2014 (4) TMI 702 - AT - Income Tax

Determination of Permanent Establishment - Article 5 of Indo-Mauritius DTAA GPI project Held that - The matter is principally factual would require an exposition and a clear understanding of the concept of PE - the words permanent establishment postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another, which can be attributed to a fixed place of business in that country - It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country onto the soil of another country - The rule to be invoked shall be the base rule of Art. 5(1), which is also commonly referred as the basic rule PE - The service rule, or any other sub-rule for that matter, is only derived from this basic rule and not in derogation. The assessee s claims and contentions raised besides being un-evidenced, are at polar opposite to what would one would normally expect as well as the material on record in the form of the base documents and the communications exchanged between the parties in the regular course of business - The plea of the employees being subject to change is without material - The claim of the personnel only executing planning and supervising work, is again without substance and contradictory of the contract work as profiled by the documents, and as stated here-in-before - a fixed place of business, as contemplated in the definition of PE under Art. 5, does not at all imply or is confined to a place where the top management of the company is located - A branch of an enterprises may well be its PE; only the profit attributable to the same being liable to be taxed in the source State - as is apparent from the modus operandi to be adopted, the regular interviews, interactions, meetings, training sessions and seminars, etc., both by the consultants and the principal consultants, forming Tier I and Tier II of the assessee s teams deputed on the project, and which are admittedly and principally at the GPI s premises, is as much a part of the work undertaken by the assessee-company as is the independent collection, collation, analysis and review, etc. of the data/information being sought from the organization during any phase of the project management thus, the assessee clearly has a PE in India during the relevant years Decided against Assessee. Profit attributable to PE Held that - The issue though not raised by the assessee per its memorandum of appeal, was agitated during hearing, and being germane to the issue is admitted as held in Dit (International Taxation) Versus Morgan Stanley And Company Inc. 2007 (7) TMI 201 - SUPREME Court , economic nexus is an important aspect of the principle of attribution of profits thus, the matter is required to the remitted back to the AO for fresh adjudication Decided in favour of Assessee. Restriction of claim for business expenses Held that - The claim has been restricted by the Revenue on the ground of it being not subject to verification - the assessee failed to produce the relevant vouchers - The plea that the records being old, so that the same are not traceable, is not admissible thus, there is no need for interference Decided against Assessee. Disallowance u/s 40(a)(iii) of the Act wrongly mentioned as 40(a)(ia) of the Act Held that - As decided in assessee s own case, that the limitation as regards the actual expenses, made particularly with reference to section 44C, has also been clarified by him as not applicable in view of Circular No.333 dated 02.04.1982 by CBDT, so that Art. 7(3) of Indio-Mauritius DTA would prevail Decided against Revenue. Disallowance of indirect expenses Held that - The indirect expenditure as reflected in the assessee-company s global audited accounts can be, without demur, taken as a legally firm basis for applying the same to the Indian operations in terms of Art. 7(3) of the treaty - The Revenue may further seek a certificate from the auditors of the company after arriving at an agreement as to what constitutes and comprises indirect expenditure - Insistence on the production of vouchers would be exaggerated Decided against Revenue.

Summary

Issues involved:
1. Existence of a Permanent Establishment (PE) in India under the India-Mauritius tax treaty.
2. Attribution of profits to the PE.
3. Allowance of business expenditure.
4. Applicability of sections 40(a)(iii) and 44C of the Income Tax Act, 1961.

Detailed Analysis:

1. Existence of a Permanent Establishment (PE) in India:
The principal issue in these appeals is whether the assessee, a non-resident company registered in Mauritius, had a PE in India as per Article 5 of the India-Mauritius tax treaty during the relevant years. The assessment for A.Y. 1997-98 initially included income received from an Indian company, GPI, as business income. The taxability of this income was contested based on the existence of a PE in India. The tribunal restored the matter to the Assessing Officer (A.O.) for further enquiry.

The tribunal emphasized the need to ascertain how the assessee conducted business in India, including the modus operandi, place of stay, communication with the Mauritius office, and the place of management. The A.O. and the first appellate authority concluded that there was a PE in India, making the business income taxable in India.

The assessee argued that its employees were mainly involved in planning and supervising work methods for GPI and that the management was based in Mauritius. The employees stayed in hotel rooms for residence, not as an office. The Revenue contended that the contracts required continuous inputs and interaction, implying a place of management in India. The tribunal concluded that the assessee had a PE in India during the relevant years, based on the nature of the business and the modus operandi followed.

2. Attribution of Profits to the PE:
The issue of profit attribution to the PE was not initially raised by the assessee but was admitted during the hearing. The tribunal restored this aspect to the A.O. to decide in accordance with the law, emphasizing the importance of economic nexus in attributing profits.

3. Allowance of Business Expenditure:
For A.Y. 1997-98, the assessee's claim for business expenditure was restricted due to the inability to produce relevant vouchers. The tribunal upheld this restriction, noting that the assessee failed to improve its case. For A.Y. 1999-2000, the first appellate authority allowed part of the indirect expenditure based on the ratio of domestic to global turnover. The tribunal accepted the assessee's claim in principle but allowed the Revenue to verify the global indirect expenditure through the company's auditors.

4. Applicability of Sections 40(a)(iii) and 44C:
The Revenue's appeal for A.Y. 1999-2000 challenged the deletion of disallowances made under sections 40(a)(iii) and 44C. The tribunal followed its decision for A.Y. 1997-98 and the CBDT circular, confirming that Article 7(3) of the India-Mauritius DTA would prevail over these sections. The Revenue's appeal was dismissed.

Conclusion:
The tribunal concluded that the assessee had a PE in India during the relevant years, making its business income taxable in India. The matter of profit attribution was restored to the A.O. for further examination. The tribunal upheld the restriction of business expenditure for A.Y. 1997-98 and allowed part of the indirect expenditure for A.Y. 1999-2000, subject to verification. The Revenue's appeal regarding the applicability of sections 40(a)(iii) and 44C was dismissed. The assessee's appeals were partly allowed, and the Revenue's appeal was dismissed.