2023 (1) TMI 1464 - AT - Income Tax

Income deemed to accrue or arise in India - Absence of business connection and Permanent Establishment (PE) in India - assessee, a non-resident corporate entity, is incorporated in the United Kingdom (UK) - HELD THAT - As respectfully following the consistent view in assessee s own case 2021 (10) TMI 1023 - ITAT DELHI and 2022 (2) TMI 1058 - ITAT DELHI we decide these grounds against the assessee by holding that the assessee has business connection and PE in India. These grounds are dismissed. Attribution of profit to PE at 25% of the total turnover - As decided in assessee s own case in past assessment years, we hold that 15% of the booking fees should be attributed to the PE in India. Disallowance of various expenses, including distribution expenses/distributors fee while computing the profit of the PE - While deciding identical issue in past assessment years, the Tribunal has held that 100% deduction of distribution expenses/distributors fee has to be allowed. Whereas, in respect of all other expenses, 70% deduction has to be allowed. Allowance of head office expenses u/s 44C - While deciding identical issue in assessee s own case in assessment year 2016- 17 2022 (2) TMI 1058 - ITAT DELHI remit this issue to the file of the AO for allowing the correct claim of the head office expenditure to the assessee in the light of the details/information/ documents already on record and which he may require the assessee to furnish before him - Ground is allowed for statistical purposes.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment include:

Whether the assessee has a business connection or Permanent Establishment (PE) in India.
The applicability of the India-UK Double Taxation Avoidance Agreement (DTAA) benefits to the assessee.
The attribution of profits to the PE in India and the correct percentage of revenue to be attributed.
The disallowance of various expenses, including distribution fees and other operational costs, in computing the profits of the PE.
The allowability of head office expenses under section 44C of the Income-tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Business Connection or Permanent Establishment (PE) in India

Relevant Legal Framework and Precedents: The determination of PE is guided by Article 5 of the DTAA and Indian domestic tax laws, particularly sections 5 and 9 of the Income-tax Act. Past judgments by the Delhi High Court and ITAT in similar cases were considered.
Court's Interpretation and Reasoning: The court found that the assessee had a PE in India through its dependent agent, Interglobe Technology Quotient India Pvt. Ltd. (ITQPL), which was involved in promoting and managing the assessee's Global Distribution Services (GDS).
Key Evidence and Findings: ITQPL's role as a distributor and the economic dependency on the assessee were crucial in establishing the presence of a PE.
Application of Law to Facts: The court applied the principles of agency PE and fixed place PE to conclude that the assessee had a PE in India.
Treatment of Competing Arguments: The assessee's argument of ITQPL being an independent entity was rejected based on the control and dependency factors.
Conclusions: The court upheld the existence of a PE in India.

Issue 2: Applicability of India-UK DTAA Benefits

Relevant Legal Framework and Precedents: The DTAA between India and the UK provides relief from double taxation, subject to certain conditions.
Court's Interpretation and Reasoning: The court found that the assessee was a conduit entity primarily for treaty shopping and thus not entitled to DTAA benefits.
Key Evidence and Findings: The lack of commercial substance and the corporate structure suggested treaty shopping.
Application of Law to Facts: The court applied the principles of beneficial ownership and commercial substance to deny DTAA benefits.
Treatment of Competing Arguments: The assessee's reliance on the Tax Residency Certificate (TRC) was insufficient to establish eligibility for DTAA benefits.
Conclusions: The court denied the DTAA benefits to the assessee.

Issue 3: Attribution of Profits to PE

Relevant Legal Framework and Precedents: The attribution of profits is guided by the principles of Article 7 of the DTAA, focusing on the functions, assets, and risks associated with the PE.
Court's Interpretation and Reasoning: The court relied on past decisions to attribute 15% of the gross booking fees to the PE, contrary to the Assessing Officer's 25% attribution.
Key Evidence and Findings: The historical attribution rate of 15% was consistently upheld by higher judicial authorities.
Application of Law to Facts: The court applied the established attribution rate, considering the minimal operations in India.
Treatment of Competing Arguments: The court rejected the higher attribution rate proposed by the Assessing Officer.
Conclusions: The court concluded that 15% of the gross booking fees should be attributed to the PE.

Issue 4: Disallowance of Expenses

Relevant Legal Framework and Precedents: Section 40(a)(i) and related provisions guide the allowability of expenses.
Court's Interpretation and Reasoning: The court allowed 100% deduction of distribution expenses and 70% of other operational expenses.
Key Evidence and Findings: The expenses were integral to the business and incurred for the purpose of maintaining the network of subscribers.
Application of Law to Facts: The court applied the non-discrimination clause and past judgments to allow the expenses.
Treatment of Competing Arguments: The court dismissed the Assessing Officer's disallowance of expenses based on nomenclature issues.
Conclusions: The court allowed the deduction of expenses as claimed by the assessee.

Issue 5: Allowability of Head Office Expenses under Section 44C

Relevant Legal Framework and Precedents: Section 44C provides for the deduction of head office expenses for non-resident entities.
Court's Interpretation and Reasoning: The court directed the Assessing Officer to correctly compute the allowance of head office expenses.
Key Evidence and Findings: The computation of head office expenses was found to be incorrect by the Assessing Officer.
Application of Law to Facts: The court remitted the issue for correct computation based on available records.
Treatment of Competing Arguments: The court acknowledged the assessee's claim for correct computation.
Conclusions: The court ordered the Assessing Officer to recompute the head office expenses.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "The issue of Appellant's PE/BC in India is covered against it by the above decisions of Hon'ble Delhi High Court and Hon'ble Delhi ITAT in Appellant's predecessor's case."
Core Principles Established: The consistent application of past judicial decisions on PE and attribution of profits, the denial of DTAA benefits due to lack of commercial substance, and the allowance of expenses based on non-discrimination principles.
Final Determinations on Each Issue: The court upheld the existence of a PE in India, denied DTAA benefits, attributed 15% of gross booking fees to the PE, allowed the deduction of expenses, and directed the recomputation of head office expenses.

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