean that these employees are doing business of the foreign principal unless the work so done by these employees entitles the foreign parent company for Rewards of the work so done. It is also to be remembered that merely because the foreign parent company is engaged in rendering certain centralized services, it does not mean that all the services are to be rendered by the foreign principal alone or that no part of that work can be done by the employees of the Indian subsidiaries. If Indian subsidiary has engaged the foreign principal for some part of the marketing work, it does not mean employees of Indian subsidiary will not touch the marketing function at all. In any case, what is paid to the foreign principal is the actual cost incurred by the foreign principal on rendering the services plus a mark up. The services not rendered by the foreign principal, therefore, cannot entitle him to any gains. Therefore, the situs and manner of rendering of services, by anyone other tha....
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....; place i.e. a distinct place with certain degree of permanence. While in terms of the provisions of Article 5(7), existence of a subsidiary or parent company in the source jurisdiction by itself does not constitute a PE, there is no bar on the parent or subsidiary being PE of each other. The true test, in our considered view, is whether or not business of the foreign enterprise is carried out by the PE. Therefore, when business of enterprises of one of the contracting states is carried out by its subsidiaries in the other contracting states, such a subsidiary can indeed be its permanent establishment. In principle, therefore, there cannot be any bar on a subsidiary being a permanent establishment of the parent company. However, whether or not is it to be treated as a 'permanent establishment of the parent company, must be examined on the facts of the each case. Let us examine what is the case of the revenue before us. The Assessing Officer has, on the basis of perusal of emails exchanged between the taxpayer company and its subsidiaries in India, has inferred that "each and every activity is done under the active supervision of 'Epcos AG in India'. It is contended that....
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.... the enterprise. However, in the present definition, this course has not been taken. Late Prof. Vogel also concurred with this schoold of thought and observed that "....the 'permanent establishment need not be a branch in the nature of facility engaged in activities of the same type as those of the head office organization, nor need the place of business directly contribute to enterprise's profits" and "all that its business must do is to serve the enterprise's overall purpose, but it must be an activity". The question, however, is that the activity must be of the business of the taxpayer company, and not of the independent subsidiaries of such a taxpayer company. On the facts of the case before us, no part of the work of Epcos AG was carried out in India. The e-mails and letters were sent from outside India, and at best Indian subsidiaries acted upon the advices so given in the e-mails and letters in India. That action of the subsidiaries cannot alter the situs of the activities of the Epcos AG. Does mere existence of PE leads to taxability of income in source country? 40. It is also important to bear in mind that a non resident company having a PE in India, b....
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....that only such 'royalties' and 'fees for technical services' are excluded from the scope of Article 12(1) and (2) as are attributable to the PE through which business is carried on by the enterprise. In other words, the taxability under Article 12 shifts to taxability under Article 7 only in respect of 'royalties' and 'fees for technical services' which are attributable to the PE in question. In case an assessee receives 'royalties' and 'fees for technical services' but these receipts do not have an effective nexus with the PE and are not, therefore, attributable to the PE, the exclusion clause under Article 15(5), as also taxability under Article 7(1) and (2) is not triggered. Conclusion on the first issue i.e. on existence of PE: 41.1 In the light of these discussions, 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 Article 7. Of course, in the light of our finding that....
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....followed and surprisingly, they have not even distinguished. They simply ignored stating that the said order is not accepted by the Revenue and the matter is pending before the Hon'ble High Court of Bombay. Considering the above, we are of the considered opinion that there is no case for sending the files to the Revenue. In fact it is the case of the assessee that the facts are identical vis-a-vis 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." 4.6. After considering the arguments of the Assessing Officer given in the assessment order as well as in the subsequent reports and that of the appellant, including the documents and submissions available on record, it cannot be denied that the facts and circumstances of this case is similar to A.Y. 2006-07 and A.Y. 2003-04. The Assessing Officer has not distinguished the facts on those lines even during appeal. Therefore, the findings given by the Hon'ble ITAT has to be followed. Ground No. 1 of the appellant....
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....te purposes." 4.1 Facts of the case in brief, are that the Assessing Officer, during the course of assessment proceedings observed that as per 12(5) of the DTAA between India and Germany, if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carried on business on the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment, the provision by which royalty is taxed at 10% would not apply. In such case, the provisions of Article 7 shall apply. 4.2 He noted that Article 7(1) of DTAA between India and Germany stipulates that : "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them a....
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....hat such royalties and fees for technical services have a live economic nexus with the PE and only then exclusion clause under Article 12(5) as a/so taxability under Articles 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 Sections 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 Article 7. The provisions of Section 44D and Section 115A do not, therefore, come into play only because there is a PE in India. Taxability under the domestic law: 48. The next thing to be examined is taxability of 'royalties and fees for technical services' earned by the assessee company in terms of the provisions of the Indian Income Tax Act, 1961. 49. There is no dispute on the basic facts. The amounts received by the assessee company on this account meet the definition of 'royalties' and of fees for techni....
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....half of the assessee. We find the Ld.CIT(A) has decided the issue following the decision of the Tribunal in assessee's own case for A.Y. 2003-04 and 2006-07. We find the above decision of the Tribunal has been followed by the Tribunal in assessee's own case for A.Y. 2008-09 vide ITA No.2535/PN/2012 order dated 31-01-2014 wherein the Tribunal has held as under : "3. Next issue is with regard to non attribution of income deemed to accrue or arises in India. In this regard again the learned Authorized Representative has submitted that this issue is also covered in favour of the assessee (relating to non-attribution of income), the Tribunal has decided the issue vide para 10 of its order in assessee's own case for A.Y. 2006-07, wherein the issue has been decided in the similar facts and circumstances for A.Y. 2003-04, by observing as under: "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 ....
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....s offered in the return of income. Accordingly, Ground No. 2 is allowed." 3.1 Nothing contrary was brought to our knowledge on behalf of revenue. Facts being similar, so following the same reasoning, we are not inclined to concur with the finding of DRP and the same is set aside. According to us, taxation at gross basis at higher rate of 20% u/s.115A r.w.s. 44D of Act are unwarranted and taxation has to be at 10% on gross basis under article 12(2) of the Tax Treaty as offered in the return of income. Accordingly, this ground of assessee is allowed." 5.1 Nothing contrary was brought to our notice against the order of the Tribunal in assessee's own case for A.Y. 2003-04, 2006-07 and 2008-09. Since the order of the CIT(A) is based on the decision of the Tribunal in assessee's own case for A.Y. 2003-04, 2006-07 and since the Tribunal has taken similar view in A.Y. 2008-09 in assessee's own case, therefore, in absence of any contrary material brought to our notice we find no infirmity in the order of the CIT(A). Accordingly, we uphold the same. Ground of appeal No.3 by the Revenue is accordingly dismissed. ITA No.787, 788, 789 and 790/PN/2012 (A.Y.2001-02, 2003-04, 2004- 05 & 2....
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.... companies within the group. Implementation of such system entailed substantial costs to be incurred by each member of the Pool consisting of cost of employees dedicated for the project, software and license cost, costs of consultants engaged in customizing the system, data migration, training etc. As per the assessee under this project agreement, the Pool Members incurred costs for developing global template which was then to be shared between all members through receivables / payables. The assessee also claimed to have contributed its own costs to the Pool for participation along with various other members of the Group. The assessee claimed to have acted as the Pool Leader for the purpose of implementing the arrangement and received contributions from the various participants. Accordingly, the assessee stated that the receipts from project "MOVE" are not in the nature of services rendered to the Indian companies for which tax is to be paid in India by the assessee company. 9.2 However, the AO was not satisfied with the arguments advanced by the assessee. The AO noted that this fact was noticed on perusal of assessee's return of income wherein TDS certificates for the taxes....
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.... appellant and its WOSs spread all over the world, all of which are undisputedly under the active control of the appellant. There is no dispute to the fact also that the appellant has other agreements in existence for providing services and know-how etc. for which payments and royalties have been received subject to withholding tax. Now the only question arises is, whether the impugned receipt is of the nature of technical service or not. Under technical consideration of the DTAA and the IT provisions available in Income tax Act, the Indian subsidiaries have been held not to be a PE of the appellant company by the higher Courts despite the clear-cut demonstration by the Assessing Officers that the appellant company holds huge and constant control on day to day matters of business also including the recovery of outstandings in the market but the aforesaid finding regarding the active control has remained established. In such view of the matter, only on the strength of documents created by the related interested parties, it cannot be said that the appellant has discharged its onus of claim made that the receipts are of the nature of reimbursement having no elements of income. In fact....
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....under the "MOVE" project. 10.1 He submitted that as per the agreement entered into between the assessee company as a pool leader and its subsidies/group companies as Pool members the project cost is to be allocated to the members to the agreement and the members to the agreement are to reimburse the cost incurred by the assessee company. As per the agreement clause 6(2) it is provided that the project cost incurred by the pool leader shall be reconciled with the assessee company as a pool leader on monthly basis. He submits that the both the authorities below have not at all examined the agreement between the assessee company and its subsidiary group companies as a pool members and has arrived on an erroneous conclusion. He submits that reimbursement of expenditure cannot be treated as income earned on the project "MOVE" and cannot be treated as income in the hands of the assessee at entirety. Per contra the Ld. Departmental Representative supported the order of the authorities below. 10.2 The assessee has filed the compilation in which the copy of the agreement in respect of "MOVE" project is placed at pages 38 to 55. The argument of the Ld. Counsel is based on the terms of ....