2022 (12) TMI 1396 - AT - Income Tax

Income deemed to accrue or arise in India - agency PE - both the authorities treated the assessee as DAPE Dependent Agent Permanent Establishment - nature of the business activities carried out by the assessee and subsidiary of the assessee viz. Krones India Pvt. Ltd. ( KIPL ) - HELD THAT - For an enterprise to be considered as habitually securing orders wholly or almost wholly for the other enterprise, it is essential that the enterprise frequently accepts orders on behalf of the other enterprise or habitually represents to persons offering to buy goods or merchandise that acceptance of an order by such enterprise constitutes the agreement of the other enterprise to supply goods or merchandise under the terms and conditions specified in the order and further the other enterprise takes actions that give purchasers the basis for a reasonable belief that such person has authority to bind the other enterprise. We are of the considered view that KIPL is only undertaking marketing enterprise and contracts are finalized by the assessee and signed by the assessee outside India. Therefore, KIPL cannot be said to be habitually securing and concluding order on behalf of the assessee. KIPL maintains stock inventory and economically dependent on the assessee - The agreement with KIPL is effective from 2007 and we are in Assessment Year 2011-12 which means that no adverse view has been taken by the Revenue in the past and we have been told by the ld. counsel for the assessee that no adverse view has been taken by the Revenue after the present assessment. Though the AO has heavily relied upon the TP Study Report of KIPL, but has not brought any evidence on record that KIPL has habitually secured orders for the assessee. None of the customers have been examined by the Assessing Officer though the customers from India include renowned organizations like Nestle, Coco Cola, Pepsico etc. Considering all we are of the considered view that the observations made in the TP Study Report of KIPL regarding scope of its business activities do not result in holding KIPL as DAPE of the assessee and further, since KIPL has been remunerated by the assessee for commission activities on arm s length basis, no further attribution is required in lieu of law laid down by the Hon'ble Supreme Court in the case of Morgan Stanley 2007 (7) TMI 201 - SUPREME COURT We, accordingly, hold that pursuant to the specific exclusion of independent agent under Article 5(5) of the DTAA, the case o the assessee falls outside the scope of PE. We, accordingly, direct the Assessing Officer to delete the impugned addition. Appeal of the assessee is allowed.

Issues Involved:
1. Whether Krones India Pvt. Ltd. (KIPL) constitutes a Dependent Agent Permanent Establishment (DAPE) of the assessee.
2. Taxation of offshore supplies in the hands of the alleged PE.
3. Attribution of profits in relation to offshore supplies to the alleged DAPE.
4. Taxation of receipts from technical services and Installation & Commissioning charges.
5. Attribution of profits in relation to Installation & Commissioning charges/technical services.
6. Levy of interest under section 234B of the Income-tax Act.
7. Computation of arm's length price of Bank Guarantee.

Detailed Analysis:

1. Dependent Agent Permanent Establishment (DAPE):
The primary issue was whether KIPL should be considered a DAPE of the assessee. The CIT(A) and the Assessing Officer (AO) concluded that KIPL habitually secures orders for the assessee, maintains stock inventory, and is economically dependent on the assessee. The Tribunal, however, found that KIPL does not carry out any manufacturing or processing activity in India using intangibles of the assessee, and the contracts for supplies are directly negotiated and concluded by the assessee. KIPL only coordinates delivery and payment, for which it receives a commission. The Tribunal concluded that KIPL is not habitually securing and concluding orders on behalf of the assessee and is not economically dependent on the assessee, thus not constituting a DAPE.

2. Taxation of Offshore Supplies:
The CIT(A) upheld the taxation of offshore supplies in the hands of the alleged PE. The Tribunal noted that supplies are made on a CIF basis directly to customers by the assessee, and KIPL only coordinates delivery and payment. Therefore, the offshore supplies are not chargeable to tax under the provisions of the Act or as per Article 7 of the DTAA read with the Protocol.

3. Attribution of Profits to DAPE:
The CIT(A) confirmed the attribution of profits to the alleged DAPE. The Tribunal observed that since KIPL is remunerated on an arm's length basis for its commission activities, no further attribution of profits is required. The Tribunal directed the AO to delete the impugned addition.

4. Taxation of Receipts from Technical Services and Installation & Commissioning Charges:
The CIT(A) upheld the action of taxing the receipts from technical services and Installation & Commissioning charges by the assessee at 40%, holding that the assessee has a PE in India. The Tribunal found that the receipts from such business activities were effectively connected with the alleged PE in India and confirmed the attribution of profits.

5. Attribution of Profits in Relation to Installation & Commissioning Charges/Technical Services:
The CIT(A) confirmed the attribution of 100% of profit pertaining to Installation & Commissioning charges/technical services to the alleged PE of the assessee. The Tribunal, however, found that KIPL was remunerated on an arm's length basis for all the functions performed by it, and no further attribution is required.

6. Levy of Interest under Section 234B:
The CIT(A) held that the provisions of levy of interest under section 234B are consequential in nature. The Tribunal referred to the decision of the Hon'ble Supreme Court in the case of DIT Vs. Mitsubishi Corporation, which held that the assessee cannot be held liable to pay interest under section 234B if the payer has defaulted in deducting tax at source. Consequently, the Tribunal dismissed the Revenue's appeal on this issue.

7. Computation of Arm's Length Price of Bank Guarantee:
The CIT(A) directed the AO to compute the arm's length price of the Bank Guarantee. The Tribunal found that the Bank Guarantee does not constitute income of the assessee in India under the provisions of the Act or the DTAA and that it was not given in the financial year relevant to the subject assessment year. The Tribunal held that the direction was without jurisdiction.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that KIPL does not constitute a DAPE of the assessee, and directed the AO to delete the impugned addition. The Tribunal dismissed the Revenue's appeal regarding the levy of interest under section 234B.

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