TaxTMI 
TaxTMI 
2024 (9) TMI 1122
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....,27,56,590/- against the refund claimed of Rs. 2,58,55,080/- while returning the income for the year. 1:2 The Appellant craves leave to add, alter, amend and/or substitute all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 2:0 Re.: Holding that the Appellant has a 'Permanent Establishment' ("PE") in India:: 2:1 The Assessing Officer / the Dispute Resolution Panel have erred in holding that the Appellant has a 'Permanent Establishment" ("PE") in India. 2:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, it has no PE in India and the stand taken by the Assessing Officer/the Dispute Resolution Panel in this connection is erroneous, misconceived and not in accordance with law. 2:3 The Appellant submits that the Assessing Officer/the Dispute Resolution Panel has erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material to hold that the Appellant had a PE in India. Further the Assessing Officer / the Dispute Resolution Panel have also failed to consider the contrary material and evid....
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....further income can be taxed in India as the alleged PE has been remunerated at an arm's length and hence the stand taken by the Assessing Officer / the Dispute Resolution Panel in respect thereof is incorrect, erroneous, misconceived and illegal and hence ought to be struck down. 5:3 The Appellant submits that the Assessing Officer be directed to accept the total income as returned. 6:0 Re.: Treating the "royalty" received during the year u/s. 44DA of the Income-tax Act, 1961: 6:1 The Assessing Officer / the Dispute Resolution Panel have erred in holding that the royalty income is "effectively connected" with the alleged PE of the Appellant in India and is therefore taxable u/s. 44DA of the Income-tax Act, 1961. 6:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject and in particular the provisions of the India-USA DTAA¹, the Assessing Officer / the Dispute Resolution Panel the "royalty" received by it during the year under consideration is not taxable u/s. 44DA of the Income-tax Act, 1961 since it does not have any PE in India and hence the stand taken by the Assessing Of....
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....d in levying interest u/s. 234A of the Income-tax Act, 1961 on the Appellant. 9:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no interest u/s. 234A is leviable and the stand taken by the Assessing Officer in this regard is misconceived, incorrect, erroneous and illegal. 9:3 The Appellant submits that the Assessing Officer be directed to delete the interest u/s. 234A so levied on it and to re-compute its tax liability accordingly" 3. Brief facts are that the assessee, Gemological Institute of America Inc. (GIA), is a charity registered under the US laws. It is in the business of grading of diamonds. In India, M/s. GIA India Laboratory Pvt. Ltd. is a subsidiary of the assessee which was regarded as a Permanent Establishment [P.E.] of the assessee by the AO. The assessment was finalized, after holding that 50% of the total receipts of Rs. 547,10,44,459/- is attributable to the PE in India. On these receipts of Rs. 273,55,22,230/-, profit rate of 20.31% was applied to calculate the total business income of the assessee, attributable to the PE which works out to Rs. 55,55,84,565/-. Further, roy....
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....ng purposes; it is not an arrangement between two parties where each party contributes its share in order to undertake an economic activity which is subjected to joint control; in fact, the arrangement is akin to an assignment or subcontracting of grading services to the assessee company, wherever GIA India Lab does not have the requisite expertise or technology or capacity for carrying out the grading services; further, the aforesaid arrangement has also been accepted as a mere rendering of grading services by the Transfer Pricing Officer both in the case of GIA India Lab and the assessee company. In this background, we may now proceed to decide as to whether the Indian Subsidiary GIA India Lab can be construed as a PE under any of the aspects contained in Article 5 of India-USA DTAA. 10. Firstly, we may examine whether GIA India Ltd. can be constituted as a fixed place PE of the assessee in terms of Article 5(1) of the India- USA DTAA. As per Article 5(1) of the Indo-USA DTAA, a fixed place PE arises when the foreign entity has a fixed place in India through which its business is wholly or partly carried on. In this context, the learned Counsel pointed out that a similar....
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....sions of that paragraph; (b) he has no such authority but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in India wholly or almost wholly for the enterprise. 14. The definition excludes from the ambit of a PE any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status acts in the ordinary course of its business. The OECD Commentary deals with the concept of 'Independent Agent' in paragraphs 36 to 39. In terms of paragraph 37 of the OECD Commentary, a person will be regarded as an independent agent (i.e. it will not constitute a PE of the enterprise on whose behalf it acts) only if: - He is independent of the enterprise both legally and economically, and - He acts in the ordinary course of his business when ac....
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....pecially in the face of the fact that the nature and source of income in question remains the same. Therefore, on this aspect also, we are not inclined to uphold the stand of the assessing authority. 17. Before parting, we may also refer to the reliance placed by the Ld. DR on the judgment in the case of Formula One World Championship Ltd. (supra). In that case, the assessee was a U.K tax resident who obtained licence over all commercial rights in FIA Formula One World Championship. For this purpose, the assessee (foreign tax payer) entered into a contract with J.P. Sports (an Indian concern) by way of which it granted to J.P. Sports the right to host, stage and promote Formula One Grand Prix of India event at Motor racing Circuit owned by J.P. Sports. After examining all the relevant agreements, the case of the Revenue was that the Circuit located in India constituted a PE of assessee (i.e. the foreign tax payer) in India. The Hon'ble High Court concluded that since the assessee (foreign tax payer) had full access to the Circuit and could dictate as to who was authorised to access the Circuit and organising any other event on the Circuit was not permitted, the said Ci....
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....essee company. This subsidiary company set up a laboratory in India and since then engaged in the activity of gem grading in India. 4.1. Prior to setting up of the subsidiary, the assessee contracted with a third party "consolidator" called "International Diamond Ltd" arrangement, the consolidator coordinated the collection of diamonds from India, and the assessee graded the diamonds and issued grading reports. It was agreed between the parties to the consolidator arrangement that the cost to the consumers would be divided in the ratio of 90:10 (90 for the assessee and 10 for the consolidator). This arrangement continues to exist to date even after formation of GIA India Lab. However, the ratio w.e.f. 12 September 2011 is 88: 12 (88 for the assessee and 12 for the consolidator). It is important to appreciate that after GIA India Lab was set up, this agreement also requires that the cost to the consumer would remain the same whether diamonds were graded by GIA India Lab or through the consolidator. 4.2. During the year under consideration, GIA India Lab graded diamonds, stones or pearls weighing from 0.15 carats to 3.99 carats. However, due to technical limitations....
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.... year under consideration vis a vis earlier years. Infact, the Id. DRP while dismissing the contentions of the assessee, had merely placed reliance on the earlier year orders of the Id. DRP. We find that this Tribunal in assessee's own case for A.Y.2010-11 in ITA No.1138/Mum/2015 dated 21/06/2019 had decided the very same issue in assessee's favour by holding that the assessee does not have any PE in India. The relevant operative portion of the said Tribunal Order is hereby reproduced as under:- 9. "We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around as to whether or not the subsidiary of the assessee company i.e., GIA India Lab can be construed as its PE in India. The income-tax authorities have invoked section 9 of the Act and/or Article 5 of the India-US Treaty in order to say that the assessee company has a PE in India. On the contrary, as per the assessee, the impugned receipts are in the nature of business profits, and in the absence of any PE in India, the same are ....
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....ffice operations to the Indian subsidiary or the manner and mode of the payment of royalty transactions or eFund India providing support for carrying on core activities being performed by the taxpayer or associated transactions, cannot be the basis to construe the Indian subsidiary as PE of the foreign tax payer. Further, before the Hon'ble Delhi High Court, the Department had contended that the foreign company had a joint venture or partnership with Indian subsidiary as the businesses of the assessee company and the Indian subsidiary were inter- linked and closely connected (which is also contended in the case of the assessee before us) and therefore the Indian subsidiary was regarded as PE of foreign company in India. The aforesaid argument of the Revenue was repelled since the conditions under Article 5 of the DTAA were not met and it has been held that PE cannot be established merely because of transactions between associated enterprises or the principal sub-contracting or assigning the contract to the subsidiary. 11. Factually, in the case of the assessee company, there is no joint venture arrangement between the assessee company and GIA India Lab vis-à-vis....
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....oyees deputed to e-Fund India fund India did not create a service PE as the entire salary cost was borne by e-fund India and they were working under control and supervision of e-fund India. In the facts of the instant case, since the said services are rendered outside India and none of the employees/ personnel of the assessee company has visited India and therefore, service PE is not triggered in the case of the assessee company. 13. In terms of Article 5(4) of the India - US/DTAA, an agency PE is created where a person-other than an agent of an independent status to whom paragraph 5 applies - is acting in India on behalf of an enterprise of the USA, that enterprise shall be deemed to have a permanent establishment in India, if: (a) he has and habitually exercises in India an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in India a stock of goods or merchandise from wh....
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....company. Further, GIA India Lab is not having any authority to conclude contracts and has neither concluded any contracts on behalf of the assessee company nor has it secured any orders for the assessee company in India. Thus, GIA India Lab cannot be regarded as agency PE" of the assessee company in India. 16. Before parting, we may also note the reference made by the Ld. Representative to the assessment concluded by the Assessing Officer for assessment year 2009-10. It was explained that during the assessment proceedings for assessment year 2009- 10, a similar query i.e. why GIA India Lab should not be construed as PE of the assessee company in India was raised, but after considering the detailed response furnished by assessee vide reply letter dated 02 November 2012, no addition whatsoever was made, which is evident from the Assessment Order (AY 2009-10) dated 26 March 2013. Thus, in this background it was all the more incumbent upon the Revenue in this year to discharge its onus as to why a different stand is being adopted, especially in the face of the fact that the nature and source of income in question remains the same. Therefore, on this aspect also, we are not inc....
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.... no change in the facts and circumstances of the case, during the year under consideration vis- à-vis earlier years which has been admitted both by the Id. AO as well as Id. DRP, respectfully following the aforesaid decisions of the Tribunal, we hold that the Id. AO erred in invoking section 9 of the Act and/or Article 5 of the India USA DTAA in order to say that assessee has a PE in India. Accordingly, the ground No.2 raised by the assessee is allowed." 15. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee's own case for the A.Y. 2010-11 and 2017-18, we allow the grounds raised by the assessee. Accordingly, grounds raised by the assessee in Ground Nos. 3 & 4 are allowed." 7. Respectfully following the decision of the co-ordinate bench, we allow these grounds in favour of the assessee and hold that the assessee did not have a PE in India. 8. Ground No. 4 and 5 relate to the attribution of profits. On this issue also the co-ordinate bench in its order for AY 2020-21 has observed as under: "16. With regard to Ground Nos. 5, 6 & 7 raised by the assessee, the s....