2025 (1) TMI 806 - AT - Income Tax

Accrual of income in India or not - Permanent Establishment ('PE') in India - taxability of offshore supply of equipment under the Act and taxability of offshore supply of equipment under the India-Singapore Double Taxation Avoidance Agreement DTAA - assessee is a Singapore-incorporated entity established an Indian branch in the year 2002 for security equipment installation and maintenance - HELD THAT - We find that identical issues arose in the AY 2019-20 in the assessee own case which was decided in favour of the assessee 2023 (2) TMI 1013 - ITAT DELHI , thus there is no justification in attributing the profit on off shore sale of equipment in the hands of the assessee. There are no distinguishing facts or material placed before us to take a contrary view. Receipt from Glidepath, New Zealand - AO has made the addition on account of absence of main documents and contract for the exact nature of work awarded to the assessee and the fact that the assessee engages in artificial splitting of contracts - HELD THAT - AO has not disputed the fact that the compensation paid to SDVS was provided on a cost-plus arm's length markup. The issue of artificial splitting of contract has been dealt elsewhere in the order where the ITAT has given a finding that the work orders, splitting the scope of work between the assessee and its subsidiary in India, have been dully approved/agreed upon by the clients of the assessee and therefore we find the AO s allegation of splitting the contract has no legs to stand. Assessee argument that the maintenance receipts from Glidepath cannot be taxed in the hands of the assessee as the SDVS has been remunerated on a cost-plus basis and that where there is an international transaction under which a non-resident compensates another enterprise at arm's length price taking into account all the risk-taking functions of the enterprise, nothing further would be left to be attributed to the enterprise in India - SDVS was adequately remunerated on which it has already paid its due tax in India and there is no reason for further attribution. The assessee has correctly placed reliance on the decision of Morgan Stanley Co. 2007 (7) TMI 201 - SUPREME COURT Thus, receipt from Glidepath cannot be subjected to tax in the hands of the Assessee and we direct the AO to delete the addition. The ground no. 5 and its sub ground are allowed. Receipts from KITCOL, TTD and maintenance receipts from CIAL - assessee claims that the same has already been offered to tax in other AYs and taxing the same will amount to double-taxation - HELD THAT - We find that the AO added these amount in absence of any proof. In the interest of justice, we deem it fit to restore the issue to the file of the AO to examine and decide the issue as per law. The assessee is also directed to furnish evidence to reconcile the receipts as being offered for tax in earlier years.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the assessee has a Permanent Establishment (PE) in India as per the Double Taxation Avoidance Agreement (DTAA) between India and Singapore.
• The taxability of offshore supply of equipment under the Income Tax Act, particularly in relation to the existence of a business connection in India.
• The applicability of the DTAA in determining the taxability of offshore supplies and whether the Force of Attraction Rule applies.
• The treatment of maintenance receipts from Glidepath and whether they should be attributed to the PE in India.
• The correctness of adding back receipts from Cochin International Airport Ltd., Tirumala Tirupati Devasthanams, and Kerala Industrial and Tech Consultancy Organization, considering claims of double taxation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Permanent Establishment in India

• Relevant Legal Framework and Precedents: Article 5(2) of the DTAA and the concept of PE under international tax law.
• Court's Interpretation and Reasoning: The court examined whether the activities of the assessee's Indian branch and subsidiary constituted a PE. It was argued that the branch was only for maintenance services and not involved in offshore supplies.
• Key Evidence and Findings: The court noted the division of responsibilities between the assessee and its Indian subsidiary, with the latter handling installation and maintenance.
• Application of Law to Facts: The court referenced previous ITAT decisions and Supreme Court rulings, concluding that the offshore supplies were not attributable to the PE.
• Treatment of Competing Arguments: The Revenue's argument of artificial contract splitting was rejected, as the division was pre-agreed with customers.
• Conclusions: The court concluded that there was no PE in relation to offshore supplies, aligning with previous rulings.

Issue 2: Taxability of Offshore Supply under the Income Tax Act

• Relevant Legal Framework and Precedents: Section 9(1) of the Income Tax Act and relevant Supreme Court decisions like Ishikawajima Harima Heavy Industries.
• Court's Interpretation and Reasoning: The court emphasized the principle that only income attributable to operations in India is taxable.
• Key Evidence and Findings: The court found that the title and risk of the equipment transferred outside India, negating a business connection.
• Application of Law to Facts: The court applied the principle of apportionment, determining no taxability for offshore supplies.
• Treatment of Competing Arguments: The Revenue's reliance on the Force of Attraction Rule was dismissed based on the DTAA's provisions.
• Conclusions: The court ruled that offshore supplies were not taxable under the Income Tax Act.

Issue 3: Taxability under the DTAA

• Relevant Legal Framework and Precedents: Articles 7 and 14 of the DTAA and the Multilateral Convention (MLI).
• Court's Interpretation and Reasoning: The court found that the Force of Attraction Rule did not apply, as the DTAA limits attribution to the PE's involvement.
• Key Evidence and Findings: The court noted the lack of evidence showing the PE's involvement in offshore supplies.
• Application of Law to Facts: The court reiterated the DTAA's protection against broad attribution of profits.
• Treatment of Competing Arguments: The Revenue's argument was countered by emphasizing the DTAA's specific provisions.
• Conclusions: Offshore supplies were not taxable under the DTAA.

Issue 4: Maintenance Receipts from Glidepath

• Relevant Legal Framework and Precedents: Arm's length principle and Supreme Court rulings on international transactions.
• Court's Interpretation and Reasoning: The court found that the receipts were adequately compensated on a cost-plus basis, with no further attribution needed.
• Key Evidence and Findings: The court noted the subcontracting arrangement and arm's length compensation to the Indian subsidiary.
• Application of Law to Facts: The court applied the Morgan Stanley precedent, confirming no additional tax liability.
• Treatment of Competing Arguments: The Revenue's claim of artificial contract splitting was dismissed.
• Conclusions: Maintenance receipts were not taxable in the assessee's hands.

Issue 5: Receipts from CIAL, TTD, and KITCOL

• Relevant Legal Framework and Precedents: Principles against double taxation.
• Court's Interpretation and Reasoning: The court acknowledged the assessee's claim of prior taxation and directed verification.
• Key Evidence and Findings: The court noted the absence of evidence for double taxation claims.
• Application of Law to Facts: The court remanded the issue for verification of claims.
• Treatment of Competing Arguments: The court allowed the assessee to provide evidence of prior taxation.
• Conclusions: The issue was remanded for further examination.

3. SIGNIFICANT HOLDINGS

• Verbatim Quotes of Crucial Legal Reasoning: "The attraction rule implies that when an enterprise (GE) sets up a PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits that the GE derives from the sources country-whether though PE or not."
• Core Principles Established: The court reinforced the principle that only profits attributable to the PE's involvement in transactions are taxable, aligning with DTAA provisions.
• Final Determinations on Each Issue: The court ruled in favor of the assessee on all major issues, directing the deletion of additions related to offshore supplies and maintenance receipts, while remanding the issue of double taxation for further examination.