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2019 (7) TMI 859 - AT - Income TaxIncome accrued in India - PE in India so as to attribute certain income which is taxable in India - India-USA DTAA - business of diamond grading and preparation of diamond dossiers - taxability of Instructor Fee earned from GIA India Lab , subsidiary company - HELD THAT - Considering the functions and the risks assumed by GIA India Lab vis - vis its business activities in India (as has been recorded in the transfer pricing study report - which functional and risk analysis has been accepted by the TPO both in the case of GIA India Lab and in the case of the assessee company), GIA India Lab is an independent entity which is rendering grading services to its clients in India. GIA India Lab also bears service risk and all client facing risks vis- -vis the stones sent to the assessee company for grading purposes (as has been recorded in the Transfer Pricing Study Report). Hence, GIA India Lab is not acting in India on behalf of the assessee company. Further, GIA India Lab is not having any authority to conclude contracts and has neither concluded any contracts on behalf of the assessee company nor has it secured any orders for the assessee company in India. Thus, GIA India Lab cannot be regarded as agency PE of the assessee company in India. In view of the aforesaid discussion AO has erred in invoking section 9 of the Act and/or Article 5 of the India-USA DTAA in order to say that the assessee company has a PE in India. Thus, assessee succeeds on this issue.
Issues Involved:
1. Permanent Establishment (PE) in India. 2. Attribution of receipts to the alleged PE. 3. Estimation of gross profit attributable to the PE. 4. Levy of interest under section 234B of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Permanent Establishment (PE) in India: The primary dispute revolves around whether the assessee, a US-based company, has a Permanent Establishment (PE) in India. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) concluded that the assessee has a PE in India through its subsidiary, GIA India Laboratory Private Limited (GIA India Lab), and thus certain income is taxable in India. The assessee contended that it has no PE in India under the India-USA Double Taxation Avoidance Agreement (DTAA), arguing that there is no fixed place, service, or agency PE as required under Article 5 of the DTAA. The Tribunal analyzed the agreements and operations between the assessee and GIA India Lab, concluding that GIA India Lab operates independently and is not a joint venture or partnership with the assessee. The Tribunal relied on precedents such as DIT vs E-Funds IT Solution and Swiss Re-insurance Co Ltd v. DDIT(IT) to determine that GIA India Lab does not constitute a fixed place, service, or agency PE of the assessee in India. Therefore, the Tribunal held that the assessee does not have a PE in India, and the income is not taxable in India. 2. Attribution of Receipts to the Alleged PE: The AO and the DRP attributed 50% of the receipts from the gem grading services to the alleged PE in India. The assessee argued that no part of its receipts should be attributable to India as it has no PE in India. Since the Tribunal concluded that the assessee does not have a PE in India, the issue of attribution of receipts becomes academic. Thus, the Tribunal did not delve further into this issue. 3. Estimation of Gross Profit Attributable to the PE: The AO and the DRP estimated 20.31% of the receipts attributable to the alleged Indian operations as profits of the PE taxable in India. The assessee contended that even if it had a PE in India, no further income could be taxed as the alleged PE was remunerated at arm's length. However, since the Tribunal held that the assessee does not have a PE in India, this issue also became academic and did not require further adjudication. 4. Levy of Interest under Section 234B: The AO levied interest under section 234B of the Income Tax Act, 1961. The assessee argued that no interest under section 234B is leviable. The Tribunal noted that this issue is consequential in nature and does not require specific adjudication since the primary issue of PE was decided in favor of the assessee. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the assessee does not have a PE in India and thus its income is not taxable in India. Consequently, the issues of attribution of receipts and estimation of gross profit became academic, and the levy of interest under section 234B was deemed consequential.
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