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2014 (4) TMI 529 - AT - Income TaxScope of the term business connection u/s 9(1)(i) of the Act Indo -German treaty - Whether assessee s Indian subsidiary constitute its business connection in India u/s. 9(1)(i) of the Act or a Permanent Establishment ( PE ) in India under India-Germany Tax Treaty Held that - The decision in Assistant Commissioner Of Income-Tax. Versus Epcos Ag, Germany 2008 (6) TMI 288 - ITAT PUNE-B followed - Nothing contrary was brought to our knowledge on behalf of revenue - the assessee did not have any PE in India, much less a PE to which subject royalties and fees for technical services could be attributed - In terms of India-German DTAA, India does not have right to tax these receipts as business profit under Article 7 - no revenue earned by the assessee could be said to be attributable to PE, even if one was to come to the conclusion that a PE existed, no taxability could arise under Article 7 - The assessee has offered the royalties and fees for technical services for taxability in India under Article 12A and to that extent, admitted tax liability exists Decided in favour of Assessee. Non attribution of income deemed to accrue or arises in India Taxability @ 20 per cent u/s 44DS r/w s.115A in case PE is found to be in existence - Held that - The decision in Assistant Commissioner Of Income-Tax. Versus Epcos Ag, Germany 2008 (6) TMI 288 - ITAT PUNE-B followed - the amounts received by the assessee company meet the definition of royalties and of fees for technical services u/s 44D which, in turn, refers to Expln.2 to s. 9(l)(vi) respectively - the taxability of amounts received by the assessee company on account of royalties and fees for technical services will be @ 20 per cent on gross basis - Nothing contrary was brought to our knowledge on behalf of revenue - taxation at gross basis at higher rate of 20% under section 115A r.w.s. 44D of Act are unwarranted and taxation has to be at 10% on gross basis under article 12(2) of the Tax Treaty as offered in the return of income Decided in favour of Assessee.
Issues Involved:
1. Non-constitution of Permanent Establishment (PE) of the Appellant in India. 2. No attribution of income deemed to accrue/arise in India to the alleged PE of the Appellant in India. 3. Erroneous charging of interest under Section 234B of the Act. 4. Denial of recourse to Non-discrimination clause - Article 24 of the Tax Treaty (not pressed). 5. Lack of adequate opportunity (not pressed). Issue-wise Detailed Analysis: 1. Non-constitution of Permanent Establishment (PE) of the Appellant in India: The primary issue concerns whether the appellant's Indian subsidiary constitutes its "Business Connection" in India under Section 9(1)(i) of the Income-tax Act, 1961, or a "Permanent Establishment" (PE) in India under various provisions of Article 5 of the India-Germany Tax Treaty. The appellant contended that it operates entirely from outside India and has no fixed place of business in India. The Tribunal noted that this issue was previously addressed in the appellant's own case for A.Y. 2006-07, where it was held that the appellant did not have a PE in India. The Tribunal reiterated that the activities carried out by the Indian subsidiary did not constitute significant or critical business activities of the appellant, and thus, no part of the revenue earned by the appellant could be attributed to a PE in India. Consequently, the Tribunal allowed Ground No. 1, concluding that the appellant did not have a PE in India. 2. No Attribution of Income Deemed to Accrue/Arise in India to the Alleged PE of the Appellant in India: The second issue pertains to whether any income deemed to accrue or arise in India could be attributed to the alleged PE of the appellant under Article 7 of the Tax Treaty. The Tribunal referred to its previous decision for A.Y. 2006-07, where it was held that even if a PE existed, no income could be attributed to it unless there was a significant economic nexus between the PE and the income. The Tribunal emphasized that the income from royalties and fees for technical services should be taxed at a rate of 10% on a gross basis under Article 12(2) of the Tax Treaty, as offered in the return of income, rather than at the higher rate of 20% under Section 115A read with 44D of the Act. Consequently, Ground No. 2 was allowed, and the Tribunal directed that the income be taxed at 10% on a gross basis. 3. Erroneous Charging of Interest under Section 234B of the Act: The third issue involves the erroneous charging of interest under Section 234B of the Act. The Tribunal noted that this issue is consequential to the findings on the primary issues. Since the primary issues were decided in favor of the appellant, the interest charged under Section 234B would need to be recalculated accordingly. Therefore, this ground was allowed as a consequence of the earlier findings. 4. Denial of Recourse to Non-discrimination Clause - Article 24 of the Tax Treaty: This ground was not pressed by the appellant during the hearing and was therefore dismissed as not pressed. 5. Lack of Adequate Opportunity: This ground was also not pressed by the appellant during the hearing and was dismissed as not pressed. Conclusion: The Tribunal allowed the appeal partly, ruling in favor of the appellant on the grounds of non-constitution of PE and non-attribution of income to the alleged PE in India. The issue of erroneous charging of interest under Section 234B was deemed consequential and would be adjusted based on the primary findings. Grounds related to non-discrimination and lack of adequate opportunity were dismissed as not pressed. The judgment was pronounced on January 31, 2014.
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