TaxTMI 
TaxTMI 
2026 (9) TMI 2040
X X X X Extracts X X X X
X X X X Extracts X X X X
....as "the Act"). These proceedings span across three distinct Assessment Years (AY), adjudicated by the Assessing Officer, DCIT, Circle-3(1)(1) (International Taxation), New Delhi (hereinafter referred to as "the AO"), as detailed below: i. Assessment Year 2013-14: Involves the CIT(A) order dated 14.12.2017, which emanates from the assessment order dated 27.01.2017 passed by the AO under section 143(3) read with section 144C(13) of the Act. ii. Assessment Year 2015-16: Involves the CIT(A) order dated 18.02.2020, arising from the assessment order dated 05.02.2019 passed by the AO under section 143(3) read with section 144C(13) of the Act. iii. Assessment Year 2016-17: Involves the CIT(A) order dated 18.02.2020, arising from the assessment order dated 24.01.2019 passed by the AO under section 143(3) read with section 144C(13) of the Act. 2. Since the above captioned six appeals were heard together and the facts in issues are identical, all the six appeals are being disposed of by this common order for the sake of convenience and brevity. We first take up the AY 2013-14, as the lead case. 3. Assessee has raised following grounds of appeal in ITA No.1828/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed to tax in the return of income by the Appellant. 4.1 The Ld. CIT(A) has erred in facts of the case and in law in not excluding the amount of INR 2,08,41,050 being pure reimbursements from the taxable income of the Appellant and not granting the refund of tax wrongly deducted on the said reimbursement of INR 2,08,41,050. 4.2 The Ld. CIT(A) has erred in law in concluding that once the amount has been offered for tax and assessed accordingly, the assessee cannot revert during the course of assessment to state that such sum is not taxable. The Appellant craves leave to add, amend, alter, delete, rescind, forego or withdraw any of the above grounds of appeal either before or during the course of the proceedings before the Hon'ble Tribunal in the interest of the justice. The aforesaid grounds are mutually exclusive and without prejudice to each other. 4. Revenue has raised following grounds of appeal in ITA No.1911/Del/2018 for A.Y. 2013-14 : 1. "Whether on the facts and in the circumstances of the case, CIT(A) has erred in holding that the assessee company was having its PE in India only in the case of M/s Toyota Lakozi Auto Private Ltd, ign....
X X X X Extracts X X X X
X X X X Extracts X X X X
....conded to Toyota Lakozy Auto Pvt. Ltd and working under the control and supervision of Toyota Lakozy Auto Pvt. Ltd. 5. The brief facts of the case is that the Assessee is a company incorporated and fiscally domiciled in Japan and is eligible to claim the benefits of the India-Japan Double Taxation Avoidance Agreements ("DTAA"). During the relevant year, the Assessee was engaged in trading activities and earned income from supervision services, software usage fees, technical fees, commission income and offshore supply of goods to Indian entities. The Assessee filed its return of income declaring income of Rs 33,76,12,807/- taxable, on gross basis, as fees for technical services ("FTS") under Article 12 of the India- Japan DTAA as follows: S No Nature of Service Amount Tax Traetment 1 Onshore services 31,76,87,043 Offered as FTS 2 Receipts from secondment agreement 2,08,41,050 Offered as FTS 3 Loan Agreement Fees 88,310 Not offered for tax 4 Offshore supply 286,12,89,930 Not offered for tax 5 Reimbursement of expense received 1,02,88,238 Not offered for tax 5.1 During assessment proceedings, the Assessing O....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Conditions prescribed under Article 5(4) are not satisfied i) Article 5(4) of the India-Japan DTAA provides that a Supervisory PE can arise only where supervisory activities are carried on in India for more than six months and in connection with a building site, construction, installation or assembly project. Thus, both conditions are cumulative and mandatory. ii) Consequently, mere presence of employees in India does not create a Supervisory PE unless the supervisory activities are linked with a qualifying installation, construction or assembly project and continue beyond the prescribed threshold period. iii) The AO, for the subject assessment year, issued notices under section 133(6) of the Act to various Indian parties, to whom the Assessee provided services during the relevant year, and prepared the following list of Japanese expatriates who were allegedly present in India for providing services to its customers in India (refer page 114 of the paper book): S. No. Name of the Company to whom services rendered Name of the Japanese expatriate No. of Days in India 1 Toyota Lakozy Auto Pvt Ltd Yuji Kuroki 307 Kensuke Yamada 36....
X X X X Extracts X X X X
X X X X Extracts X X X X
....installation or assembly project i) The finding of the CIT(A) that a Supervisory PE existed in relation to Toyota Lakozy is contrary to Article 5(4) of the DTAA. Toyota Lakozy is merely an authorized dealer engaged in retail trading and sale of Toyota vehicles refer pages 1 to 3 of the compilation of papers volume-2. It is not engaged in any construction activity, installation project, assembly project or building site work. Form 3CEB and the supporting documents on record clearly establish that Toyota Lakozy is engaged in automobile dealership activities only (pages 589 to 596 of the paperbook). ii) Neither the AO nor the CIT(A) has identified any installation or assembly project undertaken by Toyota Lakozy during the relevant year. In the absence of fulfilment of this foundational requirement, Article 5(4) of the DTAA cannot be invoked. iii) Reliance is placed on the decision of the Delhi Tribunal in FCC Co. Ltd. v. ACIT: ITA Nos. 54 & 8960/Del/2019 placed at pages 60 to 69 of compilation of papers - volume 2. wherein it was held that where employees merely render technical services and there is no installation or assembly project in existence, no Super....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e supplies comprised traded goods, capital goods, raw materials and spares. The evidence on record, including invoices, bills of lading, bills of entry and import documentation, conclusively demonstrates that: * The contracts for supply were concluded outside India; * Property and title in goods passed outside India; * The consideration was received outside India; * Goods were imported by Indian buyers in their own capacity: * Transactions were undertaken on a principal-to-principal basis. Thus, no part of the operations relating to offshore supply was carried out in India. iii) Under sections 5(2) and 9(1)(i) of the Act, income of a non-resident can be taxed only to the extent it accrues or arises in India or is attributable to operations carried out in India. Since the entire supply transaction stood completed outside India, no income therefrom can be said to accrue or arise in India. iv) The AO proceeded on an erroneous assumption that offshore supply and supervisory services formed part of a composite arrangement. No material whatsoever has been brought on record to substantiate such conclusion. v)....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Heavy Industries Ltd. (supra), the relevant extracts from the decision are reproduced as under. "66. Article 5.3 provides that a person is regarded as having a permanent establishment if he carries on construction and installation activities in a Contracting State only if the said activities are carried out for more than six months. Paragraph 6 of the Protocol to India Japan Tax Treaty also provides that only income arising from activities wherein the permanent establishment has been involved can be said to be attributable to the permanent establishment. It gives rise to two questions, firstly offshore services are rendered outside India; the permanent establishment would have no role to play in respect thereto in the earning of the said income. Secondly, entire services having been rendered outside India, the income arising therefrom cannot be attributable to the permanent establishment so as to bring within the charge of tax. 67. For attracting the taxing statute there has to be some activities through permanent establishment. If income arises without any activity of the permanent establishment, even under the DTAA the taxation liability in respect of oversea s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p is following similar arrangement in case there is secondment of employees. In Toyota Boshoku's case for assessment years 2013-14, 2015-16 and 2016-17, the Hon'ble Bangalore Bench of the Tribunal, held that employees seconded to Indian entity were regarded as its employees and reimbursement to non-resident AE by Indian entity would not be in the nature of FTS, but would be in the nature of 'salary', and therefore, reimbursements would not be chargeable to tax in the hands of the AE. Relevant citations are as under: * Toyota Boshoku Automotive India (P.) Ltd. vs DCIT: [2022] 138 taxmann.com 166 (Bangalore) * Toyota Boshoku Automotive India (P.) Ltd. vs DCIT: [2022] 145 taxmann.com 141 (Bangalore) iv) Numerous judicial precedents including Tekmark Global Solutions LLC: [2010] 38 SOT 7 (Mum), Abbey Business Services: [2020] 122 taxmann.com 174 (Kar), Burt Hill Design: [2017] 79 taxmann.com 459 (Ahm) and Faurecia Automotive Holding: ITA No. 784/PUN/2015 have held that reimbursement of salary costs of seconded employees does not constitute taxable income in the hands of the foreign entity. v) Further, salary income has already suffere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roviding services to its customers in India for more than a year. As the AO has invoked the Article 5(4), it would be appropriate, at this juncture to reproduce the Article 5(4) of the India- Japan DTAA as under: ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially ******: 3. A building site or construction, installation or assembly project constitutes a permanent establishment only if it lasts for more than six months. 4. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State. 5. ******* 17. A careful perusal of Article 5(4) of the India-Japan DTAA shows that a Supervisory PE ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y in the decision of the CIT(A) that the Assessee does not have supervisory PE in respect of Toyota Kirloskar Auto Parts ("TKAP"), ТТ Assembly India Private Limited, Mitsubishi Electric Automotive India Private Limited and AT India Auto Parts Limited as the threshold of more than six months under Article 5(4) is not breached. 20. In the instant case, not only the presence of assessee's employees in India does not exceed six months, there is no evidence or materials gathered by the AO to demonstrate that the assessee employees were engaged in supervisory activities in connection with any building site, construction, installation or assembly project. Mere presence of assessee's employees would not create a Supervisory PE unless the supervisory activities are linked with a qualifying construction, installation or assembly project and continue beyond the prescribed threshold period of six months. 21. That leaves us with M/s Toyota Lakozy Auto Pvt Ltd, to whom the two employees of the assessee had rendered services and have spent more than six months. We find that though the employees were rendering service for more than six months, the other cumulative and mandatory c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....30 We further note that the AO considered the offshore supply and supervisory services as a composite arrangement. We do not find that the AO has gathered any materials to substantiate such conclusion. We also note that these supplies comprised traded goods, capital goods, raw materials and spares and the assessee has been able to demonstrate through evidences such as invoices, bills of lading, bills of entry and import documentation, that the contracts for supply were concluded outside India; Property and title in goods passed outside India; The consideration was received outside India; Goods were imported by Indian buyers in their own capacity and that the transactions were undertaken on a principal-to-principal basis. The assessee was able to show that no part of the operations relating to offshore supply, was carried out in India and therefore, the income arising out of such transactions are not covered under sections 5(2) and 9(1)(i) of the Act. Following the Supreme Court decision in the case of Ishikawajima-Harima Heavy Industries Ltd.: (2007) 288 ITR 408 (SC), wherein it was held that offshore supply profits are not taxable in India where Transfer of ....