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2020 (7) TMI 595 - AT - Income TaxExistence of PE - addition on account of salary reimbursement cost treated as fee for technical services - royalty income was offered to tax in India on the basis of tax rates prescribed in DTAA between India and Singapore i.e. @ 10% - AO was of the view that the person employed by the assessee, working under the Indian entity, were seconded to India; the salary of the said person was reimbursed by the Indian entity and hence taxable in the hands of the assessee. HELD THAT - The evidences need to be seen in their entirety as the burden of proving that the foreign assessee has a PE in India and consequently it has to be taxed on the business generated by such PE is initially on the Revenue. Such is the proposition laid down by Hon ble Supreme Court in ADIT vs E-funds IT Solutions Inc. 2017 (10) TMI 1011 - SUPREME COURT In such a scenario, the question of taxability of service PE in India of the assessee company is answered in the negative. The evidences have also been gone into by the CIT(A), who has given detailed finding. DR for the Revenue has failed to controvert the said finding of the CIT(A). In the absence of the same, it cannot be said that the assessee had service PE in India. Another aspect which is to be kept in mind for the taxability of service PE is that the expenses of salary cost needs to be deducted from the business income generated by the PE in India, which in the present case would be NIL. There will be no income attributable to the PE. We find no merit in the stand of the Revenue in this regard. Taxability in the hands of the assessee company i.e. income arising on account of deputation of Mr. Vinod Mahboobani and whether the same constitute service PE - We find no merit in the stand of the Assessing Officer in this regard, i.e. existence of service PE and provision of technical services; the same cannot co-exist. In any case under Article 12 of DTAA, the clause of make available needs to be fulfilled to hold existence of PE for technical services. In the absence of fulfillment of make available clause, it is not possible to hold that there is taxability of FTS under Article 12 of the DTAA. We find no merit in the stand of the Assessing Officer in treating the reimbursement received by the assessee company from YRIPL on account of salary payment as FTS. We have already held in the paras above that Mr. Vinod Mahboobani was working as an employee of YRIPL and not as an employee of the assessee company. The reimbursement of salary had no element of income and was not taxable. In any case since Mr. Vinod Mahboobani had already paid taxes in India on the aforesaid salary, the same amount being taxed as FTS in the hands of the assessee company, would amount to double taxation. Upholding the order of the CIT(A), we dismiss the ground of appeal raised by the Revenue. Attribution of business income to the alleged PE of the assessee company in India - AO has failed to establish his case and where none of the conditions specified in Article 5(8) of the DTAA have been satisfied, then it cannot be said that the assessee had any DAPE in India. In any case, the marketing activities undertaken by the YRMPL were on behalf of the YRIPL and its franchisees and in the absence of any link whatsoever with the business of the assessee company, there is no merit in attribution of contribution made by the Independent third-party franchisees, to constitute PE of the assessee company in India. Assessee has no PE in India and no business undertaken in India, hence no fixed place PE also. - Decided in favour of assessee.
Issues Involved:
1. Existence of a Permanent Establishment (PE) 2. Employee secondment and lien over employment 3. Link between royalty income and functions performed by the seconded employee 4. Place of management constituting a PE and characterization of salary reimbursement as Fee for Technical Services (FTS) 5. Indian affiliates constituting Dependent Agent PE (DAPE) 6. Attribution of AMP receipts to PE 7. Chargeability of interest under Section 234B Detailed Analysis: 1. Existence of a Permanent Establishment (PE) The Revenue argued that the existence of a PE is a finding of fact, and the CIT(A) erred in ignoring overwhelming facts supporting the existence of a PE. The Tribunal examined the Deputation Agreement and concluded that Mr. Vinod Mahboobani was under the control of YRIPL and not the assessee company, thus negating the existence of a service PE in India. 2. Employee Secondment and Lien Over Employment The Revenue contended that Mr. Mehboobani retained lien over his employment with YRAPL, pointing to the existence of a PE. The CIT(A) concluded that Mr. Mahboobani was under the control of YRIPL, and there was no right or lien over his employment by the assessee company. The Tribunal upheld this finding, noting that the salary was reimbursed on a cost-to-cost basis, and taxes were paid in India, thus no service PE existed. 3. Link Between Royalty Income and Functions Performed by the Seconded Employee The Revenue argued that Mr. Mahboobani's activities contributed to increased royalty received by YRAPL. The Tribunal found no link between the royalty income and the functions performed by Mr. Mahboobani, as he was working solely for YRIPL, and there was no service PE. 4. Place of Management Constituting a PE and Characterization of Salary Reimbursement as FTS The Revenue claimed that the assessee had a place of management constituting a PE in India and that salary reimbursement should be characterized as FTS. The Tribunal held that the salary reimbursement had no element of income and was not taxable as FTS. The reimbursement was a cost-to-cost payment, and Mr. Mahboobani had already paid taxes in India, avoiding double taxation. 5. Indian Affiliates Constituting Dependent Agent PE (DAPE) The Revenue argued that Indian affiliates constituted DAPE. The Tribunal found that the marketing activities undertaken by YRMPL were on behalf of YRIPL and its franchisees, with no link to the business of the assessee company. None of the conditions specified in Article 5(8) of the DTAA were satisfied, and therefore, no DAPE existed. 6. Attribution of AMP Receipts to PE The Revenue contended that the CIT(A) erred in not adjudicating the attribution of AMP receipts to the assessee's PE. The Tribunal found no merit in this argument, as the marketing activities were undertaken for the benefit of YRIPL and its franchisees, not the assessee company. 7. Chargeability of Interest Under Section 234B The Revenue argued that interest under Section 234B was chargeable. The Tribunal upheld the CIT(A)'s reliance on the decision of the Hon'ble Delhi High Court in DIT Vs. Jacobs Civil Incorporated, which held that the levy of interest under Section 234B was not applicable in the assessee's case. Conclusion: The Tribunal dismissed the Revenue's appeal, holding that there was no service PE or DAPE in India, and the salary reimbursement was not taxable as FTS. The marketing activities undertaken by YRMPL did not constitute a PE, and no business income was attributable to a PE in India. The Tribunal also upheld the CIT(A)'s finding that interest under Section 234B was not chargeable. The appeal of the Revenue was dismissed in its entirety.
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