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2022 (5) TMI 674 - AT - Income TaxPermanent Establishment (PE) in India - attribution of profit to the PE - whether the assessee has a PE in India? - assessee is a company incorporated in Singapore and is a tax resident of that country as engaged in the business of manufacturing and sale of scientific research instruments and peripheral - AO has treated DHR Holding India Pvt. Ltd., an associated enterprise of the assessee based in India, as the fixed place PE, agency PE and dependant agent PE under Article 5(1), 5(8) and 5(9) of India Singapore DTAA - legal relationship and real nature of the transaction between the assessee and DHR India - HELD THAT - As allegation of the AO that the assessee utilizes the premises of DHR India as a warehouse to stock its goods and sales outlet is not borne out from the materials on record. The facts on record clearly reveal that the assessee s employees have never visited India. Direct sales to Indian customers were made from Singapore through shipment. The sales effected by DHR India are on its own independent status. Therefore, the products purchased by DHR India under the Distribution Agreement and kept in its inventory cannot be considered to be the products belonging to the assessee, as, they are sales transaction on principal to principal basis for resale by DHR India to Indian customers. Further, clause 11.1 and 11.2 of Sales Commission Agreement makes it clear that any replacement of products/spares under warranty/maintenance has to be provided by DHR India out of its own inventory and DHR India will have the right to either get a replacement from assessee or cross charge the cost to the assessee. Therefore, the terms of the agreements make it clear that assessee does not have a warehouse or sales outlet in India to constitute a fixed place PE in India under Article 5(1) of the Treaty. Thus, in our view, the conclusion drawn by the Assessing Officer that the assessee has fixed place PE or dependant agent PE is not borne out from any cogent material/evidence brought on record. Unfortunately, DRP has not properly appreciated the facts and simply adopted the version of the Assessing Officer. There is nothing on record to suggest that the assessee is utilizing the premises of DHR Holding India Pvt. Ltd. either as warehouse for storage of its products or as a sales outlet for soliciting/procuring orders from Indian customers. Further, there is no cogent material on record to demonstrate that DHR Holding India Pvt. Ltd. habitually exercises authority to conclude contracts on behalf of the assessee or maintains stock of goods or merchandise from which it regularly deliver goods to Indian customers on behalf of the assessee or it habitually secures orders in India wholly and exclusively for the assessee. Thus, none of the ingredients of Article 5(8) are satisfied. The terms of the agreement as well as the conduct of parties do not make out a case for the Revenue that the premises of DHR India would constitute either a fixed place PE or agency PE. Revenue authorities have not brought any material on record to demonstrate that the activities of DHR India are wholly devoted on behalf of the assessee and as such it does not have any independent status and was not acting in the ordinary course of its business. We have noted, from the stage of assessment proceeding itself, the assessee has consistently urged that DHR India is having its own independent status and business and its activities are not wholly devoted to the assessee - departmental authorities have rejected the claim of the assessee without bringing any contrary material on record to demonstrate that the activities of DHR India are wholly and exclusively devoted to the assessee. That being the factual position, it cannot be said that DHR India constitutes dependant agent PE of the assessee. Thus, in our view, conditions of Article 5(9) of India Singapore DTAA are not fulfilled. As regards DHR India constituting the dependant agent PE, we have already deliberated on the issue and have held that no material has been brought by the departmental authorities to demonstrate that the Indian entity habitually exercises its authority to conclude contract etc. in terms of Article 5(8) or its activities are wholly devoted on behalf of the assessee. Thus, there cannot be any PE under Article 5(8) and 5(9) of the Indian Singapore Tax Treaty. Thus, applying the legal principle to the facts emerging on record, we hold that the assessee does not have any PE in India. Therefore, in absence of PE, the business profits of the assessee cannot be taxed in India. Accordingly, the additions made by way of attribution of profit to the PE in India deserve to be deleted. - Decided in favour of assessee.
Issues Involved:
1. Constitution of Permanent Establishment (PE) in India. 2. Attribution of profits to the alleged PE. 3. Initiation of penalty under section 270A and 271BA of the Income-tax Act, 1961. Detailed Analysis: Issue 1: Constitution of Permanent Establishment (PE) in India The core issue is whether the assessee, a company incorporated in Singapore, has a Permanent Establishment (PE) in India. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) held that the assessee had a fixed place PE and a dependent agency PE in India based on agreements with DHR Holding India Pvt. Ltd. and statements from employees of a customer. The AO observed that DHR India acted as an Indian representative, maintained inventory, and concluded contracts on behalf of the assessee. However, the assessee contended that it did not have a PE in India as it sold products directly from Singapore and subcontracted maintenance services to DHR India, which was compensated at arm's length. The Tribunal examined the agreements (Sales Commission Agreement, Distribution Agreement, and Marketing Support Services Agreement) and found that DHR India acted as an independent contractor without authority to conclude contracts on behalf of the assessee. The Tribunal noted that the AO relied on statements from third-party employees without giving the assessee an opportunity to cross-examine them, which was procedurally incorrect. The Tribunal concluded that the AO and DRP failed to provide cogent evidence to establish a fixed place PE or dependent agent PE in India, and thus, the assessee did not have a PE in India. Issue 2: Attribution of Profits to the Alleged PE The AO attributed profits to the alleged PE by applying an ad-hoc methodology and computed an amount of Rs. 5,69,67,807/- as profit attributable to the PE in India. The assessee argued that the attribution was unrealistic, ignored arm's length remuneration principles, and was based on incorrect assumptions. The Tribunal, having concluded that the assessee did not have a PE in India, held that the business profits of the assessee could not be taxed in India, rendering the issue of profit attribution moot. Issue 3: Initiation of Penalty under Section 270A and 271BA The AO initiated penalty proceedings under sections 270A and 271BA of the Act. However, since the Tribunal held that the assessee did not have a PE in India and the business profits could not be taxed in India, the basis for initiating penalty proceedings was invalidated. Conclusion: The Tribunal allowed the appeal partly, holding that the assessee did not have a PE in India, and thus, its business profits could not be taxed in India. Consequently, the issues related to profit attribution and penalty initiation were rendered academic and did not require further adjudication. The decision emphasized the importance of proper procedural adherence and the need for cogent evidence in establishing a PE.
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