2016 (10) TMI 426 - AT - Income Tax

Permanent Establishment (PE) in India - DTAA between India and the Swiss Confederation - Held that - In the present case, the business of the assessee has been conducted from the address of project coordinator, Mr. V. Subramanian and all correspondences relating to prospecting of client, participation in bids, correspondence with customers, signing of contract document, execution of the project and closure of the project etc. were initiated or routed through the business address of the company as above. Mr. V. Subramanian is the Power of Attorney holder from the company for all the projects, as the assessee was non-resident. To constitute a PE, the business must be located at a single place for a reasonable length of time. The activity need not be permanent, endless or without interruptions. It may not be out of place to mention that functions performed by Sri V. Subramanian or the Indian subsidiary could not be classified as preparatory or auxiliary in character. The facts strongly indicate towards Sri V. Subramanian constituting a dependent agent / PE for reasons brought on record by the AO and as discussed in foregoing paragraphs. There were no presence of a number of principals who exercised legal and or economic control over the agent Sri V. Subramanian. The principal i.e. the assessee has failed to demonstrate this aspect when confronted by the AO. The principal i.e. the assessee was relying on the special skills and knowledge of the agent Sri V. Subramanian the Managing Director of the Indian entity by the same name and rendering similar functions. Sri V. Subramanian was acting exclusively or almost exclusively for and on behalf of the assessee during the currency of the contracts in question. To that extent it was not in furtherance of his ordinary course of business. Finally the refuge taken of Article 5(2)(j) on the short period of contracts and the interregnum does not offer any solace to the assessee either. The assessee has not demonstrated it was a mere passing, transient or casual presence for its activity in India. In view of this, we confirm the order of the lower authorities This ground is therefore dismissed. Income computation - contention of the ld. AR is that the assessee is entitled to salestax, service-tax, customs duty paid on import - Held that - In our opinion, due deduction to be given in respect of the above components proportionate to the Indian rupees component, if it is not already given. It is also brought to our notice that the AO passed the rectification proceedings vide order dated 27.9.2012. While passing the rectification order, he has not considered all the above components properly. Accordingly, we direct the Assessing Officer to give credit to the above components subject to the provisions of section 43B of the Income-tax Act, which is relating to the income in Indian rupees component. It is needless to say that the AO shall give opportunity to the assessee before passing consequential order. With this observation, this ground of appeal of appeal is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Determination of Permanent Establishment (PE) in India.
2. Attribution of profits to PE.
3. Allowance of expenses related to the project.

Detailed Analysis:

1. Determination of Permanent Establishment (PE) in India:
The primary issue was whether the assessee maintained a fixed place of business as a "Permanent Establishment" (PE) in India under Article 5.2(i) of the Double Taxation Avoidance Agreement (DTAA) between India and the Swiss Confederation. The assessee, a foreign company, argued that it did not have a continuous presence or business connection in India, and thus, the project receipt from the Tanakpur Power Project was exempt from Indian tax. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) found otherwise, citing that Mr. V. Subramanian, representing the assessee, had a fixed place of business in India. The AO noted that all project-related activities were conducted through Mr. Subramanian's office, which constituted a PE. The DRP upheld this view, emphasizing the intertwined activities of the assessee and its Indian subsidiary, and the continuous and organized manner of business operations in India.

2. Attribution of Profits to PE:
The DRP directed that the attribution of profits to the PE must align with Article 7(1) of the DTAA, which allows the source country to tax only the profits attributable to the PE. The AO was instructed to tax the profits attributable to the operations carried out in India. The AO determined the total income based on the gross receipts, deducting sales tax and service tax, and estimating the income at 10% of the net amount. The assessee contested this, arguing that the computation was incorrect and excessive.

3. Allowance of Expenses Related to the Project:
The assessee claimed that the income computation did not consider all allowable expenses, such as customs duty, transport, installation costs, etc. The AO allowed only sales tax and service tax deductions. The Tribunal directed the AO to give due credit to all components proportionate to the Indian rupees component, subject to Section 43B of the Income-tax Act, which mandates the deduction of certain expenses only on actual payment.

Conclusion:
The Tribunal upheld the lower authorities' decision regarding the existence of a PE in India, dismissing the assessee's arguments. However, on the issue of expense allowance, the Tribunal directed the AO to reconsider and allow appropriate deductions for expenses related to the Indian rupees component, ensuring compliance with Section 43B. The appeal was partly allowed for statistical purposes, with specific instructions for the AO to provide the assessee an opportunity to present their case before passing the consequential order.