AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (11) TMI 1512
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.... in law, voidab- initio and therefore, liable to be quashed and/ or set aside. 2. That on the facts and circumstances of the case and in law, the assessment order passed under section 143(3)/ 144C(13) of the Act on 29.07.2024, being barred by limitation, is bad in law and void-ab-initio. Re: Sales commission not chargeable to tax in India 3. That the assessing officer erred on facts and in law in holding that sales commission of Rs. 69,28,86,504 received by the Assessee from LM India was taxable in India. 3.1 That the assessing officer erred on facts and in law in arbitrarily holding that the Assessee had business connection in India during the subject assessment year. 3.2 That the assessing officer erred on facts and in law in holding that LM Wind Power Blades India Private Limited ("LM India") constitutes Fixed Place Permanent Establishment ("PE") of the Assessee in India under Article 5 of the India-Denmark Double Taxation Avoidance Agreement ("Tax Treaty"). 3.3 That the assessing officer erred on facts and in law in arriving at the aforesaid findings by not considering the business model of the Assessee in correct perspectiv....
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....g officer erred on facts and in law in initiating penalty proceedings under section 271AA on the basis of order dated 08.06.2023 passed by the TPO under section 92CA3) of the Act. 7.1 That the assessing officer/ TPO erred on facts and in law in initiating penalty proceedings under section 271AA of the Act, without appreciating that international transactions from which no income chargeable to tax arose were not required to be reported by the Assessee in Form No.3CEB." 2. At the outset, ld. AR of the assessee brought to our notice the relevant facts of the case, the assessee is a foreign company incorporated in Denmark and is a tax resident of Denmark. The assessee is a part of the LM group, which is in the business of manufacturing rotor blades for wind turbine generators. Since the said business is capital intensive in nature, it is dominated by few large global customers who have operations in major territories around the world (e.g., Siemens Gamesa, GE, etc.). He submitted that during the relevant previous year, the assessee had following receipts from LM India: S. No. Nature of receipt Amount (in Rs. ) 1. Sales commission received from LM India for sa....
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....tion of Rs. 16,97,57,193/- being sales commission received from LM India, ld. AR submitted that the assessee is part of LM Group, which is engaged in the business of manufacturing of rotor blades for wind turbine generators. Since the said business is capital intensive in nature, it is dominated by few large global customers who have operations in major territories around the world (e.g., Siemens Gamesa, GE, etc.). He submitted that the buyers of the rotor blades mainly operate globally and have the same technical and business requirements in all locations, they strongly prefer to deal with global suppliers and have a centralized point of contact. He further submitted that in the case of LM group, to meet the requirements of global customers, the assessee centrally handles the sales process for global accounts, on behalf of LM Wind Power Blades (India) Pvt Ltd ("LM India") and other group companies. In particular, the assessee is taking responsibility towards global customers, as is evident from the Sales Commission Agreement effective from 01.01.2010 :- - Maintain relationship with the global customers outside India and search for new potential global customers; ....
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....t assessment year, no sales were made by LM India to independent local customers, which were not part of any global group. He submitted that in terms of the Sales Commission Agreement dated 01.01.2010, LM India pays sales commission to the Assessee as per the following percentage of sales of LM India: Category Sales commission % Corresponding sales of LM India in Indian market Global customer 6% Seimen Gamesa, Senvion, Vestas, etc. Local customer 2% No local customer 7. He submitted that during the impugned assessment year, the assessee received Rs. 69,28,86,504 from LM India as sales commission, being 6% of sales made by LM India to Indian counterparty of the global customers. In the return of income filed in India for the captioned assessment year, the said amount of sales commission was not offered to tax by the assessee, as the same was not taxable in India in the absence of any business connection and/ or Permanent Establishment ("PE") in India. He submitted that in the assessment order dated 29.07.2024, it has been held that premises of LM India were under the control and at the disposal of the assessee for carrying out its business in India and ....
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....submitted hereunder: - 9. At the outset, reference is made to the relevant agreements, under which the assessee has earned receipts from LM India during the subject assessment year: (i) Sales Commission Agreement dated 01.01.2010 The terms and conditions for payment of sales commission to the Assessee are set out in the said agreement as under: "1. Purpose of agreement (a) LM Wind Power AS and wholly owned subsidiaries and other affiliated companies constitute a multinational group of enterprises (hereinafter the 'LM Group'). LM Global Sales and the LM Blade Factory (hereinafter the parties) are a part of the LM Group. (b) LM Global Sales is concluding the sales to global customers on behalf of companies in the LM group. When LM Global Sales has entered into a long-term agreement or a framework agreement with a global customer, the companies in the LM Group does not need to perform any sales activity towards the customer. (c) Consequently LM Group Sales may be considered as the sales department of the companies in the LM group in respect of global customers and to some extent towards the local customer." ................
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....is not the case where the Assessee has exercised control over LM India. Neither party has acted on behalf of the other party; rather, both LM Group entities undertake their respective activities in their independent capacity and on principal-to-principal basis. The said MoU records the understanding of the parties and lists down the capacity commitments by Gamesa Group entities and pricing & payment terms agreed by the two groups for supply of the blades. He further submitted that there is no clause in the said MoU, which even remotely suggests that the Assessee exercised control over LM India and that the premises of the latter were at the disposal of the Assessee. (iii) Agreement for Dobaspet Facilities Extension dated 10.12.2015 It is further submitted that the other relevant agreement, which resulted in sales commission being received by the Assessee is "Supply Agreement" dated 10.12.2015, entered into between (1) Gamesa Eolica, S.L, Spain & Gamesa Renewables Pvt Ltd, India (collectively referred to as "Gamesa Group Renewables entities"), and (2) LM Wind Power AS, Denmark & LM Wind Power Blades (India) Pvt Ltd. On perusal of the terms and conditions of the aforesaid agree....
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....ales activity towards the customer. In terms of the agreement, the Assessee is considered as the sales department of companies in the LM Group, for which it is remunerated @ 6% of revenue on blade sales to external global customers. The said agreement also makes it clear that the Assessee and LM India remain independent contractors and nothing in the agreement shall be construed to place the parties in the relationship of partners, joint ventures, fiduciaries or agents. No part of the aforesaid scope of services, it is submitted, required the Assessee to be present in India or have presence in the form of premises of LM India. As a matter of fact, no such presence in India even existed during the relevant assessment year to give rise to the allegation that the Assessee had control over the premises of LM India and that the same constituted Fixed Place PE of the Assessee in India. Once the Assessee negotiates and concludes contracts with global customers, the orders for supply of blades are required to be fulfilled by LM India by making supplies directly to Indian counterpart companies of global customers, such as GAMESA. The consideration for such supply is also directly received b....
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.... received from LM India. He submitted that in view thereof, no portion of sales commission can be taxed in India. He submitted that reliance in this regard is also placed on the decision of the Supreme Court in the case of CIT vs Toshoku Ltd: 125 ITR 525 (SC). In view of the above, he submitted that sales commission is not liable to tax in India as the Assessee does not have 'Business Connection' in India. 14. With regard to Ground No.3.2, assessee does not have Fixed Place PE in India, he submitted that even otherwise, in terms of section 90(2) of the Act, the provisions of the Act are overridden by the provisions of the India-Denmark DTAA, to the extent the provisions of the latter are more beneficial to the Assessee. In this regard, he submitted that sales commission received by the Assessee, being 6% of sales made by the LM India to entities apart from the Assessee are not taxable in India under the India-Denmark DTAA and therefore, for this reason too, provisions of the Act have no application to the present case. He submitted that in the impugned final assessment order, it is held that there exists PE of the Assessee in India. The said allegation, it is submitted, is compl....
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....essing by another enterprise ; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of 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, for scientific research, or for other activities which have a preparatory or auxiliary character, for the enterprise." (emphasis supplied) 15. He submitted that Paragraph 1 of Article 5 of the Tax Treaty, which defines the term PE to mean a "fixed place of business through which the business of an enterprise is wholly or partly carried on", is similarly worded as paragraph 1 of Article 5 of the OECD Model Convention. He submitted that the OECD Commentary on Article 5 of the OECD Model Convention states that the following conditions should exist in order to constitute "fixed place of business" for the purpose of paragraph 1 of that Article: - the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment; - this place of business must be "fixed", i.e., it must be established at a di....
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.... .............................." (emphasis supplied) 17. He submitted that The Hon'ble Supreme Court in the case of DIT vs Morgan Stanley & Co: 292 ITR 416 (SC) while dealing with Article 5(1) of the India-USA DTAA, held as under: "Existence of P.E. in India With globalization, many economic activities spread over to several tax jurisdiction. This is where the concept of P.E. becomes important under article 5(1). There exists a P.E. if there is a fixed place through which the business of an enterprise, which is a multi-national enterprise (MNE), is wholly or partly carried on. In the present case MSCo is a multi-national entity. As stated above it has outsourced some of its activities to MSAS in India. A general definition of the P.E. in the first part of article 5(1) postulates the existence of a fixed place of business whereas the second part of article 5(1) postulates that the business of the MNE is carried out in India through such fixed place. One of the questions which we are called upon to decide is whether the activities to be undertaken by MSAS consist of back office operations of the MSCo and if so whether such operations would fall within ....
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....e of business. Thus, there should be a nexus between the place of business and carrying on of business. 20. He submitted that in order that the foreign enterprise resident of a Contracting State can be said to have a Fixed Place PE in the other Contracting State, it is essential to demonstrate that the foreign enterprise has a fixed place available at its disposal in the other Contracting State, which is used for purposes of undertaking core business activities of that foreign enterprise in that other contracting State. 21. He further submitted that the Hon'ble Courts have in the undernoted cases emphasized the importance of disposal test, i.e., the fixed place must be available to the foreign enterprise for its use without any hindrance and further that such fixed place must be used for carrying on the core business of the foreign enterprise in the other contracting State:- * The Hon'ble Supreme Court in the case of Formula One World Championship Ltd vs CIT: 394 ITR 80 (SC), after referring to the OECD Model Tax Convention, Commentaries by Professor Philip Baker and Professor Klaus Vogel, and international tax jurisprudence, observed that in terms of Article 5(1) of....
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....handed down by this Court as well as the Supreme Court insofar as Fixed Place PE and DAPE are concerned as well as the language of Article 5, we have no hesitation in holding that the LO failed to meet the threshold requirements so as to constitute a PE. 69. In summation, we come to the firm conclusion that the LO did not meet the criteria established in sub-paras 1 and 2 of Article 5, so as to constitute a 'fixed place' of business or meet the tests of virtual projection, a takeover of the premises as well as the precepts of control and disposal in order to be a Fixed Place PE. The activities undertaken by the LO even otherwise were clearly auxiliary in character and would thus clearly fall within Article 5(3)(e) of the DTAA. The LO also did not meet the requirements of a DAPE as per of clauses (a), (b) and (c) of para 4 of Article 5. Furthermore, the software utilised for the purpose of connecting the Indian agents to the mainframe, being intangible property, would invariably be excluded from the threshold of PE. The argument of the premises of the Indian agents constituting a PE is clearly misconceived since these were independent third parties having their own ....
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.... and Technology, S.L Unipersonal, Spain ("SGRE Spain") for the development and supply of blades (hereinafter referred to as "Global Agreement"). 2. "Agreement on supply of Wind Turbine Blades" dated 01.04.2019 entered into between the Assessee and LM India (hereinafter referred to as "Supply Agreement") 3. Global Framework Agreement dated 24.07.2019 (hereinafter referred to as "Global Framework Agreement") entered into between the Assessee alongwith its group entities (collectively referred as "LM Group entities") and Siemens Gamesa Renewable Energy along with its group entities, (collectively referred as "SGRE Group entities"). 1. Global Agreement The assessing officer has laid much emphasis on the Global Agreement to hold that the Assessee has business connection in India and that premises of LM India constitutes Fixed Place PE of Assessee in India. It is submitted that the assessing officer was conscious of the fact that the said agreement was entered into only on 13.01.2021, which is evident from the noting in the assessment order at various places. However, despite being aware of the non-applicability of the Global Agreement to the subject assessm....
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....rincipal basis; consideration for supply of goods has been made by the Assessee at arm's length price, which has also been accepted by the transfer pricing officer in order dated 08.06.2023 passed under section 92CA(3) of the Act. The assessing officer further erred in alleging that since as per the Supply Agreement, LM India agreed to make all reasonable efforts to meet the Assessee's obligation with its customers, therefore, LM India is not an independent party and is under the control of the Assessee. The assessing officer has grossly erred in not appreciating that the Assessee is the customer of LM India and it is the duty of a businessman to put its best effort to meet the customer's demand. For LM India, it is imperative for it to manufacture as per the requirements of its customer, viz., the Assessee. The same does not lead to the conclusion that LM India is under the control of the Assessee. Further, the allegation regarding LM India's factories constituting Fixed Place PE of the Assessee since title and risks transfer at that location is totally bereft of logic and cannot be countenanced. It is a standard delivery term between two commercial parties that ....
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....y proceeded on the erroneous assumption that the Assessee carries on business in India through PE constituted by LM India, but also assumed net profit rate @ 35% of sales commission and further attributed 70% of the profits to LM India, which is not sustainable. 27. With regard to Ground No.3.5, without prejudice, no attribution to alleged PE, ld. AR submitted that without prejudice to the aforesaid submissions that the Assessee does not have PE in India, in terms of Article 7 of the DTAA, the business profits arising to a Denmark enterprise are taxable in India only if there exists PE of the Denmark enterprise in India. In case PE is established in India, profits are taxable in India, to the extent the same are attributable to: (a) the Indian PE; (b) sales in India of goods or merchandise of the same or similar kind as these sold through the PE; or (c) other business activities carried on in India of the same or similar kind as those effected through the PE. Assuming arguendo, even if the allegation of the assessing officer that the Assessee has PE in India is accepted, it is submitted that no part of the sales commission can be brought to tax in India for the reasons submitted....
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....rd to the functions performed, assets used or risks assumed by the PE. In this regard, it is submitted that even if the Assessee is alleged to have PE in India, the attribution of income to the alleged PE has to be basis transfer pricing exercise, taking into account the functions performed, the assets employed and the risks assumed by the alleged PE. In this regard, the Hon'ble Supreme Court in the case of CIT vs Ahmedbhai Umarbhai & Co: 18 ITR 472 (SC) observed that where a person is carrying on manufacture and sale, the profits received relate firstly to his business as manufacturer and secondly, to his trading operations; profit or loss has to be apportioned in a business-like manner and according to well established principles of accountancy. He submitted that in such cases, the Supreme Court held that it will be doing no violence to the meaning of the words 'accrue or arise' if the profits attributable to the manufacturing business are said to arise or accrue at the place where the manufacture is being done and the profits which arise by reason of sale are said to arise at the place where the sales are made. He further submitted that the aforesaid view was reiterated by the H....
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....the business deemed under section 9(1)(i) of the Act to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. He submitted that in that view of the matter, without prejudice to the argument that the Assessee does not have PE in India, that sales commission is not attributable to the alleged PE and that there is not profit embedded in the sales commission receipt on account of global net loss, it is submitted that since the relevant activities were carried out by the Assessee from outside India only, the assessing officer has grossly erred in attributing 70% of the assumed profits embedded in sales commission to the alleged PE in India. 33. In view of his above submissions, he pleaded that the addition of Rs. 16,97,57,193 made to the income returned by the Assessee for the subject assessment year on account of attribution of sales commission receipt to the alleged PE, therefore, deserves to be deleted in entirety. 34. On the other hand, ld. DR of the Revenue brought to our notice page 103 of the paper book, which is agreement of Know how transfer, he specifically brought to our notice the clause Res....
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.... to sell the products manufactured by it to the local customers, on which, it has to pay 2% for which the assessee will claim the same. This year, it was brought to our notice that there is no sales made to the local customers. This is not the issue under consideration in the present appeal. 36. The only issue is that the tax authorities treated the above services offered by the assessee is taxable in India with the observation that the assessee is having PE in India for the reason that the source of Income is thru India. Accordingly, the TPO observed from the framework agreements entered by the assessee effective from January 2010 and from July 2019. With the above facts on record, he drawn conclusion that the assessee is having PE in India as per the provisions of DTAA and he also held that the assessee is having business connection in India. He also drawn conclusion on the basis that the assessee had represented the LM India and finalized the framework based on the manufacturing capacity in India. Against the above findings of tax authorities, the assessee had filed a detailed note, which is reproduced by us in this order itself. 37. After considering the facts on record, ....
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....y claimed the commission for the services rendered outside India. The revenue had not brought on record how the assessee is treated as having PE or Business connection in India, merely observing certain clause of global agreement. There is no record brought on record with regard to fixed place of business or service PE or any employee of the assessee company had visited in India to execute any of the contracts or utilize the place of business in India. In absence of any material, we are inclined not to accept the findings of revenue authorities. Therefore, the commission income is not taxable in India. 40. With regard toattribution of commission income earned by the assessee in India to extent of 35% of the commission income, since we already held this transaction is executed outside India, the same cannot be charge to tax in India, attribution of such commission is ruled out. 41. It was further submitted that the assessee had claimed the above commission based on the global framework and commission agreement entered into with the LM India and the other agreement for Dobaspet Facilities Extension dated 10.12.2015 was with tripartite agreement, this was not executed this year.....
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.... company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession 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 or fixed place of profession, as the case may be, shall be computed under the head "Profits and gains of business or profession" in accordance with the provisions of this Act." (emphasis supplied) 44. He submitted that the action of the assessing officer in invoking the provisions of section 44DA of the Act to tax royalty income under the head 'PGBP' is erroneous, contrary to the facts emanating in the present case and statutory provisions and therefore, deserves to be set aside. Reasons in support are set out hereunder: (a) Section 44DA of the Act is not applicable in absence of PE of the Assessee in India In this regard, it is respectfully submitted that since the Assessee does not have any place at its constant disposal in India, as explained supra, there did not exist any Fixed Place PE or any o....
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....n its Transfer Pricing Memo and form 3CEB has indicated that the assessee pays LM India for carrying out R& D Services (Engineering and Support Services). The assessee has also entered into an agreement called the Master Service Agreement with LM Wind Power Technologies India Private Limited (merged with LM Wind Power Blades India Private Limited: LM India) for provision of services relating to wind turbine blades and components including finite element analysis, core engineering, product equipment design, R& D related activities, quality testing, etc. Hence, R&D activities being carried out in LM India are playing a substantial role in generation of the know how for which royalty is paid to the assessee. Therefore, since manufacturing of blades is taking place in LM India using the technical knowhow and LM India is the PE of the assessee in India, royalty paid by LM India to the assessee of Rs. 57,80,29,420/- is taxable under section 44DA of the Act as business income. Penalty proceeding u/s 270A are also proposed to be initiated as the assessee has under reported its income." 46. In this regard, it is submitted that the aforesaid assumption of the assessing officer is far-fetc....
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....llaboration and license for providing right to assemble diesel engines and its parts in India. Under that agreement, it had received royalty income in India. Accordingly, the assessee had offered said sum to tax as royalty in India in terms of Article 13 of the India-Italy Tax Treaty. The AO held that the Branch Office was employing around 25 employees who provided certain technical support and training services under an agreement in India. Therefore, royalty income earned by the assessee was effectively connected to its PE in India and chargeable to tax as business income of the assessee. He submitted that the Tribunal held that no presumption can be drawn by revenue regarding involvement of the PE in earning royalty income. To effectively connect royalty with a PE, one has to (i) evaluate the 'asset test' and to effectively connect FTS with PE one has to evaluate 'activity test' or 'function test'; (ii) PE should be engaged in the performance of technical services or should be involved in actual rendering of such services, or (iii) it should arise as a result of the activities of the PE, or (iv) the PE should, at least, facilitate, assist or aid in performance of such services ir....
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.... such services played a substantive role in creation of know-how by the Assessee, the same would lead to a conclusion that all group companies of LM Group have access to know-how, which is far-fetched and not borne out of record. (d) Royalty paid towards LM trademark and distributions rights, in addition to license of technology, production rights It is further submitted that royalty is received by the Assessee from LM India towards grant of license of technology, production rights, LM trademark and distribution rights of rotor blades and not only against the technology alleged to have been developed by LM India for the Assessee. The assessing officer has glossed over the fact that royalty is also being paid to the Assessee for license of LM trademark and distribution rights for the LM 60.0P Rotor Blades, which has no connection with the know-how generated. It cannot be the case of the assessing officer that for LM trademark rights, the services rendered by the alleged PE in India played any major/ substantive role. Thus, it is not a case of royalty being connected with the alleged PE. In view of the foregoing, it is submitted that the recharacte....
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....itiation of penalty proceedings under section 271AA of the Act alleging non-disclosure of certain international transactions. In this regard, he brought to our notice the provisions of Section 271AA of the Act which read as under: "Penalty for failure to keep and maintain information and document, etc., in respect of certain transactions. 271AA. (1) Without prejudice to the provisions of section 270A or section 271 or section 271BA, if any person in respect of an international transaction or specified domestic transaction,- (i) fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2) of section 92D; (ii) fails to report such transaction which he is required to do so; or (iii) maintains or furnishes an incorrect information or document, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of each international transaction or specified domestic transaction entered into by such person. (2) If any person fails to furnish the information and the document as required under sub-section (4) ....
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.... & spares and rotor blades from LM India, it is submitted that the transfer pricing provisions as contained in Chapter X of the Act are not attracted. Therefore, there was no obligation on the assessee to report the said transactions in Form No.3CEB filed for the subject assessment year. In this regard, he placed on the decision of the Bombay High Court in the case of Vodafone India Services (P) Ltd vs UOI: 368 ITR 1 (Bom) wherein the High Court held that income arising from an international transaction is a condition precedent for application of Chapter X of the Act and in the absence of any impact on income, a the transaction cannot be brought within the purview of Chapter X of the Act. 56. Further he submitted that the Hon'ble High Court further held that Chapter X of the Act is a machinery provision and in the absence of the transaction of issue of shares giving rise to any income chargeable under the substantive provisions of the Act, the said transaction cannot be brought within the purview of transfer pricing provisions. 57. Therefore, in the absence of any income chargeable to tax in India arising from the aforementioned transactions undertaken with LM India, he submi....
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....ction 92 of the Act having regard to the arm's length price. The transaction, it is pointed out, is an international transaction between two or more associated enterprises as defined in Section 92A of the Act. The international transaction is defined by Section 92B as to mean a transaction between two or more associated enterprises, either or both of whom are non residents, in the nature of purchase, sale or lease of tangible or intangible property or provision of services etc. or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. The computation of arm's length price is provided by Section 92C. Relying on these provisions, it is submitted on behalf of the Revenue that the income has to be necessarily computed on arm's length basis "irrespective of whether the assessee has identified the consideration for transfer of shares or not". The computational provisions do not therefore fail, according to the Revenue. This argument is based on the obvious assumption that the transfer of shares is for fair consideration or atleast there is some consideration. If no consideration had passed from or on behalf of the transferee Compa....