2007 (10) TMI 324 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of profits in India.
2. Existence of a business connection or Permanent Establishment (PE) in India.

Issue-wise Detailed Analysis:

1. Taxability of Profits in India:
The Revenue challenged the CIT(A)'s decision that no part of the profits earned by the assessee, an Italian company, from its Indian subsidiary (PIL) was taxable in India. The AO had determined that the income was taxable under both the Indo-Italian Treaty and the IT Act, citing continuous machinery supplies, control over PIL's management, and over-invoicing of machinery. The CIT(A) found no evidence of over-invoicing or involvement of the assessee's employees in the installation of machinery. The CIT(A) also noted that the transactions were conducted at arm's length, as confirmed by the customs authorities, and that the property in goods passed in Italy, not India. The CIT(A) concluded that the assessee did not earn any income in India from the supply of machinery and raw materials, thus no part of the profits was taxable in India.

2. Existence of a Business Connection or PE in India:
The AO argued that the assessee had a business connection in India under Section 9 of the IT Act and a PE under Article 5 of the DTAA. The CIT(A) disagreed, stating that the relationship between the assessee and PIL did not constitute a business connection as defined by the Supreme Court in CIT vs. R.D. Aggarwal & Co. The CIT(A) also referred to CBDT Circular No. 23, which clarifies that a parent-subsidiary relationship alone does not establish a business connection. The CIT(A) found that PIL acted as an independent legal entity, and the managing director was appointed by PIL's board, not the assessee. The CIT(A) concluded that the assessee did not have a PE in India, as PIL did not act as an agent of the assessee, nor did the assessee conduct any business operations in India.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee did not have a business connection or PE in India and did not earn any taxable income from the supply of machinery and raw materials to PIL. The Tribunal noted that the AO failed to provide evidence to support his claims and that the CIT(A)'s findings were not disputed with any material evidence. Consequently, the Tribunal dismissed the Revenue's appeal, confirming that no part of the profits was taxable in India.