2019 (5) TMI 1710 - AT - Income Tax

Attribution of profits of the PE in India - whether the assessee company has a PE in India in the form of liaison office of M/s. Rolls Royce India Ltd., a separate entity for its sale of goods in India? - HELD THAT - Once there is a finding that activities of LO have resulted in PE in India, then tax attributable to such activity must be brought to tax in India. If activities give rise to PE which undertakes marketing and sales in India then tax attribution of the PE must be made. Here the attribution in the hands of RRIL was only limited to cost plus basis, whereas in the case of the assessee the profit which has been attributed relates to purely sales of engines and parts. Nothing has been brought before us that under the MAP agreement the profit attribution of sales of RRPL were also subject matter of consideration or discussion and there cannot be any assumption that the quantum of tax agreed in the case of RRIL exhausts the contribution of profit to the PE of assessee in India. Blanket attribution as done by the authorities below does not seems to be on a sound footing, especially when they have alleged that common activities were carried out from the LO. Then in that case, it would not possible to distinguish as to which activities of LO pertains to RRIL or activities of LO were undertaken on behalf of the assessee and what part of activities at the LO which assessee itself was executing for its sale. We hold that the profits to be taxed in the hands of the assessee in the assessment years impugned before us, should be attributed at 35%, instead of 75% subject to rectification as stated above in para 14, which should be made in the computation of tax for each of the assessment years. Further, tax actually paid by the assesse for these years should be credited from the tax liability to determine the final amount to be paid or refunded to the assessee as the case may be.

Summary

Issues Involved:
1. Whether the assessee company has a Permanent Establishment (PE) in India.
2. Attribution of profits to the PE in India.

Detailed Analysis:

1. Whether the Assessee Company Has a Permanent Establishment (PE) in India:

The core issue in the appeals was whether the assessee company, Rolls-Royce Plc (RRPL), had a PE in India through the liaison office (LO) of Rolls-Royce India Ltd. (RRIL). The Tribunal noted that RRPL was supplying aero-engines and spare parts to Indian customers and had a service agreement with RRIL, which had set up a liaison office in India. The Assessing Officer (AO) conducted a survey at the LO and found that RRIL's office was a fixed place of business for RRPL and its group companies, and the activities carried out were core activities of marketing, negotiating, and selling products, not merely preparatory or auxiliary. The AO concluded that RRPL had a PE in India under Article 5(2)(f) and Article 5(2)(k) of the India-UK DTAA.

The CIT(A) upheld the AO's findings, and the Tribunal in earlier years had also decided against the assessee, which was confirmed by the Hon'ble Delhi High Court. The Tribunal noted that the same set of facts and activities could not give rise to two PEs for different entities. The Tribunal concluded that the LO of RRIL constituted a PE for RRPL in India, and the finding was based on the same documents and facts as in earlier years.

2. Attribution of Profits to the PE in India:

The AO attributed 75% of the profits to the PE in India, which was upheld by the CIT(A). The Tribunal, however, noted that the attribution of profits should be reconsidered. The Tribunal referred to earlier years' precedents where 35% of the global profits in respect of sales effected in India were attributed to the PE. The Tribunal also considered the argument that the same activities could not give rise to two separate PEs and that the profit attribution for RRIL had already been settled under the Mutual Agreement Procedure (MAP).

The Tribunal concluded that there was no double taxation as the activities of RRIL and RRPL were distinct, and the attribution of profits to RRIL did not exhaust the attribution of profits to RRPL. The Tribunal held that profits to be taxed in the hands of the assessee should be attributed at 35% instead of 75%, subject to rectification of errors in computation, such as the incorrect application of tax rates and surcharge.

Conclusion:

The Tribunal held that RRPL had a PE in India through the LO of RRIL and attributed 35% of the global profits in respect of sales effected in India to the PE, instead of the 75% attributed by the AO. The Tribunal also directed rectification of computational errors and credited tax actually paid by the assessee to determine the final tax liability or refund. The appeals of the assessee were partly allowed.