2021 (3) TMI 333 - AAR - Income Tax

Advance ruling application u/s 245R - Amount received/receivable under Purchase Order in relation to offshore supplies of High Efficiency Traction Motors ('HETMs') from a port in Japan to DMRC in India - liability to tax in India under the provisions of the Act and/ or the Agreement for Avoidance of Double Taxation between India and Japan ('the Treaty') - only objection of the Revenue is that the transaction was designed prima-facie for avoidance of tax - CIT has contended that there was a business connection of the applicant in India which constitutes Permanent Establishment and an appropriate profit needs to be attributable to the P.E. in India. Therefore, the transaction was designed for avoidance of tax - HELD THAT - We do not find any design to avoid tax by any illegal or improper means. The submission of the Revenue is mostly on the merits of the case which has to be considered in the course of merit hearing. Merely because the applicant has taken over the responsibility of risk of loss or damage till the equipments were delivered in Delhi and also that of insurance etc; it does not establish that the transaction was designed prima-facie for avoidance of tax. The question of Permanent Establishment has to be examined in the course of merit hearing and if it is established that there was a P.E., the natural consequence will follow. Department has not brought out any material to establish that there was a prima-facie case of avoidance of tax. Therefore, the application is admitted u/s 245 R (2) of the Act.

Summary

Issues:
1. Tax liability on amount received for offshore supplies.
2. Allegation of tax avoidance through transaction design.
3. Existence of Permanent Establishment (P.E.) in India.

Issue 1: Tax liability on amount received for offshore supplies

The applicant sought clarification on the tax liability of the amount received from the Delhi Metro Rail Corporation for offshore supplies of High Efficiency Traction Motors. The Revenue contended that the transaction was designed to avoid tax, citing the applicant's responsibilities for care, custody, risk of loss, and insurance. However, the applicant clarified that they were not liable for customs duty payment. The Authority found no evidence of illegal or improper tax avoidance in the transaction. It was determined that the merits of the case should be evaluated during the merit hearing, and the issue of Permanent Establishment would also be examined at that time. The Authority admitted the application under section 245 R (2) of the Act, scheduling the next hearing accordingly.

Issue 2: Allegation of tax avoidance through transaction design

The Revenue alleged that the transaction was structured to avoid tax, highlighting the applicant's assumed responsibilities and connections in India. However, the Authority did not find any concrete evidence to support the claim of tax avoidance through improper means. The Authority emphasized that the determination of Permanent Establishment and tax implications would be thoroughly assessed during the merit hearing. The absence of material establishing a prima facie case of tax avoidance led to the admission of the application for further consideration.

Issue 3: Existence of Permanent Establishment (P.E.) in India

The Revenue argued that the applicant's activities in India constituted a Permanent Establishment, suggesting that profits should be attributed to this establishment. The Authority acknowledged the need to investigate the existence of a Permanent Establishment during the merit hearing. The Department failed to provide substantial evidence to support the claim of tax avoidance, leading to the acceptance of the application for future proceedings. The decision on the tax liability and Permanent Establishment status would be determined based on the merits of the case presented during the upcoming hearings.