2018 (8) TMI 852 - AT - Income Tax

Dependent Agent Permanent Establishment in India - Article 5 of the India-USA Double Tax Avoidance Agreement ( DTAA ) - AO levied tax on the total income of DPIFI (after allowing a deduction of 5% of income for expenses) at the rate of 40% plus applicable surcharge and cess) visa- vis a rate of 15% on gross basis as per Article 12 of the India-USA DTAA pertaining to Royalty and Fees for Included Services. Held that - DRP has noted that, Jubilant is neither selling nor storing any goods for or on behalf of the assessee. The master franchisee (Jubilant) has power to appoint its sub-franchisees but the assessee is entitled to only royalty and store opening fees from sub-franchisees also. Approval of the sub-franchisee agreement is only for the limited purpose of protecting assessee s brand image and business interests. Considering the fact that the master franchisee is an independent business enterprise and restrictions placed on it by the assessee are only to safeguard its brand value and ensure proper receipt of royalty income, we are of the opinion that jubilant does not constitute a permanent establishment or agency PE of the assessee. However, the Dispute Resolution Panel noted that since the department had not accepted the decision and filed an appeal before the ITAT, to keep the issue alive and protect the interest of the department, it upheld the Assessing Officer s action. Since the identical issue has been decided in favour of the assessee by the tribunal in assessee s own case, respectfully following the same, we set aside the orders of the authorities below and decide the issue in favour of the assessee.

Summary

Issues involved:
1. Determination of Permanent Establishment (PE) under the India-USA Double Tax Avoidance Agreement (DTAA).
2. Allowance of deduction for computing income from the business.
3. Initiation of penalty under Section 271(1)(c) of the Income Tax Act.
4. Violation of principles of judicial discipline by the Dispute Resolution Panel (DRP).

Detailed Analysis:
1. The main issue in this case was the determination of Permanent Establishment (PE) under the India-USA Double Tax Avoidance Agreement (DTAA). The Assessing Officer held that the assessee had a Dependent Agent Permanent Establishment in India, leading to the taxation of income at a higher rate. However, the Dispute Resolution Panel (DRP) had earlier decided in favor of the assessee for the assessment year 2012-13, stating that the master franchisee operated independently and did not constitute a PE. Despite this, the DRP in the current case upheld the Assessing Officer's decision to protect the department's interest, leading to the appeal by the assessee.

2. Another issue raised was the allowance of deduction for computing income from the business. The Assessing Officer had determined that a certain percentage of the total income should be allowed as a deduction. The assessee objected to this determination, highlighting discrepancies in the submission of facts. The Tribunal reviewed the Master Franchise Agreement and Sub-Franchise Agreement, finding that the assessee was entitled to a percentage of sale proceeds and store opening fees, but the profit and loss belonged to the franchisee. Ultimately, the Tribunal found no merit in the Assessing Officer's decision and decided the issue in favor of the assessee.

3. The third issue involved the initiation of a penalty under Section 271(1)(c) of the Income Tax Act. The Tribunal's decision on the first issue in favor of the assessee rendered the adjudication on other issues raised by the Revenue as academic. Consequently, the appeal filed by the Revenue was dismissed, and the penalty was not imposed.

4. Lastly, the violation of principles of judicial discipline by the Dispute Resolution Panel (DRP) was raised as an issue. The Tribunal noted that the identical issue had been decided in favor of the assessee in a previous case and, respecting the principle of consistency, set aside the orders of the authorities below and decided the issue in favor of the assessee. The Tribunal emphasized that since the first ground had already been decided in favor of the assessee, the adjudication of other issues was of academic interest and was not pursued further.

In conclusion, the Tribunal allowed the appeal filed by the assessee, setting aside the orders of the lower authorities and deciding the issues in favor of the assessee based on the principles of judicial discipline and consistency in legal interpretation.