2024 (5) TMI 1417 - HC - Income Tax

Accrual of income in India - Indian establishment constituted a Fixed Place PE - Collaborative Exercise and Fixed Place PE - HELD THAT - As had been eloquently observed in Vishakapatnam Port Trust 1983 (6) TMI 31 - ANDHRA PRADESH HIGH COURT the Noida and/or the Varanasi premises would have had to be found to amount to a virtual projection , and thus essentially a complete takeover of the premises, either in its entirety or even in part, for the purposes of conducting the core business activities of the petitioner. None of the material which has been relied upon for the formation of opinion to initiate action u/s 148 answers the aforesaid test. We also take note of the judgment in Formula One World Championship Limited, and where it was significantly observed that a PE must qualify and meet the tests of stability, productivity and dependence. Of equal significance were the observations which explained the phrases at the disposal of and through . Tested on the aforesaid precepts also, the impugned notices and the reasons set out for initiating action u/s 147/148 woefully fail to rest on any evidence which could have possibly compelled us in acknowledging that a Fixed Place PE had come into being. Undisputedly, the Noida factory premises and the Varanasi office would clearly not fall under any of the categories which stand specifically enumerated in Article 5 (2) and sub-clauses (a) to (k) of the India-USA DTAA. We also bear in mind the distinct and divergent categories of products, and in the manufacture of which, the petitioner and the Indian subsidiary were engaged. Of equal significance was the Noida outfit undertaking manufacturing activity in its own right and supplying products to various arms of the Indian Railways. All of the above, in our considered opinion, when viewed cumulatively, would have been sufficient to dispel any presumption of the petitioner conducting its business activity from a permanent premises situate in India. We are consequently of the firm opinion that the assumption of a Fixed Place PE is misconceived and untenable. Whether an Indian establishment was performing functions of a preparatory or an auxiliary character? - From the statement of Mr. Shivanshu Narendra Kaushik, it transpires that designs and inputs created by employees of the Indian subsidiary were also shared with the petitioner. The said officer further stated categorically while responding to Question No. 9 that while their primary task is India specific , they were also engaged with teams created for designing traction systems as well as locomotives in relation to global tenders that may have been submitted by the petitioner. The details of the work with which the petitioner was engaged and related to overseas tenders submitted by the petitioner have also been recorded in his answer to Question No. 10. The officer then appears to have been queried with respect to the allocation of work pertaining to design of components and locomotive parts for global tenders. Responding to the said query, the officer submitted that a team is generally designated and created by the petitioner and all the team members work together and coordinate with each other. It may only be observed that the engagement of Indian personnel in connection with global tenders that were proposed to be submitted or one in which the petitioner intended to participate would also clearly fall within the ambit of work of an auxiliary or preparatory character and not be in furtherance of the core activity of the petitioner. All that need be observed is that merely because the submission of those tenders was aided by a collaborative exercise between employees of the petitioner and those of the Indian subsidiary, the same would clearly not meet the test of a complete takeover, a virtual projection or for that matter the Indian subsidiary being liable to be viewed as an alter ego . We are of the firm opinion that the respondents have clearly failed to appreciate that a collaborative team comprising of Indian and foreign employees would really not be indicative or evidence of the Noida or Varanasi premises having been virtually placed fully at the disposal of the petitioner. To meet that test, it would have to be found on facts that the Indian establishment was a mere conduit created for the business interests of the petitioner. It may only be observed that the engagement of Indian personnel in connection with global tenders that were proposed to be submitted or one in which the petitioner intended to participate would also clearly fall within the ambit of work of an auxiliary or preparatory character and not be in furtherance of the core activity of the petitioner. All that need be observed is that merely because the submission of those tenders was aided by a collaborative exercise between employees of the petitioner and those of the Indian subsidiary, the same would clearly not meet the test of a complete takeover, a virtual projection or for that matter the Indian subsidiary being liable to be viewed as an alter ego . We are of the firm opinion that the respondents have clearly failed to appreciate that a collaborative team comprising of Indian and foreign employees would really not be indicative or evidence of the Noida or Varanasi premises having been virtually placed fully at the disposal of the petitioner. To meet that test, it would have to be found on facts that the Indian establishment was a mere conduit created for the business interests of the petitioner. Article 5 (4) and DAPE - The issue of a habitual or recurrent exercise of authority does not arise at all since we have already found that an authority to conclude contracts never stood conferred. Suffice it to observe that there is not an iota of evidence which may have even remotely justified Article 5 (4) (a) being invoked. Similar is the position which emerges when the case as set up against the petitioner is examined on the anvil of Article 5 (4) (c) of the India-USA DTAA. This would have required the respondents to have established or found, as a matter of fact, that the Indian subsidiary was engaged or created solely for the purpose of securing orders for the petitioner. Clause (c) of Article 5 (4) would have been attracted if the respondents had, even on a prima facie examination, found that the Indian subsidiary was concerned primarily with securing orders for the petitioner. This, in light of the said clause using the expression wholly or almost wholly for the enterprise . Clause (c) not only alludes to aspects of an enterprise being exclusively concerned with working for the fulfilment of the business interests of another, it would also have to be additionally proven that it does so habitually . The respondents do not dispute the indubitable fact that both the petitioner as well as the Indian subsidiary had independent dealings with DLW and other arms of the Indian Railways. Of equal importance is the table which was relied upon by Mr. Datar extracted hereinabove and which indicated the extent of revenue earned by the Indian subsidiary and the minuscule percentage of that income being referable or relatable to receipts from the petitioner. Precedents rendered on the subject of Fixed Place PE bid us to answer that question based upon a finding of a fixed place being at the disposal of and under the considerable control of a foreign enterprise. There is also no material which the respondents may have taken into consideration and which would have been indicative of the Noida or the Varanasi premises having been virtually placed for the use of the petitioner and at its discretion. Even as we go through the various statements which came to be recorded, they fail to evidence the Noida or the Varanasi premises having been placed at the constant disposal of the petitioner. For the purposes of adjudging whether a Fixed Place PE had come into existence, one would have to necessarily come to the conclusion that the core business of a foreign entity was being carried on through a PE. The core business of the petitioner is the manufacture of a wide range of products, details whereof have been set out in the preceding parts of this decision. As we view and weigh the import of the statements which have been heavily relied upon by the respondents, it becomes apparent that the view as taken is rendered wholly untenable and proceeds on various assumptions which cannot possibly be countenanced. Regard must also be had to the fact that the respondents do not allege that the products being supplied by the petitioner to DLW or other arms of the Indian Railways were being manufactured in India and through the Indian subsidiary. This is a factor which weighs heavily against the respondents. Issues emanating from the MES Agreement including the General Services Agreement dated 01 January 2011 which has been taken into consideration, those and issues arising therefrom would have to be necessarily evaluated bearing in mind the significant observations which appear in the TPO s order, which not only speaks of the Noida premises providing back office support and technical support services, but also takes into consideration the Indian subsidiary being duly remunerated for those services on a cost plus basis. Even if one were to take into consideration the nature of services which were rendered by the Indian subsidiary under the aforesaid agreements, it becomes apparent that all of those would really fall within the scope of supportive preparatory and auxiliary services. Be it tracking of Letters of Credit for shipments, monitoring of upcoming tenders, coordinating with the petitioner for timely bid submission for tenders in the Indian market, gathering technical details, these are all services rendered which would fall under the larger umbrella of preparatory and auxiliary services. We have also had an occasion to take note of Article 5 (3) and sub-clauses (d) and (e) excluding fixed place of businesses used solely for the purpose of purchasing goods or merchandise or for that matter for collecting information . The supply of information is a subject which is considered alongside activities which would fall within the scope of preparatory or auxiliary functions. Of equal significance is the statement of Mr. Phaneendra Kumar Potnuru, the Director- Finance of PRIPL, Noida, which came to be recorded under Section 131 of the Act. While explaining the composition of the Board of Directors of the Indian subsidiary, the Director-Finance disclosed that two out of the four Directors are foreigners. However, the mere fact that the parent company places representatives on the Board of its wholly owned subsidiary, would hardly compel one to hold that a PE had come into existence. The aforesaid response would also establish that the Indian subsidiary was undertaking business activities independently and in its own right with DLW, Varanasi. This was therefore not a case where the subsidiary stood created solely for the purposes of undertaking activities and discharging functions concerned solely with the core business activity of the petitioner. Concluding observations - Insofar as the tests laid down in Article 5 (4) (a), (b) and (c) are concerned, the same are clearly not met since the respondents have failed to refer to any authority that may have been conferred upon the Indian entity to conclude contracts on behalf of the petitioner. The mere discovery of the seal of the petitioner is also not liable to be viewed as resulting in clause (a) and stipulations contained therein being satisfied. This, since it is not the case of the respondents that the Indian entity had been authorized to affix that seal on any document or contract. This, quite apart from there being no material that the seal was in fact affixed on any contract or agreement to which the petitioner was a party. The reasons recorded by the first respondent in support of the proposed action under Sections 147/148, also does not refer to any contract that the petitioner may have entered into with the Indian Railways, and which may have been executed for and on its behalf by the Indian subsidiary. The conclusions recorded on this score thus clearly appear to proceed on surmises and conjecture. Even clause (c) of Article 5 (4) would not stand attracted since undisputedly the Indian subsidiary had independent transactions with DLW and other Indian Railway entities. It was thus not a mere arm or an extension of the petitioner established to secure orders on its behalf and that too wholly or almost wholly for it. We are of the considered opinion that the opinion as formed by the first respondent on the issue of a PE is wholly perverse and untenable. We find ourselves unable to sustain that opinion even on a tentative, formative or prima facie basis. We are of the firm opinion that that since the very foundation on which the impugned action is based is itself rendered wholly arbitrary and unsustainable, the impugned reassessment proceedings would be liable to be quashed. We bear in mind the indubitable fact that but for the PE question being liable to be answered against the petitioner, the first respondent would have no authority to proceed. It was thus incumbent for the Court to have come to a conclusion that the decision on the question of PE had been correctly decided or was at least a tenable or plausible view which could have been taken or harboured. We, for reasons aforenoted, have found ourselves unable to sustain the opinion as formed. In our considered view, the same would not sustain even if that opinion were to be tested on a prima facie basis. We also bear in mind the fact that the view as expressed by the first respondent in the impugned proceedings cannot possibly be countenanced as being either tentative or one which left very much for contestation or debate. We consequently find ourselves unable to sustain the assumption of jurisdiction. Operative directions - We accordingly allow the present writ petitions and quash the impugned notices issued under Section 148 as well as other consequential notices issued by the first respondent. This order, however, shall be without prejudice to the respondents to independently examining whether the office of the petitioner in the Delhi Circle constitutes a PE. That is an issue which has neither been examined nor ruled upon. Consequently, all rights and contentions of parties in that respect are kept open. Since the transfer of the PAN of the petitioner was solely to facilitate the first respondent conducting the reassessment, and which we have for reasons aforenoted found to be unsustainable, the order dated 05 November 2019 passed by the fourth respondent transferring the jurisdiction of the PAN of the petitioner from the fourth to the first respondent shall also stand quashed.

Summary

Issues Involved:
1. Validity of notices issued u/s 148 of the Income Tax Act, 1961.
2. Existence of a Fixed Place Permanent Establishment (PE), Service PE, and Dependent Agent Permanent Establishment (DAPE) under the India-USA DTAA.
3. Territorial jurisdiction of the respondents.
4. Whether the activities of the Indian subsidiary constitute "preparatory" or "auxiliary" functions.

Summary:

A. Introduction
The writ petitions challenge the notices issued u/s 148 of the Income Tax Act, 1961 by the first respondent, asserting that the production unit of the petitioner's wholly-owned subsidiary constitutes a Fixed Place PE, Service PE, and DAPE based on the India-USA DTAA.

B. Factual Narrative
The first respondent initiated reassessment proceedings based on a survey conducted on 06 March 2019, alleging that the petitioner has a Fixed Place PE/Service PE/DAPE in India. The petitioner, a foreign company, contends that it has no income accruing in India and that its subsidiary, PRIPL, provides only back-office and technical support services.

C. Submissions of Progress Rail Locomotive Inc.
The petitioner argues that PRIPL's activities are limited to support services and that the PAN migration to Noida was illegal. They assert that the functions performed by PRIPL do not constitute a PE under the India-USA DTAA.

D. CBDT Notification Dated 03 November 2014
The petitioner contested the territorial jurisdiction of the first respondent based on the CBDT Notification, which delineates the areas of assessment powers. The court found that the distribution of powers was valid but emphasized that the first respondent's jurisdiction hinges on the existence of a PE.

E. The PE Issue - A Brief Background
The court examined whether a PE exists based on Article 5 of the India-USA DTAA, which defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on.

F. The Challenge of Progress Rail Locomotive Inc. Contd.
The petitioner contends that the Noida factory does not constitute a Fixed Place PE, as there is no exclusive disposal of premises for the petitioner's core activities. They argue that PRIPL's activities are of a preparatory or auxiliary character, thus not constituting a PE.

G. Tax Authority's Response
The respondents argue that PRIPL functions as a virtual projection of the petitioner, with premises at its disposal, thus constituting a Fixed Place PE. They also assert that PRIPL's activities do not fall within the negative list of preparatory or auxiliary functions.

H. PE - A Broad Overview
The court's task was to determine if the first respondent's view on the existence of a PE was legally sustainable. The court emphasized the need for a fixed place of business to be at the disposal of the enterprise and under its control.

I. Respondents' Take on PE - A Recap
The first respondent concluded that PRIPL was authorized to take decisions on tenders and perform various functions for the petitioner, thus constituting a Fixed Place PE. The court found this conclusion to be unsupported by evidence.

J. Analysing Article 5 of the India-USA DTAA
The court analyzed Article 5, which defines a PE, including Fixed Place PE, Service PE, and DAPE. The court found the first respondent's conclusions on Service PE and DAPE to be misconceived.

K. The Court's Analysis
The court found the first respondent's conclusions on the existence of a Fixed Place PE, Service PE, and DAPE to be untenable. The court emphasized that PRIPL's activities were of a preparatory or auxiliary character and did not constitute a PE.

L. Concluding Observations
The court concluded that the first respondent's opinion on the existence of a PE was perverse and unsustainable. The court quashed the reassessment proceedings and notices issued u/s 148.

M. Operative Directions
The court allowed the writ petitions, quashing the impugned notices and the order transferring the jurisdiction of the petitioner's PAN. The PAN mapping was ordered to revert to the jurisdictional AO of the petitioner.