2024 (8) TMI 358 - AT - Income Tax

Accrual of Income In India - dependent agency/PE of assessee in India or not? - salary as paid by SanDisk India to its AE on behalf of the seconded employees - HELD THAT - Addition in the hands of assessee for year under consideration as FTS in the case shear non-application of mind by the revenue authorities as it is reimbursement of expat salary expenses. As noted that, the authorities have tried to make out a business connection between assessee and SanDisk India for the year under consideration by concluding that the marketing support services rendered by SanDisk India constitutes an agency PE of assessee in India. Authorities failed to appreciate for assessment year 2016-17, as there has been no transaction in any manner whatsoever between assessee and SanDisk India, there is no question of creation of an agency PE of assessee in India through SanDisk India. The revenue has miserably failed to establish by way of any documentary evidence that for A.Y. 2016-17, SanDisk India was acting on behalf of assessee in India in order to constitute a deemed permanent establishment under Article 5(4) of India-u/s. DTAA. Revenue has not brought any interrelated transaction between assessee and SanDisk India on record to establish that assessee and SanDisk India were associated enterprises during the financial year relevant to AY 2016-17. Therefore in our considered opinion, the observations of the AO in attributing 30% of business profits of SanDisk India in the hands of assessee for the year under consideration do not have any legs to stand in the eyes of law. Thus, SanDisk India cannot be held to be a dependent agency PE of assessee in India for the year under consideration and no addition could be made in the hands of assessee as FTS or any attribution of profits earned by SanDisk India could be made in the hands of assessee for the year under consideration as there is no relation or there do not exist any transaction that has been brought on record between assessee and SanDisk India. Decided in favour of assessee.

Summary

Issues Involved:
1. Directions of the Dispute Resolution Panel (DRP)
2. Permanent Establishment (PE)
3. Reimbursement of salaries treated as Fees for Technical Services (FTS)
4. Margin attributed to PE
5. Interest under section 234A
6. Interest under section 234B
7. Initiation of penalty proceedings under sections 271(1)(c), 271A, 271AA, and 271BA
8. Relief

Issue-wise Detailed Analysis:

1. Directions of the Dispute Resolution Panel (DRP):
The appellant contended that the DRP incorrectly adjudicated the grounds of objections without considering the facts and circumstances of each ground, rendering the directions bad in law and liable to be quashed.

2. Permanent Establishment (PE):
The DRP upheld the AO's conclusion that SanDisk India constituted a Dependent Agency PE (DAPE) of the appellant in India. However, the Tribunal found that during the FY 2015-16, relevant to AY 2016-17, there were no transactions between the appellant and SanDisk India, as they were not associated enterprises until the acquisition on 12.05.2016. The Tribunal noted that the revenue authorities failed to provide documentary evidence of any business connection or transactions between the appellant and SanDisk India for the relevant year. Consequently, the Tribunal held that SanDisk India could not be considered a DAPE of the appellant for AY 2016-17.

3. Reimbursement of Salaries Treated as Fees for Technical Services (FTS):
The AO treated the reimbursement of salaries paid to seconded employees as FTS. The Tribunal found that the reimbursement pertained to expenses paid by SanDisk India to SanDisk LLC, USA, and not to the appellant. Since there were no transactions between the appellant and SanDisk India during the relevant year, the Tribunal concluded that the addition of Rs. 3,66,94,537/- as FTS in the hands of the appellant was without basis and constituted non-application of mind by the revenue authorities.

4. Margin Attributed to PE:
The AO attributed 30% of the sales to India as business income. The Tribunal, having held that SanDisk India did not constitute a DAPE of the appellant, found no basis for attributing any business profits of SanDisk India to the appellant for the year under consideration. Therefore, ground no. 4 did not require adjudication.

5. Interest under Section 234A:
The AO levied interest under section 234A. Given the Tribunal's findings on the primary issues, this ground was deemed consequential and did not require separate adjudication.

6. Interest under Section 234B:
Similar to the issue under section 234A, the interest levied under section 234B was also deemed consequential and did not require separate adjudication.

7. Initiation of Penalty Proceedings under Sections 271(1)(c), 271A, 271AA, and 271BA:
The DRP upheld the initiation of penalty proceedings. However, given the Tribunal's findings on the primary issues, this ground was also deemed consequential and did not require separate adjudication.

8. Relief:
The appellant sought relief arising from the preceding grounds. The Tribunal allowed the appeal, granting the requested relief.

Conclusion:
The Tribunal allowed the appeal, holding that SanDisk India did not constitute a DAPE of the appellant for AY 2016-17. Consequently, no addition could be made in the hands of the appellant as FTS, nor could any attribution of profits earned by SanDisk India be made in the hands of the appellant for the relevant year. The appeal was allowed in favor of the appellant.