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2015 (4) TMI 905 - AT - Income TaxDTAA between India and Switzerland - Existence of Permanent Establishment/Business connection in India - Taxability of business Income earned in India, by company incorporated outside India - Applicability of Interest u/s 234B - Held that - The decision of the Hon ble Delhi High Court in the case of E-Funds IT Services 2014 (2) TMI 442 - DELHI HIGH COURT , wherein Hon ble Court has held that establishing subsidiary in the other treaty country would not result in creating and establishing a PE of a foreign holding company in the said third country. Thus, at the outset the subsidiary SRSIPL of the assessee does not constitute a PE of its holding company i.e. the assessee. Considering the services rendered by SRSIPL in the light of the OECD commentary, SRSIPL cannot be considered as PE of the assessee. The decision relied upon by Ld. DR do not support the Revenue on the facts of the present case, like in the case of Delhi Bench of the Tribunal in the case of Motorola Inc. (supra, the facts were that the employees of the assessee had worked both for the assessee as well as its Indian subsidiary. The employees also had the right to enter the office of the Indian subsidiary either for the purpose of working for Indian subsidiary or for the purpose of working for the assessee and the Indian subsidiary provided perquisite to the employees of the assessee and the assessee paid salaries to the employees, on these facts the Indian subsidiary was considered as place of business. However, facts of the case in hand clearly show that the employees of the SRSIPL has only provided services to SRSIPL and there is no noting on record to prove that the employees had provided services to the assessee or the assessee is paying their salaries or perquisites. The decision of the Hon ble Supreme Court in the case of Morgan Stanley 2007 (7) TMI 201 - SUPREME Court has been duly considered by the Hon ble Delhi High Court in the case of E-Funds IT Solutions (supra). To sum up, the assessee does not have any business connection in India in the light of Explanation-2 to section 9(1) of the Act. The assessee does not have any PE in India. The facts on record show that there is neither Service PE nor Agency PE in the form of SRSIPL. Considering the facts in totality in the light of the relevant provisions of the law and the DTAA and the judicial decisions referred to herein above, we have no hesitation in setting aside the assessment order and accordingly we direct the AO not to treat the income of the assessee as taxable under the Act. Interest u/s 234B of the Income Tax Act, 1961 - We find that at para-10.6 the DRP following the decision of Hon ble Bombay High Court in the case of NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT has directed the AO not to levy interest as the assessee is from a foreign country. The AO has not followed the direction of the DRP. We accordingly, direct the AO to follow the directions of the DRP. Ground No.3 is treated as allowed for statistical purposes. - Decided partly in favour of assessee.
Issues Involved:
1. Whether the assessee had a Dependent Agency Permanent Establishment (DAPE) in India. 2. Whether the assessee had a clear-cut business connection in India. 3. Whether SRSIPL constituted a Service PE or Agency PE for the assessee. 4. Attribution of income to the PE in India. 5. Levy of interest under section 234B of the Income Tax Act. Detailed Analysis: 1. Dependent Agency Permanent Establishment (DAPE): The AO held that the Indian subsidiary, SRSIPL, acted as a DAPE for the assessee, Swiss Reinsurance Co. Ltd., in India. The AO observed that SRSIPL provided technical and core reinsurance services, thus constituting a DAPE. The assessee contended that SRSIPL was a separate legal entity and its activities did not create a PE in India. The Tribunal noted that the service agreement explicitly stated that SRSIPL was not an agent or broker of the assessee and operated on a principal-to-principal basis. The Tribunal concluded that the conditions for DAPE under Article 5(4) of the Indo-Swiss Treaty were not met, as reinsurance services were specifically excluded. 2. Business Connection in India: The AO argued that the assessee had a regular flow of income from India, thus establishing a business connection under section 9(1)(i) of the Income Tax Act. The assessee countered that SRSIPL was an independent entity, and its profits were taxed in India. The Tribunal referred to Explanation 2 to section 9(1) and found that none of the conditions for a business connection were satisfied. The Tribunal held that the assessee did not have a business connection in India. 3. Service PE or Agency PE: The AO treated SRSIPL as both a Service PE and an Agency PE for the assessee. The assessee argued that SRSIPL's services did not include reinsurance contracts or liability confirmations, and that SRSIPL was legally and functionally independent. The Tribunal examined the service agreement and noted that SRSIPL was not an agent, broker, or legal representative of the assessee. The Tribunal also considered the OECD commentary on Article 5 and concluded that SRSIPL did not constitute a PE for the assessee. The Tribunal emphasized that the employees of SRSIPL provided services solely to SRSIPL, not to the assessee. 4. Attribution of Income to PE: Since the Tribunal held that the assessee did not have a PE in India, the issue of attributing income to the PE became moot. The Tribunal directed the AO not to treat the income of the assessee as taxable under the Act. 5. Levy of Interest under Section 234B: The AO levied interest under section 234B, despite the DRP's direction not to do so, following the decision of the Bombay High Court in the case of NGC Network Asia LLC. The Tribunal directed the AO to follow the DRP's instructions and not levy interest under section 234B, as the assessee was from a foreign country. Conclusion: The Tribunal allowed the assessee's appeal, setting aside the assessment order. The Tribunal held that the assessee did not have a business connection or PE in India, and directed the AO not to treat the income as taxable under the Act. The Tribunal also directed the AO to follow the DRP's instructions regarding the levy of interest under section 234B. The appeal was partly allowed.
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