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2022 (2) TMI 319 - AT - Income TaxExistence of PE in India - Income accrued in India - assessee has a PE in India subsidiary company set up - abassessee is a company incorporated in USA and also a tax resident of USA - Assessee pleaded that it does not have any PE in India in terms of Article 5 of the Double Taxation Avoidance Agreement (DTAA) entered into and subsisting between India and USA. The Indian Company i.e. GIA India Laboratory Pvt. Ltd., which was set up on 26/09/2007, is a subsidiary of the assessee company. This subsidiary company set up a laboratory in India and since then engaged in the activity of gem grading in India - HELD THAT - As during the year under consideration vis- -vis earlier years 2019 (7) TMI 859 - ITAT MUMBAI which has been admitted both by the ld. AO as well as ld. DRP, respectfully following the aforesaid decisions of the Tribunal, we hold that the ld. AO erred in invoking section 9 of the Act and / or Article 5 of the India USA DTAA in order to say that assessee has a PE in India. Accordingly, the ground No.2 raised by the assessee is allowed. Taxability of royalty - HELD THAT - Since there is no PE in India, there will be no occasion to royalty being effectively connected with the PE or taxability of royalty u/s.44DA Chargeability of interest u/s.234C - HELD THAT - This ground would be consequential in nature as we have directed the ld. AO to re-determine the income in terms of the aforesaid directions. In any event, we hold that interest u/s.234C of the Act shall be charged only on the returned income and not on the assessed income. The law is very well settled in this regard.
Issues Involved:
1. Existence of Permanent Establishment (PE) in India. 2. Attribution of profits and estimation of gross profit. 3. Taxability of royalty received under Section 44DA of the Income Tax Act. 4. Credit for tax deducted at source. 5. Chargeability of interest under Section 234C of the Income Tax Act. Detailed Analysis: Existence of Permanent Establishment (PE) in India: The primary issue was whether the assessee, a US-based company engaged in diamond grading, had a Permanent Establishment (PE) in India as per Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The assessee’s subsidiary, GIA India Laboratory Pvt. Ltd. (GIA India Lab), was argued to be the PE by the Assessing Officer (AO). The AO attributed 50% of the gem grading fees received by the assessee from GIA India Lab to the Indian PE, applying a profit percentage of 20.31% to determine the total income. However, the Tribunal, following its earlier decisions in the assessee’s own case for previous assessment years (A.Y. 2010-11 to 2016-17), held that GIA India Lab cannot be construed as a PE of the assessee in India. The Tribunal noted that GIA India Lab operates independently, bears its own risks, and the arrangement between the entities is akin to an assignment or sub-contracting of grading services. Therefore, the assessee does not have a fixed place PE, service PE, or agency PE in India under the DTAA. Attribution of Profits and Estimation of Gross Profit: Since the Tribunal concluded that the assessee does not have a PE in India, the grounds related to the attribution of profits and estimation of gross profit were rendered academic and were not adjudicated upon. Taxability of Royalty Received under Section 44DA: The issue of taxability of royalty received by the assessee was also examined. The Tribunal referred to its earlier decision for A.Y. 2011-12 to 2016-17, concluding that since there is no PE in India, there is no occasion for royalty being effectively connected with the PE or for its taxability under Section 44DA of the Income Tax Act. Consequently, this ground was considered academic and infructuous. Credit for Tax Deducted at Source: The assessee sought credit for tax deducted at source (TDS) amounting to ?65,50,70,081/-. The Tribunal noted that the assessee had filed a rectification petition under Section 154 of the Act before the AO, which was pending disposal. The AO was directed to dispose of the rectification petition and grant credit for TDS in accordance with the law at the earliest. This ground was allowed for statistical purposes. Chargeability of Interest under Section 234C: The issue of chargeability of interest under Section 234C was deemed consequential. The Tribunal directed that interest under Section 234C should be charged only on the returned income and not on the assessed income, as per settled law. Conclusion: The appeal of the assessee was allowed for statistical purposes, with the Tribunal holding that the assessee does not have a PE in India, thereby rendering related grounds academic. The AO was directed to grant TDS credit and re-determine the income in accordance with the Tribunal’s directions. Interest under Section 234C was to be charged on the returned income only.
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