TaxTMI 
TaxTMI 
2026 (10) TMI 511
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....rucks and light vehicles. During the period relevant to the assessment year under appeal, the assessee sold machinery, raw material and finished goods to its subsidiary in India M/s Donaldson India Filter Systems Pvt. Ltd. (DIFS). The assessee has signed a patent, trademark and know-how license agreement with DIFS. The assessee has also signed an Information Technology Service Agreement with DIFS. The assessee received Royalty and Fee for Technical Services (FTS) from DIFS in respect of aforesaid two agreements and has offered the same to tax, as Royalty and FTS. As regards income from sale of raw material, machinery and finished goods to DIFS, no income was offered to tax from said sales. The AO held that since the assessee has PE in India, the profit from Indian sales is chargeable to tax as business profits in India. The AO attributed profit of Rs. 2,41,58,817/- on sale of Machinery, Finished goods and raw material in India to the assessee's alleged Permanent Establishment (PE) in India and made addition of the said amount as business income of the assessee. 3. Sh. Salil Kapoor appearing on behalf of the assessee at the outset stated that the assessee has raised jurisdictiona....
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....is executed. The assessee charges royalty for use of trademark, patents, knowhow, etc. The Royalty and FTS so received by the assessee from DIFS has been offered to tax in India by the assessee in its return of income. The AO has not disputed the same. 3.4 The ld. counsel submits that the AO has erred in holding that DIFS (subsidiary of assessee) is assessee's fixed place PE in India. The reason for presuming that the assessee has PE in India is information contained in Form 10- K submitted by the assessee and information gathered by the AO from website https://www.donaldson.com/en-in/contact/. The ld. counsel has drawn our attention to Form 10-K starting from pages 354 to 426 of the paper book. The said Form 10-K is part of Annual Report for 2019. The ld. Counsel contends that the AO has erred in presuming that consolidated accounts/annual return/Form-K submitted by the assessee are assessee's standalone documents. Whereas, the information given in the said documents is not alone of the assessee but the entire Donaldson group, including assessee its subsidiaries and affiliates worldwide. In Form 10-K under the head Properties a complete list of cities and countries where princi....
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.... the AO that DIFS is Dependent Agency PE (DAPE) of assessee within the meaning of Article 5(4) of India-US DTAA, the ld. counsel contended that DIFS is an independent entity and is not economically or administratively dependent on the assessee. DIFS has its own manufacturing unit in India and is engaged in the business of manufacturing and trading of engine and industrial filters etc. DIFS has its own customer base in India and sells goods to dealers and customers on its own account. The total turnover of DIFS is Rs. 282 crores (approximately). The sales by DIFS to the assessee is only Rs. 24.83 lacs. The purchases of raw material and finished goods by DIFS from assessee is Rs. 29 crores (approximately) as against total purchases of Rs. 165 crores. DIFS operates as full risk bearing independent entity. Post delivery of stock, all rewards and risks are passed to DIFS. The transactions between the assessee and DIFS are on principal to principal basses. DIFS neither secure nor conclude any contract on behalf of the assessee. He asserted that the Assessing Officer has failed to show that the conditions set out in Article 5(4) to constitute dependent agency PE are satisfied. 3.8 The ....
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....tion available on website of the assessee, as well as, Form 10-K which is part of Annual Report for the year 2019 filed before United States Securities and Exchange Commission. 8. Before proceedings further, it would be pertinent to refer to the provisions of Article 5 of India-US DTAA wherein necessary conditions are mentioned to determine fixed place PE as well as DAPE: 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 : (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; (f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources ; (g) a warehouse, in relation to a person providing storage facilities for others ; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on ; (i) a store or premises used as a sales outlet ; ....
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....tablishment in the first-mentioned State, if : a. he has and habitually exercises in the first-mentioned State 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 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 o....
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.... of companies worldwide as a whole, which is evident not only from going through the said report, but also from the consolidated financial statements appended to the report, which show the assets of the group worldwide." The co-ordinate bench of the Tribunal in the case of Oracle Systems Corporation (Supra) while adjudicating the issue of determination of PE in India, followed the decision rendered in the case of E-Funds IT Solution Inc. (supra) and held that reliance placed on report in Form 10-K is flawed as it refers to worldwide activities of the group. 10. Further, the AO on basis of information available on website has drawn conclusion that the Regional Headquarters situated at Naharpur Kasan, Nakhrola, IMT Manesar, Gurgaon is assessee's fixed place PE in India. The principal test to ascertain as to whether an enterprise (foreign assessee) has fixed palace of business in India is, the physical disposal of the premises to the said enterprises. In the case of Formula One World Championship Ltd. vs CIT, 80 taxmann.com 347 (SC) has held: "27. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such ....
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....tions used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business, that would also constitute a PE. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute PE are: a place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may ....
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....iders, proof of ownership of land at village Naharpur Kasan, District Gurgaon to show that DIFS to show that DIFS is an independent entity. The assessee has also placed on record sample invoices and Bill of Lading to show that goods are sold by the assessee to DIFS. This indicates that the transactions between assessee and DIFS are on principal to principal. Further, nowhere in the assessment order, the Assessing Officer has referred to any material to show that DIFS has authority to conclude contract on behalf of the assessee or DIFS habitually secures orders on behalf of assessee. Not even a single instance has been cited by the AO where DIFS has concluded contract on behalf of the assessee or has secured orders from any of the customers on behalf of assessee. 12. The AO in para 3.5.2 of the impugned order has referred to Clause 7 of agreement that mentions about Marketing Advertisement and Promotion. The said excerpts of agreement extracted in the assessment order are from Patent, Trademark, and Knowhow License Agreement (available at Page 221 to 239 of the paperbook). Undisputedly, the assessee has already offered income from the said segment to tax as Royalty and the AO has....