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2025 (3) TMI 352 - AT - Income TaxPermanent Establishment ( PE ) in India - treating the services in relation to preparation of design as FTS - whether RIC is a dependent agent permanent establishment/DAPE in order to tax the business income of the assessee in India and that the receipts for design and drawing is taxable as FTS u/s 9(1)(vii)? - HELD THAT -We find that the ITAT in 2022 (2) TMI 1194 - ITAT DELHI has decided the issue of whether RIC is DAPE in terms of contract dated 01.02.2005 in favour of the assessee. We find that for the instant year the same contract with RIC exist hence the facts as available in AY 2011-12 remains the same in AY 2008-09. Respectfully above we are of the considered view that RIC is not DAPE within the meaning of Article 5 of the USA-India DTAA and hence no business income can be attributed to the assessee for taxation in India. The grounds of appeal no 1 and 2 are allowed. Services related to the preparation of designs - Drawing and design has been supplied from outside India and the payment for the same has been received outside India. We find force in assessee s argument that supply of Drawings and Designs are an integral part of Imports and are highly integrated to the supply of the Plant Machinery and equipment. Without the Drawings the other supplies are of no worth. We are of considered view therefore that being a component of supply of Plant and Machinery and being an accrual overseas the receipts on account of Drawing and designs formed part of business income within the purview of Article 7 of the USA-India DTAA and the same can not be taxed separately under Article 12 of the USA-India DTAA. Since it has been decided that the assessee doesn t have a DAPE in India nor an installation PE in India the receipts on account of Drawing and Design can not be taxed as Income in India nor the same be attributed to the assessee as FTS u/ 9(1)(vii) - Decided in favour of assessee.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include: 1. Whether the appellant has a Permanent Establishment (PE) in India through Rajalakshmi International Corporation (RIC) as a Dependent Agent Permanent Establishment (DAPE). 2. Whether the services related to the preparation of designs can be treated as Fees for Technical Services (FTS) under Article 12(5) of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. 3. The applicability of interest under sections 234A, 234B, and 234C of the Income Tax Act, considering prepaid taxes and tax deducted at source. ISSUE-WISE DETAILED ANALYSIS 1. Permanent Establishment (PE) and Dependent Agent Permanent Establishment (DAPE) Relevant legal framework and precedents: The legal framework revolves around Article 5 of the India-USA DTAA, which defines the conditions under which an enterprise is deemed to have a PE in another contracting state. The Tribunal also referenced decisions from the ITAT for AY 2011-12 and decisions from the Delhi High Court and Supreme Court. Court's interpretation and reasoning: The Tribunal considered whether RIC acted as a DAPE for the appellant. The assessment order had concluded that RIC was a DAPE based on its exclusive rights to represent the company and its authority to conclude contracts on behalf of the appellant. However, the Tribunal found that RIC was an independent consultant with no authority to conclude contracts on behalf of the appellant, thus not constituting a PE. Key evidence and findings: The Tribunal reviewed the contract between the appellant and RIC, noting that RIC was engaged with other companies and acted as an independent contractor. The Tribunal also considered the ITAT's earlier decision for AY 2011-12, which had found RIC not to be a DAPE. Application of law to facts: The Tribunal applied Article 5 of the DTAA, determining that RIC did not meet the criteria for a DAPE, as it was not wholly dependent on the appellant and did not operate under the appellant's control. Treatment of competing arguments: The appellant argued that RIC was an independent consultant, while the department contended that RIC's activities indicated control by the appellant. The Tribunal sided with the appellant, finding no DAPE. Conclusions: The Tribunal concluded that RIC is not a DAPE under Article 5 of the DTAA, and no business income can be attributed to the appellant for taxation in India. 2. Fees for Technical Services (FTS) Relevant legal framework and precedents: Article 12(5) of the DTAA and Section 9(1)(vii) of the Income Tax Act were considered in determining whether the design services constituted FTS. Court's interpretation and reasoning: The Tribunal evaluated whether the design services were inextricably linked to the supply of equipment, which would affect their classification as FTS. Key evidence and findings: The Tribunal found that the design services were integral to the supply of equipment and were performed outside India, with payments received outside India. Application of law to facts: The Tribunal applied Article 7 of the DTAA, determining that the design services were part of the business income and not FTS, as they were integral to the supply of equipment. Treatment of competing arguments: The appellant argued that the design services were part of the equipment supply, while the department treated them as FTS. The Tribunal agreed with the appellant's view. Conclusions: The Tribunal concluded that the design services were not FTS and could not be taxed separately under Article 12 of the DTAA. 3. Interest under Sections 234A, 234B, and 234C Relevant legal framework: Sections 234A, 234B, and 234C of the Income Tax Act relate to interest on delayed tax payments. Court's interpretation and reasoning: The Tribunal noted that these grounds were consequential, depending on the resolution of the primary issues. Conclusions: The Tribunal did not provide a detailed analysis, as these grounds were deemed consequential. SIGNIFICANT HOLDINGS Core principles established: The Tribunal reaffirmed the principle that a dependent agent must meet specific criteria under the DTAA to be considered a PE. Additionally, services integral to equipment supply do not constitute FTS if performed and paid for outside India. Final determinations on each issue: The Tribunal allowed the appeal, determining that RIC was not a DAPE, the design services were not FTS, and the interest grounds were consequential. The appeal of the assessee was allowed, and the order was pronounced in the open court on 25.02.2025.
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