9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2023 (3) TMI 1088 - AT - Income TaxIncome deemed to accrue or arise in India - Liaison Office (LO) as a Service PE or Dependent Agency Permanent Establishment (DAPE) - Estimation of the taxable profits as per Rule 10 of the Income Tax Rules - Whether Liaison Office (LO) of the Appellant constitutes a business connection of Appellant in India as per provisions of Section 9(1)(1)? - HELD THAT - LO in India does not constitute PE in India under Article 5 of India Switzerland DTAA because. LO does not constitute a fixed place through which business of assessee is carried out in India. Employees of the LO do not negotiate finalise or discuss the mechanics of contracts including pricing with the assessee s customers. As such the employees of LO merely act as a communication link between the assessee and the airline companies. LO did not carry any activity beyond that permitted by the RBI. The activities carried by the LO are thus preparatory (auxiliary in nature). The activities/operations of the assessee in connection with the contracts are carried from outside India. Ground No.1 to 4 raised by assessee are allowed and held that LO of subsidiary of assessee does not constitute a PE in the case of assessee hence addition on this ground made by AO is directed to be deleted. Appeal filed by the assessee is allowed.
Issues Involved:
1. Business Connection under Section 9(1)(1) of the Income Tax Act, 1961. 2. Permanent Establishment (PE) under Article 5 of the India-Switzerland Double Taxation Avoidance Agreement (DTAA). 3. Service PE under Article 5(2)(1) of the India-Switzerland DTAA. 4. Agency PE under Article 5(5) of the India-Switzerland DTAA. 5. Ad-hoc Profit Rate and Attribution of Income to PE. 6. Computation of Interest under Sections 234B and 234C of the IT Act. 7. Computation of Tax Liability and Refund Adjustment. 8. Levy of Interest under Section 234D of the IT Act. 9. Initiation of Penalty Proceedings under Section 271(1)(c) of the IT Act. Detailed Analysis: 1. Business Connection under Section 9(1)(1) of the Income Tax Act, 1961: The assessee, incorporated in Switzerland, engaged in maintenance, repair, and overhaul for aircrafts, engines, and components, filed its return of income declaring total income of Rs. 9,23,94,201/-. The Assessing Officer (AO) concluded that the Liaison Office (LO) of the assessee constitutes a business connection in India as per Section 9(1)(1) of the Income Tax Act, 1961. However, the Tribunal observed that the LO was permitted by the RBI to act only as a communication channel and not to carry any business or trading activity. The LO was found to be adhering to the conditions imposed by the RBI, indicating that it did not constitute a business connection. 2. Permanent Establishment (PE) under Article 5 of the India-Switzerland DTAA: The AO and Dispute Resolution Panel (DRP) concluded that the assessee had a PE in India under Article 5 of the India-Switzerland DTAA. The Tribunal noted that the LO did not have any infrastructure, facilities, or relevant stocks of spare parts to carry out the business activities. The employees of the LO were not authorized to negotiate or finalize contracts. The Tribunal held that the LO's activities were preparatory or auxiliary in nature, falling within the exclusionary provisions of Article 5(3) of the DTAA, and thus did not constitute a PE. 3. Service PE under Article 5(2)(1) of the India-Switzerland DTAA: The AO concluded that the assessee had a Service PE in India. The Tribunal, however, observed that the LO did not render any technical services in India. The services were provided from outside India, specifically in Zurich. The Tribunal held that the LO did not create a Service PE under Article 5(2)(1) of the DTAA. 4. Agency PE under Article 5(5) of the India-Switzerland DTAA: The AO also concluded that the assessee had an Agency PE in India. The Tribunal noted that the LO did not have the authority to negotiate or conclude contracts on behalf of the assessee. The LO's role was limited to communication and coordination, and it did not secure orders for the assessee. Thus, the Tribunal held that the LO did not constitute an Agency PE under Article 5(5) of the DTAA. 5. Ad-hoc Profit Rate and Attribution of Income to PE: The AO arbitrarily computed the business income at Rs. 1,50,75,988 by estimating an ad-hoc profit rate of 10% and attributing 50% of the income to the alleged PE. The Tribunal found that the AO's estimation was based on assumptions and lacked substantive evidence. The Tribunal directed the deletion of the addition made by the AO on this ground. 6. Computation of Interest under Sections 234B and 234C of the IT Act: The AO computed consequential interest under Sections 234B and 234C of the IT Act. Given the Tribunal's findings on the non-existence of a PE, the computation of interest under these sections became academic and required no further adjudication. 7. Computation of Tax Liability and Refund Adjustment: The AO computed the tax liability without appreciating that the assessee had not received any refund nor any intimation under Section 245 of the IT Act for adjustment of refund. This issue also became academic in light of the Tribunal's findings on the non-existence of a PE. 8. Levy of Interest under Section 234D of the IT Act: The AO levied interest under Section 234D of the IT Act without appreciating that the assessee had not received any refund. This issue, too, became academic following the Tribunal's primary findings. 9. Initiation of Penalty Proceedings under Section 271(1)(c) of the IT Act: The AO initiated penalty proceedings under Section 271(1)(c) of the IT Act. However, with the Tribunal's decision to allow the appeal and delete the additions, the initiation of penalty proceedings became redundant. Conclusion: The Tribunal allowed the appeal filed by the assessee, concluding that the LO of the subsidiary did not constitute a PE in India under Article 5 of the India-Switzerland DTAA. Consequently, the additions made by the AO were directed to be deleted, and the other grounds raised by the assessee became academic and required no further adjudication. The appeal was allowed in favor of the assessee.
|
