TaxTMI 
TaxTMI 
2024 (10) TMI 428
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....er Section 147/148 of the Income Tax Act, 1961 ["Act"] and assessing the income of the appellant for Assessment Year ["AY"] 2009-10 even in the absence of any material whatsoever in the possession of the AO relating to the relevant AY? B. Whether on facts and in the circumstances of the case and in law, the ITAT was justified in upholding the finding of the AO that the appellant herein had a fixed place permanent establishment ["PE"] in India under Article 5 (1) of the Double Taxation Avoidance Agreement ["DTAA"]? C. Whether on facts and in the circumstances of the case and in law, the ITAT erred in was in upholding the finding of the Dispute Resolution Panel ["DRP"] and AO that the appellant herein had a dependant agent permanent establishment ["DAPE"] in India under Article 5 (4) of the DTAA? D. Whether on the facts and circumstances of the case and in law, the ITAT while dealing with the issue of attribution of profits erred in relying upon a Judgment which had been reversed by the Hon'ble Supreme Court?" 2. The appellant is principally aggrieved by the order of the Income Tax Appellate Tribunal [ITAT] dated 01 January 2019 pertaining to Assessm....
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....the AO, adverse inference was liable to be drawn and, consequently, the reassessment proceedings were not liable to be interdicted on that score. 8. While rendering judgment on that appeal, the Tribunal upheld the findings of the lower authorities of a Fixed Place PE having come into existence in India, a DAPE also being present and consequentially holding that 75% of the profits from the sales activities could be attributed to those entities. Following the aforesaid order, the Tribunal disposed of the appeals for AYs' 2001-02 to 2008-09. 9. The aforesaid order of the Tribunal was thereafter challenged before this Court in terms of an appeal under Section 260A of the Act. That appeal in terms of an order dated 13.09.2017 was remitted back to the Tribunal for adjudication on various issues including PE, ad hoc attribution between sales and services and taxability of income as Fee for Technical Services. 10. Pursuant to the remit, the Tribunal answered those issues in terms of its judgment dated 31 January 2018 against the assessees'. This saw the institution of another set of appeals before this Court pertaining to AYs 2001-02 to 2008-09. 11. Those appeals came to be adm....
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....cted the conversation what GE India and GE overseas discussed. Thus, there is not even an iota of doubt that GE India was fully involved in proposal development. 28.9.1. The Id. AR submitted for the third stage of 'Bid approval and negotiations', that the assessee stated before the AO that once the proposal/bid/tender have been put together as described in Stage 2 above, it is approved by the senior management during the Stage 3 and, thereafter, submitted to the end customer. Subsequently, GE Overseas may carry out negotiations with the customer, which may entail addressing queries, if any, raised by the end-customer, seeking/providing clarifications regarding work scope, pricing, etc required by the end customer. For the fourth stage of 'Final contract development and approval', the assessee stated that GE Overseas discusses the outcome of the negotiation process internally amongst its various overseas functional heads/approving authorities (operations, finance, legal, etc.) so as to decide whether or not to go-ahead with the contract on the agreed terms and conditions with the customer. If the negotiated contract terms are approved and accepted both by GE....
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....eam. 57. This court is of the opinion that the process of sales and marketing of GE's product through its various group companies, in several segments of the economy (gas and energy, railways, power, etc.) was not simple. As noticed by the tribunal, entering into contract with stakeholders (mainly service providers in these segments) involved a complex matrix of technical specifications, commercial terms, financial terms and other policies of GE. To address these, GE had stationed several employees and officials: high ranking, and in middle level. At one end of the spectrum of their activities was information gathering and analysis-which helped develop business and commercial opportunities. At the other end was intensive negotiations with respect to change of technical parameters of specific goods and products, which had to be made to suit the customers. Standard "off the shelf goods or even standard terms of contract, were inapplicable. In this setting, a potential seller of equipment - like GE, had to create intricate and nuanced platforms to address the needs of customers identified by it, in the first instance. After the first step, of gathering information, GE had....
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....chnical and financial terms of the agreement, even price negotiations, needed a collaborative process in which the potential client along with GE's India employees and its experts, had to intensely negotiate the intricacies of the technical and commercial parameters of the articles. This also involved discussing the contractual terms and the associated consideration payable, the warranty and other commercial terms. No doubt, at later stages of contract negotiations, the India office could not take a final decision, but had to await the final word from headquarters. But that did not mean that the India office was just for mute data collection and information dissemination. The discharge of vital responsibilities relating to finalization of commercial terms, or at least a prominent involvement in the contract finalization process, discussed by the revenue authorities, in the present case, clearly revealed that the GE carried on business in India through its fixed place of business (i.e the premises), through the premises." xxxx xxxx xxxx "62. With respect to this question of law ,the ITAT relied on a two-part framing to see if Agency PE is met, that is para 4 of....
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....to negotiate all elements and details of a contract in a way binding on the enterprise can be said to have exercised this authority" and "the mere fact, however, that a person has attended or even participated in negotiations ...will not be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise." The revenue responded by clarifying that India had clarified its position that it does not agree with the above portions of Para 33 commentary. The position of India is that : "a person has attended or participated in negotiations in a State between an enterprise and a client, can, in certain circumstances, be sufficient, by itself to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise; and that a person who is authorized to negotiate the. essential elements of contract, and not necessarily all the elements, can be said to exercise the authority to conclude contracts." 65. The ITAT noted that India's position has a binding effect on all conventions entered after the date - but does not retrospectively apply to conve....
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....loyees of assessee in India were also present in various locations in India and reported to director of RRIL India. The following extracts of the judgement are indicative of the approach to be adopted wherever the court has to see if the entity has a PE and a dependant agent PE: "16. After holding that the assessee had business connection in India, the Tribunal adverted to the question as to whether there was any PE in India within the meaning of Article 5 of the Indo-UK DTAA. The Tribunal extracted the provisions of Article 5 and stated the legal position that emerged therefrom. Thereafter, it referred to various documents in para 22 and narrated its effect in detail. Our purpose would be served by extracting para 23 of the impugned order which reads as under:- "23. It is also seen that the appellant has a dependent agent in India in the form of RRIL. The fact that RRIL is totally dependent upon the appellant is not denied. However, the contention of the appellant is that even though RRIL is a dependent agent and such agency is to be deemed as PE, so long such dependent agent has no authority to negotiate and enter into contracts, under Article 5 (4), there is no....
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....nt in various locations in India and they report to the Director of RRIL in India. (g) The personnel functioning from the premises of RRIL are in fact employees of Rolls Royce Plc. This has been admitted by the MD Mr. Tim Jones, GM, and can be discerned from statement of Mr. Ajit Thosar and documents like terms of employment of GMS. Thus, the appellant can be said to have a PE in India within the meaning of Article 5 (1) 5 (2) and 5 (4) of the Indo UK DTAA. Since we have found that the appellant 49612008~ 49712008, 49812008,498/2008 58412008, 64712008, 64812008, 64912008, 65012008,663/2008 has a business connection in India as well as PE in India, the income arising from its operation in India are chargeable to tax in India." 17. We are thus convinced that there is a detailed discussion after taking into consideration all the relevant aspects while holding that RRlL constituted PE of the assessee in India. While undertaking critical analysis of the material on record, the Tribunal kept in mind the objections filed by the assessee as well as the documents on which it wanted to rely upon. Those objections were duly met and answered. 18. We....
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....ecifications and the negotiations for it, to fulfill local needs and even local regulatory requirements, the complexities of price negotiation, etc. clearly show that the assessee carries out through the PE business in India. These activities also intersect and overlap with the content of the principle of dependent agent, inasmuch it is evident that these agencies work solely for the overseas companies, in their core activities." With regard to Attribution of Profit: "77. The Revenue authorities carried out a two-part analysis on this aspect, i.e. attribution of income based upon the profits derived by the assessee. By this analysis, 10% of the' sales income made in India is attributed as the basis of total profit of GE overseas entities in India. Upon that figure, the attribution of profit to the marketing activity, which the Assessing Officer applied, was 35%. In this regard, the contentions of the assessee were that the arbitrary and high and that the application of principles in Galileo International Inc. (supra) were not automatic. Learned counsel had stressed that each case would involve an intensive factual analysis to arrive at a figure that w....
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....ttributed a profit. This attribution of profits in this order is not only on account of dependent agent PE, but also other types PEs, discussed in this order. In this regard; reference is made to the order of the Hon'ble Apex Court in the case of Morgan Stanley (Supra). "As regards attribution of further profits to the P.E. of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a P.E.) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the P.E. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise, in such a case, there would be need to attribute profits to the P.E. for those functions/risks that have not been considered. The entire exercise ultimately is to' ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit at....
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....these facts and position of law, the contention of the assessee regarding applicability of the decision of Hon'ble Bombay High Court in the case of SET Satellite (Supra), is rejected, as the same is distinguishable on facts. Regarding the decision of Hon'ble Apex Court in the case of Morgan Stanley (supra), this decision supports the position taken by this office. Without prejudice to this finding, it is also stated that the overseas entities have fixed place PE (because of presence of expatriates) and also construction PE in India and profits for all the PEs have been attributed by taking them together. 16.5 It is stated that the assessee cannot take a plea that the payments to GEIIPL, requires to be allowed as deduction from the profits worked out in this order, because the global expenses including expenses incurred in India have already been considered while working out the profits. Once the profits are worked out, the expenses cannot be allowed further, because it will lead to double allowance of the expenses. It is not the revenue, which is attributed in this case, but the profits, which takes care of global expenses, including Indian expenses." xxxx....
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.... been preferred. That application came to be rejected by an order dated 13 May 2019 and which forms the subject matter of the connected writ petition. 16. The reasons which formed the basis of commencement of reassessment as noted by the AO are reproduced hereinbelow: "Reasons for issue of notice u/s 148 of the I.T. Act, 1961, in case of M/s GE Nuovo Pegnone SPA for A.Y. 2009-10 1. A survey operation was carried out at the office premise of General Electric International Operation Company INC., India Liaison office (GEIOC) located at AIFACS, 1 Rafi Marg, New Delhi - 110001 on 02.03.2007. During the course of survey, copies of various documents were obtained and statements of various GE Overseas entities (including the assessee), employees working from the liaison office of General Electric Information Operation Company Inc., Liaison office ("GEIOC"), roles and responsibilities of various employees etc. 2. On the basis of various documents found during the course of survey in the form of agreements/ purchases order/ copies of contracts the assessments were completed in this case for AY 2001-02 to AY 2008-09, wherein it was held that the assessee was hav....
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....of respective tax treaties. iv. The various documents found during the course of survey in the form of agreements/ purchases order/ copies of contracts also proved the active involvement of the employees of Indian company and expats in the conclusion of contracts on behalf of such non-resident GE Group entities. Therefore, GE India Industrial Pvt. also constituted the agent, other than an agent of independent status of the non-resident GE Group entities. This resulted into the creation of the dependent agent PE as per the provision of the tax treaties and business connection as per the provisions of Explanation 2 to Section 9 (1) (i) of the Income Tax Act, 1961. 3. During the assessment proceedings for AY 2011-12, income of the assessee was again assessed on the same lines as the assessee was continuing with the same type of business. The finding that there was no activities change in business activities gets support with the submission of the assessee, during the course of the DRP Proceedings, that it had sought assistance from M/s GE India Industrial Pvt.Ltd. ('GEIPL') i.e., an associated entity of the Asessee (established as PE as referred above), for providing....
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....ngs and postsurvey enquiries also included documents pertaining to assessee and various sales proposals that had been exchanged between assessee and the Indian office being GEIIPL since year 2001 onwards. Further, there is no denial on behalf of assessee that expats stationed in India having office at premises of GEIOC were not working for assessee in India. It is observed from reply filed by assessee, vide letter dated 10/03/16 that, details of Directors of assessee has been provided wherein, personnel called Claudio Santiago was communicating for assessee which is evident from Annexure F at page 30 of consolidated order passed by this Tribunal, in case of GE Energy Parts Inc. (Supra). Thus, it can be safely concluded that, there were expats working on making sales for assessee, even prior to years under consideration through GEIIPL, which has already held to be Fixed place PE for all GE Overseas entities, and having business connection through GEIIPL in terms of Article 5 (4) & (5) of India-Italy DTAA, there is no Income that could be deemed to have accrued or arisen in India under Sec.9 of the Act. 9.2. Admittedly assessee was engaged in various sales activities in Indi....
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....tage of issue of notice the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction ITO v. Selected Dalurband Coal Co. (P.) Ltd./1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO [1999J 236 ITR 34 (SC)." 9.5 Thus, on basis of above discussions and factual observations, we are of considered opinion that assessee had failed to disclose revenue received from sales made to Indian customers through GEIIPL on basis of materials gathered during survey for Ld. AO to form prima facie reason to believe by Ld.AO, of income having escaped assessment, for year under consideration, as per Explanation 2(b) to Section 147 of the Act." 18. Before us, the appellants sought to assail the view as taken by the Tribunal by principally contending that the entire reassessment action was based upon the survey report and material which had been gathered and collated for AYs' other than 2009-10 and thus could not have j....
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.... * Identify and seek business opportunities and provide information relating to products and services of GE Overseas to potential customers in India; * Arrange appointments, and meetings between existing as well as prospective customers and GE Overseas and provide necessary support in client meetings and discussions; * Act as a channel of communication between customers and GE Overseas; * Investigate and provide information on current trends in business, status of competing products, technology developments, pricing of competitors, Government policies and other developments, etc. that would be of interest to GE Overseas; and * Provide an effective link between GE Overseas and various regulatory authorities from time to time on all business matters. 13. It is apparent that GE India merely provides captive support services to GE Overseas and does not bear any market risks and product liability risks which arise due to market competition and pricing pressures, change in demand pattern and inability to develop/ penetrate the market, non-performance of a product to generally accepted standards, etc. Further, GE India neither maintains i....
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....pervision of GE Overseas Entity nor reported to GE Overseas entity and cannot therefore be equated with the Assessee's employees." [Annexure A, PDF page no. 1132.] xxxx xxxx xxxx 69. "As regard the criterion for assessing an agent's economic independence from the enterprise, one needs to analyse how its business relations with the enterprise are shaped, particularly in economic aspects. As per the commentary by Arthur Pleijsier, for in agent to be economically independent from its principal it would mean that even if the principal no longer requires the services of the agency, the agent could still be in business. Paragraph 38 of the OECD commentary in connection with economic independence refers the important criteria to ascertain whether the entrepreneurial risks are to be borne by the person or by the enterprise the person represents in the instant case, though GEIIPL may not be undertaking any entrepreneurial risk viz a viz services performed for the Assessee, it can still be treated as economically independent since it is not wholly or almost wholly dependent on GE Overseas for its business survival. On similar consideration, GEII expatriates will als....
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.... no merit in the challenge which stands raised to the initiation of reassessment action. 26. What has additionally weighed upon the Court is the attempt on the part of the appellant to seek a review and reconsideration of aspects which had come to be conclusively answered by this Court in the previous round of litigation which had ensued. The appellant has woefully failed to draw our attention to any material or circumstance which would justify such a course being tread or contemplated. 27. That only leaves us to deal with the issue of attribution and which formed the subject matter of Question 2.8.3. The Tribunal made the following observations regarding attribution of profit: "2.5. From materials collected during survey proceedings and post survey enquiries, Ld.AO observed that GE Group, including assessee was engaged in various activities in India for which, business was headed by expats, who were appointed to head Indian operations, with support staff provided by GE India Industrial Pvt. Ltd. (hereinafter referred to as GEIIPL). 2.6. Based upon survey materials and post survey enquiries gathered by Department, to ascertain facts for year under considerat....
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....nergy Parts Inc. vs. DDIT. It was also observed by Ld.AO that expats along with their teams were at their disposal at fixed Place business in India in the form of office premises held by GEIOC, through which they operated and carried out business of all GE Overseas entities, including assessee with support of GEIIPL. 2.11 Ld. AO during reassessment proceedings for year under consideration, observed that, certain agreements in respect of receipts by assessee revealed that, there was no change in business activity of assessee in preceding assessment years vis-a-vis year under consideration, and that, nothing was furnished to rebut this contention. Ld.AO thus concluded that, GEIOC was the fixed place PE for assessee in India, which was not just engaged in activities of auxiliary and preparatory nature but functioned more than what a Liaison Office was supposed to do. Ld.AO also was of opinion that through GEIIPL assessee had business connection with Indian counterparts and thus GEIIPL was held to be Agency PE for assessee, through which assessee carried out offshore supply of spare parts, against which revenue was not declared in return of income originally filed by assessee ....
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....with business of exploration, etc. of mineral oils/operation of aircraft in the case of non-residents. In our considered opinion, approach of Ld.AO in estimating income at 10% of sales made in India, in given circumstances, is perfectly in order, and does not require any interference. 26.4. As regards share of marketing activities in total profit, Ld.AO applied 35% by taking assistance from decision of ITAT Delhi Bench in case of Rolls Royce vs. DDIT, reported in [2009] 34 SOT 508. The said order of the Tribunal stands affirmed by the Hon'ble Delhi High Court in Rolls Royce PLC vs. DIT(IT) reported in (2011) 339 ITR 147 (Del). Further, ITAT Delhi Bench in ZTE Corporation vs. Addl. DIT reported in (2016) 159 ITD 696, has also attributed 35% of profits attributable to marketing activities in India. In our opinion and respectfully following view taken by this Tribunal in consolidated order passed in GE Energy Parts., (supra), there can be no hard and fast rule of attribution of profit to marketing activities carried out in India at a particular level and that attribution of profits to PE in India is fact based, depending upon role played by PE in overall generation of income.....
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....age of previous 8 years which comes to Rs. 236,86,40,268/-. Ld. Counsel submitted that subsequent to conclusion of hearing before DRP on 16/08/17, assessee furnished application for additional evidence under Rule 4 (3)(B) of DRP Rules, 2009, claiming that offshore supply during relevant year was Rs. 221,23, 25,028/-. It was also submitted that said sales proceeds was received from 35 customers in India and correspondence sales has been filed along with application. 22. Alternatively, Ld. Counsel submitted that assessing officer erred in estimating offshore supply based upon average of sales made in assessment year 2007-08 and 2008-09. 22.1. Ld. Counsel also submitted that for purposes of estimation, authorities below erred in relying upon ratio of Hon'ble Delhi High Court in case of Rolls-Royce PLC us. DDIT, reported in (2011) 339 ITR 147. He also submitted that Assessing Officer allocated entire marketing profits to alleged PE in India when core marketing activities were carried out by assessee outside India. 23. On the contrary, Ld. CIT DR submitted that, Ld.AO was right in calculating total profits from sales made by assessee in India at 100/0 and ....