2024 (1) TMI 943 - AT - Income Tax

Accrual of income in India - FTS - DR submitted that Testing of any equipment is an expert and technical services - expense was merely by way of reimbursement of the lab test report expenses and assessee on its own had not added any value to the test reports given by another entity.- HELD THAT - Copy of invoices from the concerned test laboratory was filed and report given by the concerned laboratory was provided and the reimbursement invoice of 1900EUR made available - DRP have fallen in error in considering the same to be in consultancy and professional services to the Indian associates. In spite of accepting that it was a reimbursement expense the DRP considered it to be substantially FTS in nature. We are of considered view that the assessee had not added any value to the laboratory report. Assessee had not played any role except for being a medium to procure a report from a laboratory having higher credibility. The same cannot at all be in the nature of FTS, as erroneously held by Tax authorites. Thus, we are inclined to decide the ground no. 1 in favour of the assessee. Existence of a PE - Determining income on presumptive basis attributable towards Permanent Establishment ( PE ) - Tax authorities have found existence of fixed place PE on allegation that the assessee is procuring its Indian business of supplying goods and services to various customers in India through the use of Indian subsidiary and also provides it with necessary services and supervision. However to establish this, the AO has not brought on record any evidence but has drawn inference for the failure of assessee to provide necessary evidences to AO. The case of assessee is that assessee was not given sufficient time to file the relevant evidences. Tax Authorities below have fallen in error to hold the existence of a PE on the basis of the mere assumption that as assessee company has a subsidiary in India and therefore whatever sales in the form of export is made by it to Indian entities, same is assumed to be with indulgence of Indian subsidiary without substantiating as to how Indian subsidiary was privy to the purchases by other entities. There is substantial force in the arguments of Ld. AR that without examining the buyers how any inference could be drawn about the role of Indian subsidiary. Tax Authorities below have fallen in error in not appreciating the evidences in the form of bill of lading showing delivery outside India and also that the payments were made outside India. They have fallen in error to take note of the fact that the export to Indian counterparts was on principals to principal basis. Assessee company is not alleged to have any fixed place of business in the form of branch office/project office/ liaison office/ godown or warehouse or any other business site in India. No employee of the assessee company was found working in India. Thus, to hold a PE on basis of existence of a subsidiary of assessee in India cannot be sustained. We are accordingly inclined to hold that there was no PE of assessee in India and consequential attribution of the profit had no basis. The ground no. 3 to 5 and 7 to 10, are accordingly decided in favour of the assessee.

Summary

Issues Involved:
1. Reimbursement of expenses received by the assessee.
2. Determination of income attributable to a Permanent Establishment (PE) in India.

Summary:

Issue 1: Reimbursement of Expenses
The Assessing Officer (AO) added Rs. 1,36,660/- to the income of the assessee, considering it as Fees for Technical Services (FTS) under the India-Germany DTAA. The AO concluded that the assessee did not provide documentary evidence to support its claim that the reimbursement charge was paid on a purely cost-to-cost basis without any markup. The Dispute Resolution Panel (DRP) upheld this view, stating that the reimbursement expenses were substantially FTS in nature and liable for taxation.

However, the Tribunal found that the Tax Authorities failed to consider relevant evidence filed by the assessee, including a Management Note and invoices from a test laboratory. The Tribunal concluded that the reimbursement was for lab test report expenses and not for consultancy or professional services. Therefore, the amount should not be considered as FTS, and this ground was decided in favor of the assessee.

Issue 2: Permanent Establishment (PE) and Attribution of Income
The AO determined that the assessee had a PE in India through its subsidiary, Mosdorfer India Pvt. Ltd., and attributed Rs. 1,66,16,994/- as business income to this PE. The AO invoked Rule 10 of the Income Tax Rules, estimating 10% profit on a presumptive basis, with 35% of such profit liable to tax in India. The DRP upheld this view, stating that the assessee's business was conducted through its Indian subsidiary.

The Tribunal found that the Tax Authorities failed to appreciate the documentary evidence provided by the assessee, including invoices and bill of ladings showing that the sales were made directly to Indian customers, with deliveries and payments occurring outside India. The Tribunal noted that the Tax Authorities did not substantiate how the Indian subsidiary was involved in these transactions. The Tribunal concluded that there was no fixed place of business or employees of the assessee in India, and thus, no PE existed. Consequently, the attribution of profit to a PE was not justified, and this ground was also decided in favor of the assessee.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal ruling that the reimbursement of expenses was not taxable as FTS and that there was no PE in India to attribute business income.