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2021 (6) TMI 254 - AT - Income TaxSalary reimbursed by the AE to the assessee - attribution of salary to the supervisory PE - assessee in the present case is a foreign company, based in USA with one associated enterprises (AE) namely M/s LZAM India in Vadodara Gujarat India - whether the employees namely Mr. Tim and Mr. Matt are the employees of the assessee Viz a viz rendering services in connection with the supervisory PE or these are the employees of the AE namely M/s LZAM India in India? - HELD THAT - On perusal of agreement for reimbursement of employee cost between assessee and M/s LZAM India we find the assessee is the ultimate parent company of the M/s LZAM India which is engaged in the business of manufacturing and selling of natural product. The assessee required personnel having high skilled and expertise in connection with its business in India. Accordingly personnel were deputed in India. As agreed upon by the parties that the deputed personnel will be the employee of the M/s LZAM India and will work under the supervision and guidance of M/s LZAM India. LZAM India will pay salary to those personnel and bear the cost of all the benefit provided to them. It was also agreed upon that the part of the salary will be paid in foreign currency to those personnel for the purpose of convenience but the quantum of same would be decided by the M/s LZAM India as per rules and regulation applicable in India. The primary evidences have not been disputed by the authorities below. Thus, no adverse inference can be drawn against the assessee merely on the informations displayed on the website. Furthermore, the informations displayed on the website cannot precede the documents which are available on record for deciding the issue on hand. Likewise, the documents in the form of passport and bank statement which were not filed by the assessee, cannot help the Revenue. In view of the above, we are not convinced with the finding of the learned DRP. Accordingly, we direct the AO to delete the addition made by him. DRP treating Mr. Tim and Mr. Matt as agent of the assessee as per clause 4 of Article 5 of India-US DTTA and accordingly treating the offshore sale as part of the income taxable in India - HELD THAT - As we have already given a finding that the individuals namely Mr. Tim and Mr. Matt are not the employees of the assessee. Rather these are the employees of the AE of the assessee namely M/s LZAM India. Therefore, the purchase agreement signed by them was entered on behalf of the AE in the capacity of authorized signatory being the directors. Accordingly, it can be concluded that there was no connection in the employees and the assessee which can establish the agency PE in India. Thus the whole basis for treating the transaction of impugned sale and purchase as attributable to the agency PE is not sustainable. Furthermore, the agency PE can be attracted as per the relevant provisions of article 5 and 7 but we note that the conditions as specified therein have not been complied with. Accordingly, we are not convinced with the finding of the learned DRP and direct the AO to delete the addition made by him.
Issues Involved:
1. Attribution of salary to supervisory Permanent Establishment (PE). 2. Constitution of a Service PE under Article 5(2)(1) of the India-USA DTAA. 3. Taxation of salary reimbursement as business profits under Article 7 of the India-USA DTAA. 4. Deduction of disbursed amounts under Article 7(3) of the India-USA DTAA. 5. Attribution of income based on actual reimbursement versus total salary. 6. Constitution of an Agency PE under Article 5(4) of the India-USA DTAA. 7. Taxation of profits from offshore sales under Article 7(1) of the India-USA DTAA. 8. Attribution ratio of profits on offshore sales. 9. Computation of interest under Section 234A of the Income Tax Act. 10. Computation of interest under Section 234B of the Income Tax Act. 11. Erroneous consideration of tax refund. 12. Computation of interest under Section 234D of the Income Tax Act. 13. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act. Detailed Analysis: 1. Attribution of Salary to Supervisory PE: The core issue was whether Mr. Timothy Earl Madden (Tim) and Mr. Matthew Scott Timmons (Matt) were employees of the assessee and if their salaries should be attributed to the supervisory PE in India. The AO found that these individuals were involved in supervisory services for the assessee's associated enterprise (AE) in India and added their salaries to the income of the supervisory PE. The assessee contended that Tim and Matt were full-time employees of the AE, not the assessee, and their salaries were reimbursed on a cost-to-cost basis. The DRP partially confirmed the AO's order but restricted the addition to the profit portion of the salary reimbursement. The Tribunal found that Tim and Matt were indeed employees of the AE, not the assessee, and directed the AO to delete the addition. 2. Constitution of a Service PE: The AO and DRP concluded that the assessee constituted a Service PE in India under Article 5(2)(1) of the India-USA DTAA due to the supervisory services rendered by Tim and Matt. The Tribunal, however, disagreed, noting that these individuals were employees of the AE and worked under its supervision and control. 3. Taxation of Salary Reimbursement: The AO taxed the reimbursement of salary as business profits under Article 7 of the India-USA DTAA. The assessee argued that these reimbursements were on a cost-to-cost basis and did not constitute income. The Tribunal held that since Tim and Matt were employees of the AE, the reimbursement did not represent income for the assessee and directed the AO to delete the addition. 4. Deduction of Disbursed Amounts: The assessee argued that if the reimbursement of salary was considered business profits, a corresponding deduction should be allowed under Article 7(3) of the India-USA DTAA. The DRP restricted the addition to the profit portion of the salary reimbursement, which was accepted by the Tribunal. 5. Attribution of Income Based on Actual Reimbursement: The AO attributed income based on the total salary of Tim and Matt, whereas the assessee contended that attribution should be based on the actual reimbursement. The Tribunal agreed with the assessee, directing the AO to delete the addition. 6. Constitution of an Agency PE: The AO and DRP concluded that Tim and Matt were dependent agents of the assessee, constituting an Agency PE in India under Article 5(4) of the India-USA DTAA. The Tribunal found that these individuals were employees of the AE and not the assessee, thus no Agency PE was constituted. 7. Taxation of Profits from Offshore Sales: The AO taxed the profits from offshore sales under Article 7(1) of the India-USA DTAA, arguing that these sales were connected to the alleged Agency PE. The assessee contended that the sales were concluded outside India and not taxable. The Tribunal agreed with the assessee, noting that the sales were offshore transactions and directed the AO to delete the addition. 8. Attribution Ratio of Profits on Offshore Sales: The DRP held that the AO's attribution of 100% of profits on offshore sales to the alleged Agency PE was not based on any material and should be calculated based on global profitability or 10%, whichever is higher. The Tribunal found no basis for such attribution, directing the AO to delete the addition. 9. Computation of Interest under Section 234A: The AO computed consequential interest under Section 234A of the Income Tax Act. The Tribunal did not specifically address this issue, as the primary issues were resolved in favor of the assessee. 10. Computation of Interest under Section 234B: Similar to Section 234A, the AO computed interest under Section 234B. The Tribunal's resolution of primary issues in favor of the assessee implied that the interest computation would need revision. 11. Erroneous Consideration of Tax Refund: The AO erroneously considered a refund of ?976,810, which the assessee claimed not to have received. The Tribunal's decision to delete the primary additions would necessitate a revision of the tax liability computation. 12. Computation of Interest under Section 234D: The AO computed interest under Section 234D without the assessee receiving any refund. The Tribunal's directive to delete the primary additions implied that the interest computation would need adjustment. 13. Initiation of Penalty Proceedings under Section 271(1)(c): The AO initiated penalty proceedings under Section 271(1)(c). The Tribunal's decision to delete the primary additions meant that the basis for penalty proceedings was removed. Conclusion: The Tribunal allowed the appeal of the assessee, directing the AO to delete the additions made in relation to the salaries of Tim and Matt, the alleged Service PE, and the alleged Agency PE. The Tribunal's findings were based on the employment agreements and the factual matrix, concluding that Tim and Matt were employees of the AE, not the assessee. The Tribunal also directed the AO to revise the interest computations and tax liability accordingly.
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