2021 (3) TMI 1470 - AT - Income Tax

Accrual of income in India - Expatriate employees seconded by the assessee to its subsidiary constituted fixed place Permanent Establishment (PE) under Article 5(1) of India Korea DTAA or not - HELD THAT - We find that the issue covered by the grounds in this appeal is answered in favour of the assessee by Tribunal in earlier assessment years and therefore, in view of the consistent stand taken by the Tribunal in assessee s own cases for previous assessment years, while respectfully following the decision of Radha Soami Satsang 1991 (11) TMI 2 - SUPREME COURT to hold there is no business activity that is conducted by the assessee through the expatriate employees, the question of estimated income does not arise. Thus, we hold the issue in favour of the assessee and direct the assessing officer to delete the addition.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the expatriate employees seconded by the assessee to its subsidiary, Samsung India Electronics Pvt. Ltd. (SIEL), constituted a fixed place Permanent Establishment (PE) under Article 5(1) of the India-Korea Double Taxation Avoidance Agreement (DTAA).
• Whether the addition of 10% estimated income on the total remuneration cost of expatriate employees seconded to SIEL in India is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Fixed Place Permanent Establishment (PE)

• Relevant Legal Framework and Precedents: The assessment revolves around Article 5 of the DTAA between India and Korea, which defines a Permanent Establishment. The Tribunal referenced its previous decisions in the assessee's own cases for earlier assessment years, where it was consistently held that the secondment of expatriate employees did not constitute a fixed place PE.
• Court's Interpretation and Reasoning: The Tribunal emphasized that the seconded employees were engaged in activities related to the business of the Indian subsidiary, not the Korean parent company. It was noted that the communication and activities performed by these employees were aligned with the Indian subsidiary's business operations, rather than constituting a separate business activity of the Korean entity.
• Key Evidence and Findings: Statements from expatriate employees and other materials were scrutinized. The Tribunal found that the employees were under the control and supervision of the Indian subsidiary, and their activities were in line with the subsidiary's business needs.
• Application of Law to Facts: The Tribunal applied Article 5 of the DTAA, concluding that there was no fixed place of business through which the Korean entity conducted its business in India. The activities of the expatriate employees were deemed auxiliary to the Indian subsidiary's operations.
• Treatment of Competing Arguments: The Department argued that the expatriate employees constituted a PE due to their roles and the communication with the Korean parent. However, the Tribunal found these arguments unpersuasive, emphasizing the lack of evidence showing that the Korean entity conducted business in India through these employees.
• Conclusions: The Tribunal concluded that the secondment of expatriate employees did not create a fixed place PE for the Korean entity in India.

Issue 2: Addition of 10% Estimated Income

• Relevant Legal Framework and Precedents: The addition was based on Rule 10 of the Income Tax Rules, 1962, which allows for estimation of income when it cannot be definitely ascertained.
• Court's Interpretation and Reasoning: The Tribunal reasoned that since no business activity was conducted by the Korean entity in India through the expatriate employees, the basis for attributing income was unfounded.
• Key Evidence and Findings: The Tribunal found no evidence that the Korean entity derived any business income in India through the activities of the expatriate employees.
• Application of Law to Facts: The Tribunal applied Article 7 of the Indo-Korean treaty and Rule 10, concluding that the addition of 10% estimated income was not justified due to the absence of a PE.
• Treatment of Competing Arguments: The Department's rationale for the 10% markup was dismissed as speculative and unsupported by evidence.
• Conclusions: The Tribunal directed the deletion of the 10% estimated income addition, as no PE existed to justify such an attribution.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "We are of the considered opinion that there is neither any business conducted by the assessee in India through the expatriated employees nor any income is derived by them through the activities of the employees. Consequently, we hold that there is no fixed place PE of the assessee constituted through the expatriated employees."
• Core Principles Established: The presence of expatriate employees in a subsidiary does not automatically constitute a fixed place PE if their activities are aligned with the subsidiary's business operations and not the parent company's business.
• Final Determinations on Each Issue: The Tribunal ruled in favor of the assessee, determining that no fixed place PE existed and the addition of 10% estimated income was unjustified. The Tribunal also directed the Assessing Officer to verify and grant credit for TDS as per law.

In conclusion, the Tribunal's decision reaffirmed its earlier stance that the secondment of expatriate employees to an Indian subsidiary did not create a fixed place PE for the foreign parent company, and consequently, the income attributed to such a PE was not warranted.