2022 (2) TMI 1194 - AT - Income Tax

Income accrued In India - receipts for design and drawing - Permanent Establishment PE in India in the nature of Dependent Agent PE DAPE as per the provisions of Article 5(4) of the India - USA DTAA - Whether DRP erred in holding that the receipts for design and drawing should be taxed u/s. 44DA of the Act instead of FTS u/s. 9(1)(vi) of the Act? - appellant company is an entity incorporated in the United States of America and is engaged in manufacturing and selling of products and equipments primarily for the North American Steel Industry - HELD THAT - A perusal of the entire contract with RIC shows that RIC is an independent consultant having no rights to conclude contract on behalf of the assessee so as to construe as a permanent establishment in India. Since, in its independent professional capacity it provides similar services to other clients as mentioned elsewhere. Further probe of facts show that one Shri Anand Mathur runs a consultancy business in the name and style of M/s. Rajlaxmi International Corporation and the assessee seeks his service to represent it in India for its project in India. The assessee executes projects i.e. supply, erection and commission of desulphurization plant on turnkey basis through international competitive bidding process. The role of the RIC Shri Anand Mathur, representative, was by and large to find a project partner for the assessee to undertake the supply and erection of indigenous components. Besides, RIC is engaged for the liasoning service of the project on behalf of the assessee who neither intended nor empowered to conclude a project on behalf of the assessee. On careful appreciation of facts, we are of the considered view that RIC is an independent consultant to provide certain liasoning service. In fact, the project is executed jointly by the assessee and its consortium partner in India M/s. Beekay Engineering Corporation In the case of RINL, consortium partner M/s. Beekay Engineering Corporation is 78% of the contract value and in the case of the contract with SAIL Bhilai Steel Plant , the value of supply services and erection done by the consortium partner is 69%. Considering agreement with RIC, we are of the considered opinion that RIC does not constitute DAPE of the assessee under the relevant article of the India - USA DTAA. The consortium partner M/s. Beekay Engineering Corporation has done its work by way of a separate contract and, therefore, the same cannot be held as installation PE of the assessee. There is no dispute that the assessee has supplied only engineering design, that too, from abroad and consideration in view thereof has also been received from outside India and since we have held that RIC is not DAPE within the meaning of Article 5 of the India - USA DTAA, there is no question of any attribution to the assessee. In light of the afore-mentioned discussion, the appeal of the assessee is allowed and that of the Revenue is dismissed.

Summary

Issues Involved:
1. Determination of Permanent Establishment (PE) in India.
2. Taxation of receipts for design and drawing services.

Issue-wise Detailed Analysis:

1. Determination of Permanent Establishment (PE) in India:
The primary grievance of the assessee was the conclusion by the Assessing Officer/DRP that the assessee had a Permanent Establishment (PE) in India in the form of a Dependent Agent PE (DAPE) as per Article 5(4) of the India-USA DTAA. The Assessing Officer based this conclusion on the Service Agreement between the assessee and Rajalaxmi International Corporation (RIC), dated 01.02.2005, interpreting that RIC acted as an agent of the assessee. The key points considered were:
- RIC had rights of representation of the assessee.
- The assessee exercised substantial control over RIC.
- RIC habitually concluded contracts in the name of the assessee.

However, upon review, it was found that RIC was engaged with other entities and was not financially dependent on the assessee. The agreement explicitly stated that RIC acted as an independent contractor with no rights to conclude contracts on behalf of the assessee. Therefore, RIC did not constitute a DAPE under Article 5 of the India-USA DTAA. Additionally, the consortium partner M/s. Beekay Engineering Corporation executed its work under a separate contract, negating the presence of an installation PE.

2. Taxation of Receipts for Design and Drawing Services:
The Revenue's grievance was the DRP's decision that the receipts for design and drawing should be taxed under Section 44DA of the Income-tax Act instead of as Fees for Technical Services (FTS) under Section 9(1)(vi) of the Act. The Assessing Officer had treated the amount received from RINL and SAIL as taxable FTS. However, since it was concluded that RIC was not a DAPE and the assessee did not have a PE in India, the receipts from engineering design supplied from abroad and received outside India were not taxable in India.

Conclusion:
The Tribunal concluded that RIC did not constitute a DAPE of the assessee under the India-USA DTAA, and the consortium partner’s work did not create an installation PE. Consequently, the appeal of the assessee was allowed, and the Revenue's appeal was dismissed. The order was pronounced in the open court on 21.02.2022.