TaxTMI 
TaxTMI 
2024 (12) TMI 814
X X X X Extracts X X X X
X X X X Extracts X X X X
....nds are also dismissed as infructuous. 4. The issue raised in Ground No. 11 pertains to the initiation of penalty proceedings under Section 270A, 271A, 271AA and 271BA of the Income Tax Act. The penalty proceedings are premature at this stage; therefore, these are dismissed accordingly as infructuous. 5. The issue raised by the assessee in Grounds Nos. 2 and 4 of the appeal is that the ld. AO/ Ld. DRP erred in treating M/s SanDisk India as a Dependent Agency Permanent Establishment (PE) of the assessee and, consequently, the taxation of the assessee's income in India. 6. The facts in brief are as follows: the assessee is a foreign company based in California, United States. SanDisk India Device Design Centre Pvt. Ltd. (now known as Western Digital India, hereinafter referred to as SanDisk India) became part of the assessee's group by virtue of the acquisition of its parent company, SanDisk USA LLC, in May 2016. 6.1 The assessee is engaged in several transactions with SanDisk India and other Indian entities during the year under review but did not file a return of income in India. Subsequently, SanDisk India was subjected to a survey proceeding on January 16 and 17, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e sales and marketing functions are carried out in India, revenue is attributed to SanDisk International Limited, Ireland. 6.2 Based on the above, the AO concluded that SanDisk India operates an indirect sales model involving distributors and resellers, with its activities extending beyond basic support functions. These activities include marketing strategies, distributor reward programs, customer identification, and supplier negotiations. SanDisk India is heavily involved in price negotiations and customer interactions, fulfilling customer requirements. However, procurement, product delivery, and payment collection are handled by the Ireland office. The Ireland office manages supplier interactions, shipment arrangements, and payment handling. While the Indian teams carry out critical business processes, the revenue is recognized by the Ireland office, which also issues the final purchase orders. Products are shipped directly from overseas warehouses to customers in India. Sales and performance targets are provided by the Ireland/USA offices. The Indian operations actively support these processes but avoid direct involvement in procurement or payment collection to maintain a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to SanDisk International Ltd., Ireland, and not to the assessee. Based on this, the assessee contended that in the absence of marketing support services, the creation of a Dependent Agency PE could not be established. 8.1 However, the DRP rejected the assessee's contentions and upheld the Assessing Officer's (AO) findings. The DRP aligned its decision with the observations made by the AO, thereby confirming the existence of a Dependent Agency PE and the related tax implications. 9. Being aggrieved by the order of the learned DRP and AO, the assessee is in appeal before us. 10. The learned AR before us filed a paper book running from pages 1 to 355 and contended that there was no transaction between the assessee and SanDisk India in relation to marketing selling or distribution of its product in India. Accordingly, the question of dependent agency permanent establishment does not arise for calculating the income chargeable to tax in the hands of the assessee being a foreign company. 11. The learned DR supported the findings of the AO and the DRP, asserting that SanDisk India played a significant role in facilitating the assessee's business in India, as evidenced by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... fixed place of business a permanent establishment under the provisions of that paragraph ; (b) he has no such authority but habitually maintains in the first-mentioned State 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 the first-mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status withi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....conclude contracts on behalf of the foreign enterprise; 2. Maintains stock and delivers goods on behalf of the foreign enterprise; 3. Secures orders wholly or almost wholly for the foreign enterprise; or 4. Devotes its activities wholly or almost wholly to the foreign enterprise, with transactions not conducted at arm's length. 12.8 Only under these conditions specified above, an Indian entity will be considered a Dependent Agency Permanent Establishment (DAPE) of the foreign enterprise. Nevertheless, there are no transactions occurring between the two parties i.e. assessee and SanDisk that satisfy the criteria outlined, therefore, there is no basis for treating the Indian entity as a dependent agent capable of creating a PE. 12.9 In simple terms, if the Indian company (SanDisk India) has not provided any services or entered into any agreement to provide services related to the sales or marketing of the foreign company's (assessee's) products, the concept of a Dependent Agency PE does not arise. As noted earlier from the observations made by the Assessing Officer (AO), which were based on materials found during the survey proceedings, SanDis....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... optimize skills, expertise, and resources. These arrangements aim to share technical and administrative knowledge, enabling the local employees of the subsidiary to benefit in future operations. The AO noted that the seconded employees remained under the purview of their original employer, with their employment relationship continuing with the assessee company. There was no direct employer-employee relationship between SanDisk India and the seconded employees. Instead, the AO concluded that the contractual relationship existed between the assessee company and SanDisk India, with the seconded employees providing services on behalf of the assessee. 14.1 The AO further determined that the services rendered by the seconded employees were technical, managerial, and administrative, thereby qualifying as FTS under Section 9(1)(vii) of the Act. The AO also concluded that the arrangement fulfilled the "make available" clause under the Double Taxation Avoidance Agreement (DTAA), as the expertise shared by the seconded employees with SanDisk India was intended to enable the latter to use such knowledge independently in future operations. The AO relied on the judgment of the Delhi High Cou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns. 20. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, the issue arises for adjudication whether the reimbursement of salary as claimed by the assessee represents the fees for technical services and therefore the same is liable to TDS under the provisions of section 195 of the Act. Indeed, the fees for technical services (FTS) are subject to Tax Deducted at Source (TDS) under the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The Article 12 of the DTAA between India and the USA deals with Fees for Technical Services (FTS) 20.1 Article 12 of the India-US DTAA deals with the taxation of fees for technical services (FTS). It provides specific rules for taxing FTS, which are payments made for services that are technical or advisory in nature. Article 12(1) - General Rule for FTS 20.2 Under Article 12(1) of the DTAA, the country of the source of income (i.e., India) has the right to tax fees for technical services, subject to the provisions of the agreement. This means that if a US based company is providing technical services to an Indian entity, India has the right to....