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2020 (3) TMI 959 - AT - Income TaxIncome accrued in India - Fixed Place Permanent Establishment ( PE ) in India as per Article 5 of the India-USA DTAA - Service PE in India - secondment agreement regarding secondment of the employees between the foreign company (i.e. the assessee) and the Indian entity (i.e. Teradata India) - secondment/assignment agreement between the foreign company (i.e. the assessee) and the expatriate, exist but no employment agreement between the expatriate and the Indian company (i.e. Teradata India) existed - HELD THAT - In the instant case the employees of the assessee has been deputed to manage the affairs of the Indian entity and provide technical knowledge. The employees though worked at the premises of the Terdata India but for all practical purposes the remained employees of the assessee company. The employees continued to make their social security contributions in USA and their salaries were also distributed to their bank accounts in USA. In the case of Centrica 2014 (5) TMI 154 - DELHI HIGH COURT there was agreement between the Indian entity and expatriate, but in this case, even there was no such agreement also. Respectfully following the finding of the Hon ble High Court, we uphold the finding of the lower authorities on the issue of existence of PE of the assessee in India in terms of the DTAA. The ground No. 2.1 to 2.4 of the appeal accordingly dismissed. Profit attribution - HELD THAT - This issue was raised by the assessee before the Learned DRP and learned DRP directed to verify the claim of the assessee, however, in the final assessment order, the Learned Assessing Officer considered the same amount for cost base on the ground that no such details were provided by the assessee in assessment proceedings. In our opinion, this is issue of the verification and if on verification certain expenses are not found pertaining to the seconded employees, same need to be excluded for taking cost base for profit attribution. Accordingly, we restore this issue to the file of the learned Assessing Officer for deciding after verification of each and every item of expense of ₹ 4,10,60,108/- and include only the item of the expenses pertaining to the seconded employees. The ground No. 2.5 and 2.6 of the appeal are accordingly allowed for statistical purposes. Non considering the global profit of the assessee for applying markup on the cost base and adopting an ad-hoc 25% as profit attributable to the PE - HELD THAT - This is issue of verification by the Assessing Officer accordingly. We restore this issue to the Assessing Officer for deciding after verification of the documents along with audited statements filed by the assessee in support of its claim of the global profit and decide the attribution of profit in accordance with Article 7 of the Indian-USA DTAA. The ground No. 2.8 of the appeal is accordingly allowed for statistical purposes. Salary by the TIPL to seconded employees in India has been accepted as the cost of the business of the TIPL, as hence salary payment made to the seconded employees by the assessee on behalf of the TIPL should also be considered as cost of business of the TIPL and should not be considered for attributing to the alleged PE - HELD THAT - This contention of the assessee is not acceptable because in the instant case, revenue earned by the PE for providing services to the Indian entity is under consideration for profit attribution and the cost or expenditure incurred by the Indian entity is not an issue in dispute. Assessee proposed that salary costs paid to seconded person is to be allowed as per Article 7 of the DTAA while making attribution to the alleged PE in India - The Article 7(2) prescribe that profit attributable to PE may be estimated on a reasonable basis, but the estimate adopted, however, should be in accordance with principle laid down in Article 7 of the treaty. The deduction of expenses are also to be allowed as per Article 7(3) of the Treaty. The Assessing Officer has considered markup at the rate of 25% on the cost base of the seconded employees in absence of details of global profit of the assessee. In our opinion, this action of the Assessing Officer was not totally arbitrary or in violation of rules of estimation, though we have already restored the issue of the estimation of the profit to the file of the Assessing Officer in accordance with Article 7 of the Indian USA DTAA. Nothing is brought on record to show whether the services of the seconded employee has been utilized towards international transactions of the Indian entity or has been utilized in domestic market. Even the services has been utilized by Associated Enterprises and remunerated at arm s length price to Teradata India , will not make any impact, as in the instant case the income taxable in the hands of the PE is under consideration and nothing has been brought on record that Arm s Length Price of the service transaction between PE of assessee and Indian Entity has been determined. What is relevant here is that income has to be taxed in the hands of the correct person and in the instant case income from rendering services by the PE has to be taxed in the hands of the PE and remunerating the Teradata India by other AEs at arm s-length price is not relevant. Accordingly, we reject this alternative argument of the assessee. Credit of tax deducted at source - HELD THAT - We restore this issue to the file of the learned Assessing Officer with the direction to the assessee to produce all the evidences in support before the Assessing Officer for verification and he will then after examination of the documents/evidence and data base of the department, allow the credit of TDS in accordance with law
Issues Involved:
1. Legality of the assessment order and additions made. 2. Determination of total income and the addition on account of secondment arrangement. 3. Existence of Permanent Establishment (PE) in India. 4. Attribution of profits to the alleged PE. 5. Initiation of penalty under section 274 read with section 271. 6. Charging of interest under section 234B. 7. Granting of credit for tax deducted at source. 8. Legality of the rectification order under section 154. Detailed Analysis: 1. Legality of the Assessment Order and Additions Made: The assessee challenged the assessment order passed under section 143(3) r.w.s. 144C(5) of the Income-tax Act, 1961, arguing that the order and additions made by the Assessing Officer (AO) were unlawful and unjust. The tribunal did not find merit in this broad contention without specific grounds. 2. Determination of Total Income and Addition on Account of Secondment Arrangement: The AO increased the assessee's total income from ?72,84,230 to ?3,07,34,310 by adding ?2,32,98,701 due to the secondment arrangement between the assessee and its Indian Associated Enterprise (AE). The assessee contended that the AO erred in determining the total income and not passing a speaking order. The tribunal upheld the AO's determination, citing the decision in Centrica India Offshore Private Limited, which confirmed the existence of a PE and the attribution of profits to such PE. 3. Existence of Permanent Establishment (PE) in India: The tribunal examined whether the assessee constituted a Fixed Place PE and a Service PE in India as per Article 5 of the India-USA DTAA. The AO and the Dispute Resolution Panel (DRP) concluded that the seconded employees continued to be under the control of the assessee, thus constituting a PE. The tribunal upheld this finding, referencing the Centrica case, where seconded employees were considered to create a PE due to their continued employment relationship with the foreign entity. 4. Attribution of Profits to the Alleged PE: The AO attributed 25% of the total reimbursement received by the assessee to the PE, amounting to ?2,32,98,701. The tribunal found that the AO did not verify the segregation of relocation expenses as directed by the DRP and restored this issue for verification. The tribunal also directed the AO to verify the global profitability of the assessee and use it for profit attribution if available. The tribunal rejected the assessee's argument that no profit element was involved in the reimbursement and that the salary paid to seconded employees should not be considered for profit attribution. 5. Initiation of Penalty Under Section 274 Read with Section 271: The tribunal found the ground of initiating penalty to be premature and dismissed it as infructuous. 6. Charging of Interest Under Section 234B: This ground was also found to be consequential and dismissed as infructuous. 7. Granting of Credit for Tax Deducted at Source: The tribunal restored this issue to the AO for verification and directed the assessee to provide evidence supporting the claim for TDS credit. 8. Legality of the Rectification Order Under Section 154: The assessee's rectification application under section 154 was rejected by the AO. The tribunal noted that the issue of relocation expenses had already been restored to the AO for verification, rendering the grounds in the rectification appeal academic. Therefore, the appeal was dismissed as infructuous. Conclusion: The appeal bearing ITA No. 7805/Del./2017 was partly allowed for statistical purposes, and the appeal bearing ITA No. 2580/Del./2018 was dismissed. The tribunal directed the AO to verify specific issues related to the segregation of relocation expenses and global profitability for profit attribution.
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