2024 (12) TMI 814 - AT - Income Tax

Taxation of the assessee's income in India - Dependent Agency Permanent Establishment (PE) of the assessee - income generated by the foreign company (the assessee) from operations attributable to India which was subject to tax in India - Scope of DTAA between India-USA - HELD THAT - In simple terms, if the Indian company (SanDisk India) has not provided any services or entered into any agreement to provide services related to the sales or marketing of the foreign company's (assessee's) products, the concept of a Dependent Agency PE does not arise. As noted earlier from the observations made by the AO which were based on materials found during the survey proceedings, SanDisk India was, to some extent, involved in the sales made by SanDisk Ireland. The materials on record also indicate that there was a formal agreement between SanDisk India and SanDisk Ireland for providing market research support and services, for which SanDisk India received fees. As further observed that the survey materials used against the appellant assessee were also utilized by the Revenue Authorities in making assessments in the hands of SanDisk Ireland. Based on the same materials and employee statements from SanDisk India, the Revenue Authorities held that SanDisk India constituted a Dependent Agency Permanent Establishment (DAPE) of SanDisk Ireland, and consequently, the income of SanDisk Ireland was deemed taxable in India. Assessments were accordingly made in the case of SanDisk Ireland for the Assessment Years (AYs) 2012-13 to 2017-18. The dispute in the case of SanDisk Ireland was brought before this Tribunal in the assessee's appeals 2023 (8) TMI 1587 - ITAT BANGALORE wherein after analyzing the statements recorded, referenced materials, and agreements, concluded that the activities carried out by SanDisk India for SanDisk Ireland did not constitute a DAPE. In view of the above, we hereby set aside the order of the ld. DRP/ AO with the direction not to hold M/s SanDisk India as dependent Agency PE and consequently the assessee income is not chargeable to tax in India. Hence, the ground of appeal of the assessee is allowed. Treating the reimbursement of salary expenses for seconded employees as Fees for Technical Services (FTS) - Scope of make available clause - facts of the case indicate that the assessee seconded its employees to its Indian subsidiary, SanDisk India, under a secondment agreement and SanDisk India reimbursed the salary expenses of these seconded employees to the assessee company, after deducting Tax Deducted at Source (TDS) under Section 192 - HELD THAT - An agreement of indefinite may indicate that the recipient is dependent on the service provider, as there is no point at which the recipient is equipped to handle the services independently. In such cases, payments under the agreement are unlikely to qualify as FTS under the Make Available clause. In view of the above, we hold that the amount received by the assessee against the services rendered to SanDisk India cannot be classified as FTS under the provisions of the DTAA and therefore the same cannot be made subject to the provisions of tax in the hands of the assessee. However, in the absence of the relevant agreement to justify indefinite period, we are accordingly, inclined to set aside the finding of the DRP and remit the issue to the file of the AO for fresh adjudication as per law and in the light of above stated discussion. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.

Summary

Issues Involved:

1. Whether SanDisk India constitutes a Dependent Agency Permanent Establishment (DAPE) of the assessee in India.
2. Whether the reimbursement of salary expenses for seconded employees qualifies as Fees for Technical Services (FTS).

Issue 1: Dependent Agency Permanent Establishment (DAPE)

The primary issue concerns whether SanDisk India acts as a Dependent Agency Permanent Establishment (DAPE) of the assessee in India under the India-USA Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) concluded that SanDisk India, through its extensive involvement in business activities such as marketing, sales, and customer support, constituted a DAPE. The AO attributed a portion of the assessee's income to India, proposing a tax liability based on these activities.

The assessee contended that SanDisk India did not engage in sales or marketing activities on its behalf and argued against the creation of a DAPE. The Dispute Resolution Panel (DRP) upheld the AO's findings, asserting that SanDisk India's activities were integral to the sales process and not merely auxiliary.

Upon review, the Tribunal examined the DTAA provisions, particularly Article 5, which outlines the criteria for establishing a DAPE. The Tribunal found no substantial evidence of SanDisk India exercising authority to conclude contracts or engaging in sales activities directly linked to the assessee. The Tribunal noted that the survey materials used to establish a DAPE for SanDisk Ireland did not support the same conclusion for the assessee. Consequently, the Tribunal set aside the DRP/AO's order, ruling that SanDisk India does not constitute a DAPE, and the assessee's income is not taxable in India.

Issue 2: Fees for Technical Services (FTS)

The second issue involves the classification of reimbursement of salary expenses for seconded employees as Fees for Technical Services (FTS). The AO treated these reimbursements as FTS, subject to tax under Section 195 of the Income Tax Act, arguing that the services provided by the seconded employees were technical and managerial. The AO cited the "make available" clause under the DTAA, suggesting that the services enabled SanDisk India to use the expertise independently.

The assessee argued that the reimbursements were cost-to-cost payments without profit elements and that SanDisk India had deducted the appropriate tax under Section 192. The DRP upheld the AO's findings, maintaining the classification as FTS.

The Tribunal reviewed the relevant DTAA provisions, particularly Article 12, which governs FTS taxation. The "make available" clause is crucial in determining whether services qualify as FTS. The Tribunal found that the agreement between the assessee and SanDisk India did not contain a "make available" clause, implying that the services did not equip SanDisk India to use the expertise independently. Consequently, the Tribunal ruled that the reimbursements do not qualify as FTS under the DTAA. However, due to the absence of the relevant agreement, the Tribunal remitted the issue back to the AO for fresh adjudication, allowing the appeal for statistical purposes.

Conclusion:

The appeal is partly allowed for statistical purposes, with the Tribunal ruling in favor of the assessee on the DAPE issue and remitting the FTS issue for further examination.