2010 (3) TMI 1157 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of income on accrual basis vs. cash basis.
2. Existence of business connection or Permanent Establishment (PE) in India.
3. Attribution of profit to PE in India.

Detailed Analysis:

1. Taxability of Income on Accrual Basis vs. Cash Basis:
The primary issue was whether the income of the assessee should be computed on an accrual basis or a cash basis. The AO held that the income should be taxed on an accrual basis, citing that the fees for technical services (FTS) are deemed to accrue in India when they become payable. The CIT(A) upheld this view, stating that the income of the non-resident should be computed on an accrual basis, as the assessee maintained its accounts on a mercantile basis at its head office. The Tribunal agreed with the CIT(A), noting that the assessee's annual accounts were prepared on a mercantile basis, and thus, the income in India should be computed on the same basis.

2. Existence of Business Connection or Permanent Establishment (PE) in India:
The second issue was whether the assessee had a business connection or PE in India. The AO and CIT(A) held that the assessee had a PE in India through its agent, ANR Associates, who performed significant activities for the assessee, including soliciting orders and maintaining customer relationships. The Tribunal examined the agreement between the assessee and ANR, noting that ANR acted almost wholly for the assessee and was subject to extensive control and instructions from the assessee. The Tribunal concluded that ANR was not an independent agent and that the assessee had a PE in India within the meaning of Article 5(1) and 5(8) of the DTAA between India and Singapore.

3. Attribution of Profit to PE in India:
The final issue was the attribution of profit to the PE in India. The AO attributed a significant portion of the profit from the sale of spares to the PE in India. The CIT(A) reduced the profit attributable to the PE to 10% for certain years and 25% for others. The Tribunal upheld the CIT(A)'s decision to attribute 10% of the profit to the PE for all assessment years, noting that ANR's role was limited to soliciting orders and promoting sales, and that the core activities were performed outside India. The Tribunal also considered the fixed remuneration paid to ANR and concluded that 10% of the total profit from the sale of spares could be attributed to the PE in India.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to tax the income on an accrual basis, confirmed the existence of a PE in India through ANR Associates, and attributed 10% of the profit from the sale of spares to the PE in India for all assessment years. The appeals filed by the assessee were partly allowed, and those of the Revenue were dismissed.