AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (3) TMI 1088
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....(1) of the Incometax Act, 1961 (IT Act). - 2. On the facts and in the circumstances of the case and in law, the Ld. AO and Hon'ble DRP erred in concluding that the Appellant has a Permanent Establishment (PE) in India under Article 5 of the India - Switzerland Double Taxation Avoidance Agreement (DTAA) and thereby erred in charging to tax, the business profits of the Appellant in India under Article 7 of the India - Switzerland DTAA. - 3. On the facts and in the circumstances of the case and in law, the learned AO and Hon'ble DRP erred in concluding that the Appellant has a Service PE in India under Article 5(2)(1) of the India - Switzerland DTAA. - 4. On the facts and in the circumstances of the case and in law, the learned AO and Hon'ble DRP erred in concluding that the Appellant has an Agency PE in India under Article 5(5) of the India- Switzerland DTAA. - 5. On the facts and circumstances of the case and in law, the learned AO and Hon'ble DRP erred in arbitrarily computing the business income at Rs. 1,50,75,988 from repair, maintenance and integrated component services (including Single Component Services) activities by estimating an adhoc profit rat....
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....,08,962 Air India Charters Ltd. 1,09,53,301 21,11,989 Spice Jet Ltd. 09,02,39,424 16,52,57,027 99,69,674 Jet Airways Ltd 2,51,262 Total 09,02,39,424 17,64,77,874 12,50,41,887 4. Out of above streams of the revenue, assessee offered only lease charges to tax in India as royalty @10% on gross basis as per Article 12(2) of the India- Switzerland DTAA. Rest of the streams of revenue from repairs and maintenance; and form integrated component services, have not been offered to tax, by claiming benefit of DTAA saying that the balance services are not in the nature of technical services and hence neither taxable under section 9(1) (vii) of the Income Tax Act, 1961 nor Article 12 the DTAA. It also claims that it does not have a Permanent Establishment in India. 5. However, AO was of the opinion that assessee has a Liaison Office (LO) as a Service PE or Dependent Agency Permanent Establishment (DAPE), there is no option but to perforce resort to estimation of the taxable profits of the assessee as per Rule 10 of the Income Tax Rules. The AO held Rule 10(ii) will not be applicable in the instant case since the global profits and gains of the assessee ha....
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....c. As per the approval of the RBI LO of the subsidiary can perform following activities (i) Representing the parent company/group companies in India (ii) Promoting export/import from/to India (iii) Promoting technical/financial collaborations between parent/group companies and companies in India. (iv) Acting as a communication channel between the parent company and Indian companies. 8. The assessee's subsidiary in India i.e. SR Technics India Private Limited has not carried any business activities/operations in India. It is a dormant company since incorporation and does not have any employees. This is evident from the fact that its name was struck of the Companies Register in India by the Registrar. We are further reproducing a table narrating the contentions of the AO and assessee's rebuttal thereon as under: Sr. No. AO's contentions Assessee's rebuttal 1. The AO has stated that the assessee has a LO with the address at B-206, City-point, AK Road, Andheri (E), Mumbai 400059 in India as reasons already stated above, the LO mentioned on its website itself. The AO observed that "it is surprising that the assessee has not mentioned even an iota of information about ....
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....cation activities, which can be performed even without making or incurring such expenses. * Average salary of the employees of LO is about Rs. 4, 00,000/- each month. This figure is absurdly high for any employee who is merely doing coordination/communication activity (or rather just acting like a post office). Paying high amount of salaries implies that the assessee is extracting professional services out of the employees who are well qualified and thereby paying them reasonably handsome amount of salaries. * The high amount of motor car and travelling expenses also leads to a conclusion that the assessee's LO is acting in the area of business development and day-to-day activities for conducting the business in India, rather than just being a communication channel. * The cost on communication charges is very low at Rs. 3, 21,548/- which is about Rs. 27,000 every month. If the LO was a mere communication office, then its communication expenses should have been the highest, as opposed to salary or travelling and motor car. * The LO is completely dependent on the assessee for its financial requirements. Thus, the AO has held that the LO does not merely act as a communication....
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.... assessee . 5. The assessee provides MRO services to the clients in India through LO. As discussed above and as is evident from various clauses of the contract placed on record, the MRO services are rendered from outside India, i.e. in Zurich. For example, we wish to draw your attention to recital A (page 3). Para 2.2 (page 7), Para 1.6- 3 (page 23). A-12.1 (page 25) and A- 12.3 (page 25) of the Repairs and Maintenance contract which clearly provide that the repair activities are performed in Zurich. A similar fact is also clear from Para 1 (page 4), Para 14.6 (page 12), Para A-4.1 (page 22) and Para C-8.5-5 (page 38) of the ICS contract. These contracts are filed in assessment proceedings. At the cost of repetition it is clarified that the Assessee does not have any employees/ assets/tools/facility in India from or through which the repair activities under the contract can be performed. 6. Considering the business activities carried by the LO, being market intelligence and administrative support, the learned AO held that the LO renders technical services to the assessee under clause 5(2) (1) of India Switzerland DTAA and thus creates a Service PE of the assessee in I....
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....clusionary provisions under Article 5(3) (d)/5(3)(e) of India Switzerland DTAA, i.e. they are preparatory/auxiliary in nature. The relevant provisions of Article 5(3) of India Switzerland DTAA are reproduced below for ready reference: The term "permanent establishment" shall not be deemed to include: (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display: (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade or business of the enterprise; (f) the maintenance of a fixed place of business solely for any combination o....
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....nd invoices thereto and sample integrated component solution agreement and invoices thereto. As submitted vide page no. 46 to 185 of Paper Book dated 10.02.2020. The relevant clauses of both the agreements are reproduced below to appreciate the factual matrix of the case as under: "Clause-2 vide page no. 56 of Paper Book of sample engine repair and maintenance agreement" 2.1 SR Technics shall perform services with respect to the Engines listed in the Indicative Fleet Plan as per Annex G (as may be revised by mutual agreement from time to time) as specified in the scope of services in Annex A on the terms of this Agreement. 2.2 SR Technics shall (a) perform the work in workshops at Zurich Airport or at other FAA & EASA approved location per MOE using appropriate tools and other equipment and (b) shall provide, inspect and calibrate all tooling and equipment required to accomplish the work. A-5 Engine maintenance, modification and repair SR Technics shall perform Engine maintenance in accordance with applicable manufactures standards, manuals and publications. These services shall include: Incoming inspection bore scope inspection and report of findings. Performan....
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....Spice Jet and SR Technics Ensures service delivery with special focus on services that are not directly shop visit related (e.g. shop visit-, removal-and spare engine planning) Defines and drives continuous improvement initiatives Ensures transparency on shop visit performance and communicates event status: Tracks and records all elements that may affect timely engine redelivery Assess spare engine situation Provide recommendations for preventive maintenance actions based on EHM data and bore scope findings Follows-up on technical issues, changes in work scope supervises engine documentation including invoicing To follow up on any other requirement as per the agreement A-12 Delivery and Redelivery A-12.1 Delivery of the Engine from Spice Jet to SR Technics Spice Jet shall deliver the Engine FCA to respective pick up location on-time to meet the agreed shop induction date as per clause A-6.3 and SR Technics shall organize the transportation of the Engine from the respective pick up location to SR Technics maintenance facility at Zurich Airport, Switzerland The respective pick up location shall be any airport where Spice Jet is operating A-12.2 Red....
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....2 are included in the RBS FHR stated in the Agreement. As per Article 7(1) of India Switzerland DTAA, if business is carried on through a PE, profits from business to the extent attributable to the PE in India is taxable in India. As discussed above, the assessee does not carry any activity through LO other than routine communication and client coordination, which can be called to constitute a PE in India. Therefore, in absence of any PE of the assessee in India, the business income earned by the assessee is not taxable under Article 7 of the India Switzerland DTAA." 11. We have thoroughly considered the whole issue with reference to the order of AO, proceedings of DRP, submissions of the assessee and Paper Book submitted. It is an established fact that Revenue streams not offered by assessee were not chargeable to tax in India (accepted by AO also) until unless assessee has a PE in India. After a thorough study of assessment order, the foundation of allegations laid down by the AO to prove LO of subsidiary company as PE of assessee, no substantive and cogent evidence were produced on record. All the allegations and working done in that regard were merely a guess work and looks ....