2022 (3) TMI 660 - AT - Income Tax

Existence of Fixed Place Permanent Establishment ( Fixed Place PE ) and Supervisory Permanent Establishment ( Supervisory PE ) of the assessee in India under the provisions of Article 5 of the Double Taxation Avoidance Agreement entered into between India and Japan. ( India-Japan DTAA ) - attribution of income from offshore supply of raw materials and components and supply of capital goods to the alleged PE of the assessee - assessee is a foreign company and a tax resident of Japan. It is governed by the provisions of the India-Japan DTAA being more beneficial - HELD THAT - Article 5(1) of the India-Japan DTAA provides that a PE of a foreign enterprise may exist in India when a foreign enterprise has a Fixed Place in India through which the business of the foreign enterprise is wholly or partly carried out. FRL is alleged to be the place of business from which the business of the assessee is being carried out. It is well settled position that in order to constitute a Fixed Place PE it is a prerequisite that the alleged premise must be at the disposal of the enterprise. The Hon ble Supreme Court in the case of Formula One world Championship Vs. CIT 2017 (4) TMI 1109 - SUPREME COURT has held that merely giving access to the premise to the enterprise for the purposes of the project would not suffice. The place would be treated as at the disposal of the enterprise when the enterprise has right to use the said place and has control thereupon. Thus considering judicial precedents wherein the constitution of Fixed Place PE has been considered and adjudicated upon, in our opinion the conditions laid down for creation of a Fixed Place PE is not satisfied in the assessee s case. Merely providing access to the premises by FRL for the purpose of providing agreed services by the assessee would not amount to the place being at the disposal of the assessee. No doubt the assesee has access to the factory premises of FRL but it is for the limited purposes of rendering agreed services to FRL without any control over the said premises. FRL is an independent legal entity carrying on its business with its own clients for which the assessee provides time to time technical assistance as required by it. The business of the assesee is not being carried out from the alleged Fixed Place PE. The Ld. DR in support of his contention that FRL constitutes Fixed Place PE of the assessee has placed reliance on certain clauses of the Licence Agreement and argued that title of goods supplied by the assessee to FRL passed in India and hence the assessee is carrying on business in India. Since the goods were manufactured outside India, sale of goods took place outside India and consideration was also received by the assessee outside India, title passed outside India and hence the assessee has not carried out any operation in India in relation to supply of the raw material and capital goods. We therefore hold that the assessee does not have a Fixed Place PE in India. Supervisory PE - As the employees of the assessee visited India to assist FRL in relation to supplies made by FRL/FCC Clutch to its customers; resolving problems relating to production, fixing of machines, maintenance of machines; checking safety status at the premises and suggesting ways for enhancing safety; support in quality control; IT related services; support for launch of new segment line; etc. In our considered opinion, none of these activities performed by the employees are in the nature of supervisory functions, supervision being the act of overseeing or watching over someone or something which is not reflected in the work done by the engineers in India for FRL. No installation or assembly project was on going at FRL s premises. FRL is in the existing business since many years and no new line of business has been launched by FRL. The employees were not rendering any services in connection with building site or a construction project or an installation project or an assembly project. From the nature of the services rendered by the employees, it is amply clear that these activities were not in connection with a building site or construction installation or assembly project. Hence the issue of computation of period of six months also becomes academic. The employees are visiting India on year to year basis under the contract. In AY 2014-15 and AY 2015-16, the employees visited India to render certain technical services under the Licence Agreement read with Dispatch of Engineers Agreement which have been duly offered to tax by the assessee as FTS as per the provisions of India-Japan DTAA. We therefore hold that the there is no Supervisory PE of the assessee for the AYs under consideration. Since we have held that the assessee does not have a PE, the issue of attribution of profits to such PE does not arise for consideration. Appeals of the assessee are allowed.

Summary

Issues Involved:
1. Existence of Fixed Place Permanent Establishment (PE) and Supervisory PE under Article 5 of the India-Japan DTAA.
2. Attribution of income from offshore supply of raw materials and components and supply of capital goods to the alleged PE.

Detailed Analysis:

1. Existence of Fixed Place Permanent Establishment (PE) and Supervisory PE:

The primary issue in both appeals is whether the assessee, a foreign company and tax resident of Japan, has a Fixed Place PE and Supervisory PE in India under Article 5 of the India-Japan DTAA. The assessee entered into a joint venture agreement with an Indian company and formed a JV company in India. The assessee also incorporated a wholly owned subsidiary in India. The JV company and the subsidiary are engaged in the business of manufacturing and supply of automobile clutch assemblies.

The assessee received royalty income, fees for technical services (FTS), and income from the supply of raw materials and capital goods from the JV company. The royalty income and FTS were offered to tax, but the income from the supply of raw materials and capital goods was not offered to tax, as the assessee treated them as business profits not taxable in India in the absence of a PE.

The Assessing Officer (AO) concluded that the assessee has a business connection in India and a Fixed Place PE as well as Supervisory PE under Article 5 of the India-Japan DTAA. The AO held that the JV company’s premises served as a "branch" and an "office" of the assessee, constituting a Fixed Place PE. The AO also concluded that the assessee’s employees’ visits to India for setting up a new product line constituted a Supervisory PE as their stay exceeded six months.

The Dispute Resolution Panel (DRP) upheld the AO’s findings, stating that the JV company is financially and economically dependent on the assessee, and the assessee controls and supervises the JV company. The DRP also referenced the case of Huawei Technologies Co Ltd, where a PE was established due to the active involvement of employees in India.

Upon appeal, the Tribunal analyzed the provisions of Article 5(1) of the India-Japan DTAA, which defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried out. The Tribunal held that merely providing access to the premises by the JV company for the purpose of providing agreed services does not constitute a Fixed Place PE. The Tribunal also held that the business of the assessee is not being carried out from the alleged Fixed Place PE, and the title of goods passed outside India. Therefore, the assessee does not have a Fixed Place PE in India.

Regarding the Supervisory PE, the Tribunal analyzed Article 5(4) of the India-Japan DTAA, which defines a PE as carrying on supervisory activities for more than six months in connection with a building site or construction, installation, or assembly project. The Tribunal found that the employees’ activities were not in the nature of supervisory functions and were not in connection with a building site or construction, installation, or assembly project. Therefore, the assessee does not have a Supervisory PE in India.

2. Attribution of Income:

Since the Tribunal held that the assessee does not have a PE in India, the issue of attribution of profits to such PE does not arise for consideration.

Conclusion:

The Tribunal concluded that the assessee does not have a Fixed Place PE or Supervisory PE in India for the assessment years under consideration. Consequently, the appeals of the assessee were allowed, and the grounds relating to the charge of interest under section 234B and levy of penalty under section 271(1)(c) of the Income-tax Act were deemed consequential.