2025 (2) TMI 151 - AT - Income Tax

Income accrued in India or not? - existence of a Permanent Establishment (PE) in India - Whether Itochu India Private Limited constitutes a dependent agent PE of Itochu Japan in India under Article 5 of the India-Japan DTAA? HELD THAT - We find that the role of ITOCHU India is limited to act as a communication channel. We have examined the email correspondences and there is nothing to show ITOCHU India is acting in its individual capacity to conclude the contract or even a part thereof. It is merely bridging the communication gap between ITOCHU Japan and the Indian customer. There is nothing in the form of evidence which show that Itochu India habitually exercises the authority to conclude contracts in India or maintains stocks in India for delivery to customers or secures orders in India. AO has rejected all the arguments of the assessee on the basis that the assessee has failed to produce India specific accounts for the trading operations and the profit earned thereon and accordingly held that as the profits earned by the assessee from Indian operations are not available guidance is drawn from Rule 10 r.w.s. 44BB of the Act wherein the deemed profits is estimated @ 10% of the revenue of price/consideration. We are of the considered view that when the financials of Itochu India and the assessee were there along with the agency agreement then making such observations without an independent inquiry on its own is not justified. AO has laid burden on the assessee to establish the nature of agency. However no attempt was made to examine the agreement. Only because the nature of business of trading is a continuous flow of the business process that cannot be a foundation to conclude a principal-agent relationship for the purpose of Article 5 of the DTAA. DRP at the same time discredited the case of the assessee only on the basis of assumptions and surmises as to how to his mind the two entities may have been actually transacting their business. As before us for the present AY the factual aspects are crystal clear that there is no PE of assessee in the form of Itochu India. Thus there is no justification to follow the AY 2013-14 and 2015-16 orders of Co-ordinate bench to set aside the assessment to the files of AO for further verification of the facts about nature of contractual relationship between the assessee and Itochu India.

The judgment from the Appellate Tribunal ITAT Delhi involves an appeal by the assessee, Itochu India Private Limited, against the final assessment order passed by the Assessing Officer (AO) concerning the existence of a Permanent Establishment (PE) in India and the attribution of income to this alleged PE under the India-Japan Double Taxation Avoidance Agreement (DTAA).

Issues Presented and Considered:

The core issues considered by the Tribunal were:

Whether Itochu India Private Limited constitutes a dependent agent PE of Itochu Japan in India under Article 5 of the India-Japan DTAA.
Whether the income attributed to the alleged PE by the AO was justified.
Whether the AO's methodology for attributing income to the alleged PE was appropriate and in line with legal precedents.

Issue-wise Detailed Analysis:

1. Existence of Permanent Establishment:

Legal Framework and Precedents: The assessment was based on Article 5(7) of the India-Japan DTAA, which outlines conditions under which a dependent agent PE is constituted. The AO relied on previous assessments for AY 2013-14 and AY 2015-16, and the decision of ITAT Delhi in Galileo International Inc. case.
Court's Interpretation and Reasoning: The Tribunal examined the Memorandum of Agency Agreement between Itochu Japan and Itochu India, which explicitly stated that Itochu India had no authority to conclude contracts on behalf of Itochu Japan. The Tribunal emphasized that the mere designation of Itochu India as an agent did not fulfill the conditions of Article 5(7) without evidence of habitual authority to conclude contracts or maintain stock in India.
Key Evidence and Findings: The Tribunal noted that Itochu India acted merely as a communication channel between Itochu Japan and Indian customers, without authority to negotiate or finalize contracts. The Tribunal found no evidence of Itochu India maintaining stock or securing orders independently.
Application of Law to Facts: The Tribunal applied the criteria of Article 5(7) and concluded that Itochu India did not meet the conditions to be considered a dependent agent PE. The Tribunal highlighted the lack of evidence for Itochu India's authority to conclude contracts or maintain stock on behalf of Itochu Japan.
Treatment of Competing Arguments: The Tribunal rejected the AO's assertions, which were based on assumptions rather than concrete evidence. The Tribunal also dismissed the reliance on previous years' assessments, stating that the current facts did not support the existence of a PE.
Conclusions: The Tribunal concluded that Itochu India did not constitute a PE of Itochu Japan in India, as the conditions under Article 5(7) were not satisfied.

2. Attribution of Income to Alleged PE:

Legal Framework and Precedents: The AO attributed 50% of the income from sales made to Indian customers to the alleged PE, applying a profit rate of 10% under Section 44BB of the Income Tax Act.
Court's Interpretation and Reasoning: The Tribunal found the AO's attribution methodology arbitrary and lacking justification. The Tribunal emphasized that once a transaction is at arm's length, no further profits should be attributed to the PE under the DTAA.
Key Evidence and Findings: The Tribunal referred to the transfer pricing documentation and certificates, which confirmed that the transactions were at arm's length. The Tribunal also noted that Itochu India's major income sources were independent trading activities, not commissions from Itochu Japan.
Application of Law to Facts: The Tribunal applied the arm's length principle and found that the AO's attribution of income was excessive and unjustified. The Tribunal criticized the AO for not conducting an independent inquiry into the nature of the transactions.
Treatment of Competing Arguments: The Tribunal rejected the AO's reliance on assumptions and emphasized the need for concrete evidence to justify income attribution. The Tribunal also dismissed the AO's use of Section 44BB, as it was not applicable to the trading activities of Itochu Japan.
Conclusions: The Tribunal concluded that the income attribution by the AO was not justified, and the appeal by Itochu India was allowed.

Significant Holdings:

Core Principles Established: The Tribunal reiterated the importance of concrete evidence in establishing a PE and the application of the arm's length principle in attributing income to a PE.
Final Determinations on Each Issue: The Tribunal determined that Itochu India did not constitute a PE of Itochu Japan and that the income attribution by the AO was unjustified. The appeal was allowed, and the assessment order was set aside.

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