2020 (5) TMI 629 - AT - Income Tax

Income accrued in India - PE in India - use or hire of the containers in international traffic - India UK DTAA - HELD THAT - Payment of arm s length remuneration to the agent, and taxability of income embedded in such payment in India, is not even in dispute before us, the stand of the authorities below cannot be approved. Given this finding, it is immaterial as to whether the DAPE existed or not, for the simple reason that, as the binding legal position is, the existence of DAPE is wholly tax neutral. We are aware that on a conceptual note, a PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, other than agent's remuneration in the source country - which is taxable in the source state anyway de hors the existence of PE, become taxable in the source state, the very approach to the DAPE profit attribution may indeed seems incompatible with the above legal position. It may sound incongruous from an academic point of view but then that s what the law is. We hold that once an agent has been paid arm s length remuneration, and the income embedded in such remuneration has been taxed in India, no further profits can be taxed in the hands of the DAPE. Accordingly, the action of the authorities below, in bringing income of the DAPE- independent of the agency remuneration received by the agent of the assessee, is unsustainable in law. We, therefore, uphold the plea of the assessee and delete the impugned addition in the hands of the assessee. Pronouncement of orders within 90 days - Covid-19 epidemic - Worldwide lockdown - HELD THAT - An unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure . The term force majeure has been defined in Black s Law Dictionary, as an event or effect that can be neither anticipated nor controlled When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an ordinary period. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. Period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case. Of course, there is no, and there cannot be any, bar on the discretion of the benches to refix the matters for clarifications because of considerable time lag between the point of time when the hearing is concluded and the point of time when the order thereon is being finalized, but then, in our considered view, no such exercise was required to be carried out on the facts of this case.

Summary

Issues Involved:
1. Applicability of Article 9 (Shipping) of the India-UK Double Taxation Avoidance Agreement (DTAA).
2. Determination of a Dependent Agent Permanent Establishment (DAPE) under Article 5 of India-UK DTAA.
3. Attribution of profits to the DAPE and the application of Section 44B of the Income Tax Act, 1961.
4. Procedural issue regarding the delayed pronouncement of the order due to COVID-19 lockdown.

Issue-Wise Detailed Analysis:

1. Applicability of Article 9 (Shipping) of the India-UK DTAA:
The assessee claimed exemption of freight income under Article 9 of the India-UK DTAA. The Assessing Officer (AO) rejected this claim on the grounds that the assessee did not own or hire ships and the income was not derived from the use or hire of containers in international traffic. The CIT(A) confirmed the AO's decision. However, the Tribunal found that the core issue was the existence of a DAPE, making the applicability of Article 9 a secondary, academic issue.

2. Determination of a Dependent Agent Permanent Establishment (DAPE) under Article 5 of India-UK DTAA:
The AO determined that the assessee had a DAPE in India through Freight Connections India Pvt Ltd, attributing 10% of the freight income to this DAPE. The CIT(A) upheld this decision. The Tribunal, referencing the Hon'ble jurisdictional High Court's judgment in Set Satellite (Singapore) Pte Ltd v. DDIT, noted that if the agent is paid an arm's length remuneration, no further profit can be attributed to the PE. Since it was undisputed that the agent was paid an arm's length remuneration, the existence of a DAPE was deemed tax neutral.

3. Attribution of Profits to the DAPE and Application of Section 44B of the Income Tax Act, 1961:
The AO attributed 10% of the freight income to the DAPE and assessed the income accordingly. The Tribunal held that once an agent is paid an arm's length remuneration, no further profits can be taxed in the hands of the DAPE. Consequently, the addition of ?54,84,213 was deleted. This decision was also applied to ITA No. 8423/Mum/2010, resulting in the deletion of ?40,82,990.

4. Procedural Issue Regarding Delayed Pronouncement of the Order Due to COVID-19 Lockdown:
The order was pronounced beyond the 90-day period due to the COVID-19 lockdown. The Tribunal referred to Rule 34(5) of the Income Tax Appellate Tribunal Rules, 1963, and the exceptional circumstances caused by the lockdown. It noted that the term "ordinarily" in the rule allows for flexibility under extraordinary circumstances, such as the pandemic. The Tribunal cited various judicial precedents and government notifications recognizing the pandemic as a natural calamity, justifying the delay in pronouncement.

Conclusion:
Both appeals were allowed, with the Tribunal holding that the existence of a DAPE was tax neutral due to the arm's length remuneration paid to the agent. The additions made by the AO were deleted, and the procedural delay in pronouncement was justified in light of the COVID-19 lockdown.