2018 (12) TMI 2012 - 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 - Admittedly there is no material change in the facts and circumstances of the case as both DRP and AO had followed the earlier year orders. Accordingly we also hold that there is no fixed place PE through the expatriate employees nor any income is derived by the assessee to the expatriate employees. Further it has been observed by the Tribunal that since there is no service PE clause in India South Korea DTAA therefore no question of service PE arises. Accordingly the judgment relied upon by the AO in the case of Centrica 2014 (5) TMI 154 - DELHI HIGH COURT would not be applicable because in that case seconded employees were held to constitute Service PE. In the result the grounds raised by the assessee are allowed and even the attribution part would be allowed in favour of the assessee because once there is no business activity conducted by the assessee through expatriate employees then there could not be question of any kind of attribution of estimate. Applicability of rate of 15% on all income by the AO held to be in the nature of royalty and fee for technical services - Despite the fact that in the earlier years the rate of tax paid by the assessee was @10%. Accordingly we remit this issue to the file of the Assessing Officer to examine the assessee s claim that the rate of tax u/s. 115A would be 10% and not 15%. AO will give adequate/proper opportunity to the assessee to substantiate its case. Computing of surcharge and cess - As been pointed out by the learned counsel that no surcharge and cess can be levied because the same is not provided in the DTAA. We are in tandem with such a contention raised by the learned counsel because the DTAA provides the overall rate which is all inclusive and therefore no surcharge or cess has been levied. Accordingly this issue is allowed in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment are:

1. Whether the expatriate employees seconded by the appellant to its subsidiary in India constituted a fixed place Permanent Establishment (PE) under Article 5(1) of the India-Korea Double Taxation Avoidance Agreement (DTAA).

2. Whether the decision of the Hon'ble Delhi High Court in Centrica India Offshore Pvt. Ltd. v. CIT was applicable to the present case.

3. Whether the attribution of 10% of the remuneration cost to the alleged PE in India was justified.

4. Whether the levy of a uniform rate of 15% on all income categorized as royalty and fees for technical services was correct.

5. Whether interest under Sections 234A and 234B of the Income Tax Act was correctly levied.

6. Whether the computation of surcharge and cess was accurate.

7. Whether the initiation of penalty proceedings under Section 271(1)(c) was appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Fixed Place Permanent Establishment (PE)

Legal Framework and Precedents: Article 5(1) of the India-Korea DTAA defines the criteria for establishing a fixed place PE. The precedent case of Centrica India Offshore Pvt. Ltd. v. CIT was considered.

Court's Interpretation and Reasoning: The Tribunal analyzed whether the seconded employees of the appellant constituted a fixed place PE in India. The court noted that the employees were under the supervision and control of the Indian subsidiary, SIEL, and performed activities related to SIEL's business.

Key Evidence and Findings: The court examined employment contracts, statements from expatriate employees, and the nature of their work, establishing that the employees were economically employed by SIEL.

Application of Law to Facts: The Tribunal concluded that the activities of the expatriate employees did not constitute a PE under Article 5(1) as they were not engaged in activities for the appellant's business.

Treatment of Competing Arguments: The court rejected the Revenue's argument that the appellant had a fixed place PE, citing the lack of evidence of business activities conducted by the appellant through the expatriate employees.

Conclusions: The Tribunal held that there was no fixed place PE in India through the expatriate employees.

Issue 2: Applicability of Centrica Case

Legal Framework and Precedents: The Centrica case dealt with the concept of Service PE, which was not applicable under the India-Korea DTAA.

Court's Interpretation and Reasoning: The Tribunal distinguished the current case from Centrica, noting the absence of a Service PE clause in the India-Korea DTAA.

Conclusions: The Centrica case was deemed inapplicable to the present circumstances.

Issue 3: Attribution of 10% Remuneration Cost

Legal Framework and Precedents: Article 7 of the Indo-South Korean treaty and Rule 10 of the Income Tax Rules, 1962, were considered.

Court's Interpretation and Reasoning: The Tribunal found no evidence of business income derived by the appellant through the expatriate employees.

Conclusions: The attribution of 10% of the remuneration cost was unjustified.

Issue 4: Levy of 15% Rate on Royalty and Fees

Legal Framework and Precedents: Section 115A of the Income Tax Act was relevant.

Court's Interpretation and Reasoning: The Tribunal noted the lack of discussion by the Assessing Officer on applying a 15% rate and remitted the issue for further examination.

Conclusions: The issue was remitted to the Assessing Officer to determine the appropriate tax rate.

Issue 5: Levy of Interest under Sections 234A and 234B

Conclusions: The levy of interest was deemed consequential and dependent on the resolution of other issues.

Issue 6: Computation of Surcharge and Cess

Court's Interpretation and Reasoning: The Tribunal agreed with the appellant's contention that surcharge and cess were not provided for in the DTAA.

Conclusions: The computation of surcharge and cess was incorrect, and this issue was resolved in favor of the appellant.

Issue 7: Initiation of Penalty Proceedings

Conclusions: The initiation of penalty proceedings was not specifically addressed in the judgment.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning:

"There is no fixed place PE of the assessee constituted through the expatriated employees."

"Since there is no service PE clause in India South Korea DTAA, therefore, no question of service PE arises."

Core Principles Established:

1. The presence of expatriate employees does not automatically constitute a fixed place PE if they are under the control of a local subsidiary.

2. The absence of a Service PE clause in the DTAA precludes the establishment of a Service PE.

Final Determinations on Each Issue:

1. No fixed place PE was established through expatriate employees.

2. The Centrica case was not applicable.

3. The attribution of 10% remuneration cost was unjustified.

4. The issue of the tax rate on royalty and fees was remitted for further examination.

5. The computation of surcharge and cess was incorrect.

6. The appeal was partly allowed, with findings primarily in favor of the appellant.