2016 (5) TMI 373 - HC - Income Tax

Business income attributable to PE in India - whether the Assessee, a tax resident of United States of America (USA), has a Permanent Establishment (hereafter PE ) in India? - Held that - The AO has also held that Nortel India constituted Dependent Agent PE of the Assessee in India. The aforesaid conclusion was premised on the finding that Nortel India habitually concludes contracts on behalf of the Assessee and other Nortel Group Companies. In the present case, there is no material on record which would indicate that Nortel India habitually exercises authority to conclude contracts for the Assessee or Nortel Canada. In order to conclude that Nortel India constitutes a Dependent Agent PE, it would be necessary for the AO to notice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other group entities. In absence of any such evidence, this view could not be sustained. The CIT(A) as well as the ITAT has proceeded on the basis that the Assessee had employed the services of Nortel India for fulfilling its obligations of installation, commissioning, after sales service and warranty services. The ITAT also concurred with the view that since employees of group companies had visited India in connection with the project, the business of the Assessee was carried out by those employees from the business premises of Nortel India and Nortel LO. In this regard, it is relevant to observe that a subsidiary company is an independent tax entity and its income is chargeable to tax in the state where it is resident. In the present case, the tax payable on activities carried out by Nortel India would have to be captured in the hands of Nortel India. Chapter X of the Act provides an exhaustive mechanism for determining the Arm s Length Price in case of related party transactions for ensuring that real income of an Indian Assessee is charged to tax under the Act. Thus, the income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Assessee. In view of our conclusion that the Assessee s income from supply of equipment was not chargeable to tax in India, the question relating to attribution of any part of such income to activities in India does not arise. In view of our conclusion that the Assessee does not have a PE in India, the question of attribution of any income to the alleged PE also does not arise. - Decided in favour of assessee

Issues Involved:
1. Whether the Assessee had a Permanent Establishment (PE) in India under Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and USA.
2. Whether the finding that the Assessee had a PE in India is contrary to the facts and material on record.
3. Whether the Tribunal erred in attributing 50% of the alleged profits to the alleged PE of the Assessee in India.
4. Whether the Tribunal erred in confirming the levy of interest under section 234B of the Act.
5. Whether research and development expenses were liable to be taken into account while estimating the profits under Rule 10 of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Permanent Establishment (PE) in India:
The principal controversy was whether the Assessee, a tax resident of the USA, had a PE in India. The Assessee contended that it did not have a PE in India as it only supplied equipment from overseas. However, the Income Tax Authorities (AO, CIT(A), and ITAT) concluded that Nortel India and Nortel LO constituted the Assessee's PE in India (both Fixed Place PE and Dependent Agent PE). They found that Nortel India had negotiated and secured contracts on behalf of the Assessee and other Nortel Group entities, and the Assessee was merely a shadow company of Nortel Canada, incorporated to evade taxes.

2. Finding of PE Contrary to Facts:
The Assessee argued that Nortel India acted independently and any income attributable to Nortel India should be assessed in its hands, not the Assessee's. The Court found no material evidence that Nortel LO acted on behalf of the Assessee or Nortel Canada. Similarly, there was no evidence that Nortel India's offices were used by the Assessee or Nortel Canada. The Court concluded that Nortel India did not habitually conclude contracts on behalf of the Assessee or Nortel Canada. Therefore, the finding that the Assessee had a PE in India was not supported by the facts and material on record.

3. Attribution of Profits:
The Tribunal had attributed 50% of the alleged profits to the alleged PE of the Assessee in India. The Court found that the Assessee's income from the supply of equipment was not chargeable to tax in India as no part of the income could be reasonably attributed to operations carried out in India. The Court held that the question of attributing any part of the Assessee's income to activities in India did not arise since the Assessee did not have a PE in India.

4. Levy of Interest under Section 234B:
The additional question regarding the levy of interest under Section 234B of the Act was framed in ITA No.689/2014. However, no contentions were advanced on either side regarding this issue, and consequently, it was not considered by the Court.

5. Research and Development Expenses:
The controversy in ITA Nos. 666/2014, 667/2014, and 673/2014 related to whether research and development expenses should be taken into account while estimating profits under Rule 10 of the Income Tax Rules, 1962. This issue no longer survived in view of the Court's conclusion that no part of the Assessee's income from the supply of equipment was chargeable to tax under the Act.

Conclusion:
The Court held that the Assessee did not have a PE in India and its income from the supply of equipment was not chargeable to tax in India. Consequently, the questions of attributing any income to the alleged PE and taking research and development expenses into account did not arise. The appeals were allowed, and the impugned orders were set aside, with each party bearing its own costs.

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