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2022 (5) TMI 325 - AT - Income TaxTDS u/s 195 - existence of permanent establishment (PE) - Treating the assessee in default for not deducting tax at source on the payment made to various non-resident being during the year under consideration for purchase, installation and supervision charges - Whether AO exceeded his jurisdiction by ignoring the finding of the Tribunal by applying the provision of section 5(2)(b) r.w.r.t. 9(1) of the Act in place of DTAA provisions? - HELD THAT - The scope of enquiry and assessment of remittances made to foreign parties abroad was limited to the question whether any of the foreign suppliers had rendered installation, assembly or supervisory services and/or carried out such project in India in connection with the supply of plant and machineries and whether the period of rendition of such services exceeded the prescribed threshold limit in the respective DTAAs so as to constitute an installation/assembly/supervisory PE in India. It is noticed that the Ld. AO never considered this limited issue which was set aside by the ITAT. The AO also chose to remain silent on the relevant facts and materials placed on record which showed that no installation, assembly, or supervisory services were tendered by foreign suppliers in India. In fact, it is not even the AO's case while holding that foreign suppliers had PE in India that such PE was pursuant to any installation, assembly or supervisor services rendered by any of the foreign suppliers. Instead, the AO harped on the fact that each supplier had appointed agent in India and made unsubstantiated and hypothetical allegations that terms for sale and/or contract for supplies were concluded in India through the agents in India and therefore a portion of the remittances made to such foreign suppliers were taxable in India. This Tribunal had set aside the order on the limited issue to the Ld. AO. to verify whether any of the foreign suppliers had a Permanent Establishment in Under the respective DTAAs. This ITAT has held that the installment or supervisory services in connection to sale of machinery or equipment has to cross the specified time threshold limit for the non-resident entity too be treated as having a permanent establishment in India. AO. while passing the order has not followed the directions of this ITAT and has in fact relied on the provisions of section 5(2)(b) read with section 9(1)(i) of the Act to hold that the nonresident entities had a business connection in India. Further, Ld. AO. has failed bring in material on record to establish that the foreign suppliers had a PE in accordance to the DTAAs and the decision of this ITAT. AO. has clearly exceeded his jurisdiction by making enquiries and examining issues which were clearly beyond the ambit of the set aside proceedings directed by the this Tribunal. Thus, the findings and observations recorded by the Ld. AO. are factually and legally unjustified, untenable and unsustainable therefore, the order of the Ld. AO is quashed on the ground of being illegal and beyond jurisdiction and demand raised in the said order are deleted. Common legal issues raised in ground no.1 2 of assessee s appeals for A.Y. 2010-11 2011-12 are allowed. PE in India - whether Assessing Officer erred in holding that the non-resident were having a Permanent Establishment in India without bringing any thing on record to establish that dependent Abench PE existed in light of the Article 5 6 of DTAA - HELD THAT - We notice that Ld. Assessing Officer has not brought any other material to substantiate his allegation that may demonstrate that the agent involved has habitually concluded contracts on behalf of the vendor, or has habitually maintained the vendor s stock of goods, or has habitually secured orders for the assessee. It is to be noted that all three clauses in the DTAA use the word 'habitually'. It may be relevant to further mention that the expression 'has' shall mean a legal existence. The vendors of the appellant only used auxiliary and supplemental services in the process of procurement. The ability to accept and refuse contracts and negotiate technical and financial terms was retained with the vendors itself and in no way delegated to any party in India. The ability to accept and refuse contracts and negotiate technical and financial terms was retained with the vendors itself and in no way delegated to any party in India. Whereas 'habitually secures orders' shall mean a systematic conduct on the part of the agent. The AO has considered these parties to be an agency permanent establishment of the vendors solely based on the fact that the parties were marked in the purchase order/letter of intent sent to the vendors. Thus, it is not only a legal right to secure order but also it is to be found, as a matter of fact that agent has habitually secured order or habitually negotiates contract. Assessing officer could not bring any material on record which would establish such a relationship between the independent parties and non-resident vendors wherein habitual/sustained ability to negotiate or secure contracts could be demonstrated. The ld. assessing officer has jumped to the conclusion of existence of permanent establishment due to the involvement of local parties providing auxiliary services. The assessing officer s contention is that the communication has been routed through the agent and the agent was involved in the negotiations and discussion with the appellant to finalise the transaction. The assessing officer made the farfetched assumption that all negotiations were entered into by agents on behalf of the vendors only on the basis of marking of such parties in communication of final POs and LOIs between the appellant and the vendors. AO thus contradicts all his arguments made to establish a Dependent Agency PE by suggesting that only 12% of payment made to the non-resident vendors by the assessee is attributable to income which in no way establishes existence of financially dependency of the third parties. Further, no documents or evidence was brought on record to conclude that contracts were habitually concluded by the third parties on behalf of the non-resident vendors. No enquiry with any of the parties was conducted by the ld. Assessing officer to establish that the conditions of existence of PE as per the DTAAs were satisfied. Further, dependency of the third parties was not established by the ld. Assessing officer. It is the assessee s contention that the ld. Assessing officer has incorrectly established existence of permanent establishment without conducting sufficient enquiries and bringing sufficient material on record in light of the articles of the DTAAs. Transaction carried out between the assessee and non-resident vendors are on principle to principle basis and rates were finalized by way of communication between principle to principle and there was no permanent establishment of the foreign supplies in India as per relevant provisions of the DTAA. We notice that the foreign supplies have not exceeded the threshold time limit to constitute the PE as specified in the respective DTAA. We hold that the alleged Indian entities(agents) did not had any authority to conclude contracts on behalf of the non-resident suppliers and the alleged Indian entities do not maintain any stock of goods or mercantile on behalf of the alleged non-resident entities in India. We also hold that the alleged Indian entities/agents are not mainly or wholly securing orders on behalf of the non-resident in India. Therefore, the finding of both lower authorities of constituting PE of the vendors in India deserves to be set aside and since we have hold that none of the alleged non-resident entities/vendors have any permanent establishment under the provisions of section 5(2)(b) r.w.s. 9 as well as DTAA, finding of Ld. CIT(A) in treating the assessee in default for not charging tax u/s 195 of the Act is reversed. - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) in applying provisions of the Income Tax Act instead of the Double Taxation Avoidance Agreement (DTAA). 2. Existence of Permanent Establishment (PE) of foreign suppliers in India. 3. Requirement for the assessee to deduct tax at source (TDS) under section 195 of the Income Tax Act. 4. Credit for tax payments deposited to the credit of the Central Government. Detailed Analysis: Issue A: Jurisdiction of the Assessing Officer (AO) The primary issue is whether the AO erred in referring to the provisions of the Income Tax Act, even though the ITAT held that the question of chargeability under section 5 and section 9 is academic, thus making the assessment bad in law. The ITAT had previously set aside the matter to the AO to ascertain whether any of the foreign suppliers had a Permanent Establishment (PE) as defined in the respective DTAAs. The AO, however, relied on the provisions of section 5(2)(b) r.w.s. 9(1) of the Act, holding that the non-resident entities had a business connection in India, which the ITAT found to be beyond the scope delineated by its earlier order. The ITAT concluded that the AO exceeded his jurisdiction by applying the Income Tax Act provisions instead of focusing on the DTAA provisions as directed. Issue B: Existence of Permanent Establishment (PE) The ITAT had directed the AO to verify whether any of the foreign suppliers had a PE in India under the respective DTAAs. The AO concluded that the foreign vendors had a dependent agency PE in India, but the ITAT found that the AO did not bring any material on record to substantiate this claim. The ITAT noted that the AO did not follow the specific direction to assess whether the installation or supervisory services crossed the specified threshold time limit as per the DTAAs. The ITAT observed that the transactions were on a principal-to-principal basis, and the alleged agents did not have the authority to conclude contracts on behalf of the non-resident suppliers. Therefore, the ITAT held that the AO's findings were factually and legally unjustified and quashed the assessment order. Issue C: Requirement to Deduct Tax at Source (TDS) The ITAT examined whether the assessee was required to deduct TDS on payments made to foreign suppliers. The ITAT found that the assessee had made payments for the supply of machinery, and in cases where installation or supervisory services were provided, separate invoices were raised, and TDS was deducted accordingly. The ITAT concluded that the foreign suppliers did not have a PE in India as per the DTAA provisions, and therefore, the assessee was not liable to deduct TDS under section 195 of the Income Tax Act. The ITAT reversed the finding of the lower authorities that treated the assessee as in default for not deducting TDS. Issue D: Credit for Tax Payments The ITAT addressed the issue of credit for tax payments deposited to the credit of the Central Government. Since the ITAT quashed the assessment order and allowed the assessee's appeal on the merits, the issue of credit for tax payments became consequential. The ITAT directed that the credit for tax payments should be allowed in accordance with its decision. Conclusion: The ITAT allowed the assessee's appeals, quashing the assessment orders as illegal and beyond jurisdiction. The ITAT held that the AO exceeded his jurisdiction by applying the Income Tax Act provisions instead of the DTAA provisions and failed to establish that the foreign suppliers had a PE in India. The ITAT concluded that the assessee was not liable to deduct TDS under section 195 and directed that credit for tax payments should be allowed.
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