2011 (4) TMI 1469 - AT - Income Tax

Summary

Issues Involved:
1. Non-constitution of Permanent Establishment (PE) of the appellant in India.
2. No attribution of income deemed to accrue/arise in India to the alleged PE of the appellant in India.

Summary:

Issue 1: Non-constitution of Permanent Establishment (PE) of the appellant in India

The appellant contested the AO's and DRP's conclusion that its two Indian subsidiaries constituted a 'Business Connection' u/s 9(1)(i) of the Income-tax Act, 1961 or a 'Permanent Establishment' (PE) under Article 5 of the India-Germany Tax Treaty. The appellant argued that it operates entirely from outside India and has no fixed place of business in India. The Tribunal referred to its previous decision for AY 2003-04, where it was held that the appellant did not have any PE in India and that no revenues earned by the appellant could be attributed to a PE. The Tribunal noted that neither the AO nor the DRP distinguished the facts of the current year from AY 2003-04 and followed the previous decision, allowing Ground No. 1 in favor of the appellant.

Issue 2: No attribution of income deemed to accrue/arise in India to the alleged PE of the appellant in India

The appellant argued that since it operates entirely from outside India, no income can be attributed to the alleged PE in India under Article 7 of the Tax Treaty. The Tribunal referred to its previous decision, which stated that even if a PE existed, no part of the revenues could be attributed to it unless there was a live economic nexus with the PE. The Tribunal concluded that the taxation on a gross basis at a higher rate of 20% u/s 115A read with 44D of the Act was unwarranted and that taxation should be at 10% on a gross basis under Article 12(2) of the Tax Treaty. Accordingly, Ground No. 2 was allowed in favor of the appellant.

Conclusion:

The appeal was allowed in favor of the appellant on both grounds, following the Tribunal's previous decision for AY 2003-04.