2010 (2) TMI 807 - AT - Income Tax

Whether fees received for deputing two persons to India as a business profit in as much as the assessee should be considered as a person having permanent establishment in India or not. - Held that - the American company has provided is selecting and offering personnel to work under the control and supervision of the assessee in India. It is not a part of any technical services to be rendered by the assessee to the Indian company. The deputed persons are for all practical purposes employees of the Indian company. They carry out work allotted to them by The Indian company. Assessee has no control over the activities or the work to be performed by the deputed persons. there is no income in reimbursement of the salary of the deputed employees paid by the assessee. decided in favour of Assessee.

Issues Involved:
1. Determination of Permanent Establishment (PE) in India under Article 5(2)(ii) of the India-US Double Tax Avoidance Agreement (DTAA).
2. Eligibility of the appellant as a tax resident of the USA for DTAA benefits.
3. Taxability of income under the cash system of accounting.
4. Classification of income as Fees for Technical Services (FTS).
5. Credit for tax deducted at source.
6. Levy of interest under section 234B of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Determination of Permanent Establishment (PE) in India:
The primary issue was whether the fees received by the assessee for deputing personnel to India constituted business profits and whether the assessee had a Permanent Establishment (PE) in India. The CIT(A) concluded that the appellant was only providing personnel and not rendering any services in India. The agreement indicated that the personnel worked under the supervision and control of Lucent India, and the appellant was not responsible for their work. Hence, the appellant did not have a PE in India under Article 5(2)(ii) of the DTAA. This was supported by the ruling in M/s. Tekniskil (Sendirian) Berhard v. CIT, where it was held that providing workers on hire did not constitute a PE.

2. Eligibility of the Appellant as a Tax Resident of the USA:
The Assessing Officer initially held that the appellant, being a partnership, could not avail the benefits of the DTAA as it did not file a tax residency certificate. However, the appellant later submitted the tax residency certificate, which was accepted by the CIT(A). The CIT(A) recognized that the appellant, a Limited Liability Company (LLC) electing to be taxed as a partnership under US tax law, was eligible for DTAA benefits.

3. Taxability of Income under the Cash System of Accounting:
The appellant followed the cash system of accounting and did not receive any payments during the financial year 2002-03. The CIT(A) accepted this method, and it was concluded that since no income was received during the relevant assessment year, there was no taxable income.

4. Classification of Income as Fees for Technical Services (FTS):
The CIT(A) distinguished the appellant's case from the ruling in XYZ, In re, where managerial services were provided. In the appellant's case, the agreement was solely for providing personnel, not for rendering technical or consultancy services. Thus, the income could not be classified as Fees for Technical Services under section 9(1)(vii) of the Act.

5. Credit for Tax Deducted at Source:
The appellant argued that since payments made to it were subject to tax deduction at source, any tax liability should be considered extinguished. The CIT(A) did not specifically address this issue in the judgment, but the overall conclusion implied that no additional tax liability existed due to the absence of a PE and the nature of the income.

6. Levy of Interest under Section 234B:
The appellant contended that since payments were subject to tax deduction at source under section 195, there was no liability to pay advance tax, and thus, interest under section 234B should not be levied. The CIT(A) did not explicitly rule on this, but the dismissal of the revenue's appeal suggested agreement with the appellant's position.

Conclusion:
The CIT(A) and the Tribunal concluded that the appellant did not have a Permanent Establishment in India, and the income from deputing personnel was not taxable in India. The appeal by the revenue was dismissed, affirming the CIT(A)'s decision that the appellant's business income was not taxable in India under Article 7 of the DTAA.

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