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TMI Blog2014 (3) TMI 1110X X X X Extracts X X X X X X X X Extracts X X X X ..... was rejected by the CIT(A) in A.Y. 2006-07 for the reasons discussed above. Accordingly, the issue in ground No.1 is allowed Taxability of payment received by the assessee from EIPL on account of project “MOVE” - Held that:- The Ld.CIT(A) has not gone into the details of the terms of the agreement. It is true that some mark up is there which has described as administrative surcharge to the extent of 3%. Prima-facie, it appears that the project “MOVE” undertaken by the assessee company is not as a business activity but to support the group companies worldwide to improve their efficiency. In our opinion, this issue needs fresh adjudication. We, therefore, consider it fit to restore the issue to the file of the Ld.CIT(A) for Denovo adjudication with direction that he should examine the contention of the assessee in the light of the agreement between the assessee as a pool leader and its other group companies as Pool members. Interest charged u/s.234B - Held that:- We with the consent of both the parties remit the issue of charging of interest u/s.234B to the file of the Ld.CIT(A) for fresh adjudication. - ITA.Nos.786 to 790/PN/2012, ITA No.812/PN/2012, CO No.25 to 28/PN/2013 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own as EIPL) and Epcos Ferrites Pvt. Ltd., Kolkatta (EFPL). EFPL has now merged with EIPL and therefore, presently only EIPL, Nashik exists as a corporate body in India. EIPL is separately assessed to tax as a resident Indian company for its operations carried out in this country. The assessee company filed its return of income on 1.11.2004 declaring taxable income of ₹ 18,32,15,432, comprising of items (a) to (e) of the table given below and offered tax @ 10% as per Article 11 and 12 of India-Germany DTAA, as withheld by its Indian Subsidiaries : Received from EPCOS India Private Limited S.No. Particulars Gross Amount in Rs. (a) Royalty 99,55,167 (b) Product Marketing Services 6,57,33,995 (c) Information Technology Services 4,94,37,968 (d) Technical Services 2,65,75,812 (e) Interest received on ECB loan 3,15,12,490 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer following his order for A.Y.2003-04 and directions received u/s.144A completed the assessment u/s 143(3) of the IT. Act on 29.12.2006. In the directions issued u/s.144A it was held that the assessee has a PE in India in the form of its WOSs under Article 5 of the India-Germany DTAA and therefore, the taxable income of the assessee are assessable as business profits under Article 7 of the DTAA and not under Article 11 and 12 of the DTAA. Therefore, the income was held to be taxable @ 20% u/s 44D r.w.s. 115A of the IT. Act without allowing any deduction in respect of any expenditure or allowance. 2.5 The Assessing Officer following his order for A.Y. 2003-04 held that the assessee has a PE in India and the assessee has a business connection in India u/s.9(1)(i) of the Income Tax Act, 1961. Further, the assessee is in the receipt of income from this business connection (in the form of royalty income). Hence, he was of the opinion that this income is deemed to accrue or arise in India u/s.9(1)(i) of the Act and is included in the total income of the assessee u/s.5(2) of the Act. 2.6 Before CIT(A) it was argued that the facts of the assessee's case under appeal are similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have got confused with consumption of services with carrying out of business. ii. The Indian WOSs are not Branch PE of the Appellant under Article 5(2)(b) of the India-Germany DTAA: In Para 16 of his appellate order, the CIT(A) has held that the subsidiaries are not Branch of the Appellant as they are independently incorporated and managed. iii. The Emails correspondences do not indicate that each and every activity of the Indian WOSs is supervised by the Appellant resulting in constitution of the PE of the Appellant: In Para 19, the CIT(A) concludes, From the above correspondence it is clear that there is no active supervision of EPCOS AG in India. These are routine correspondence and emails between the assessee and the subsidiaries in India regarding the product marketing. This correspondence deals with a very limited aspect of business of Indian subsidiaries and therefore the A.O. wrongly concluded that each and every activity of the Indian subsidiaries is done under the active supervision of EPCOS AG in India. It is also to be mentioned here this correspondence has no reference to the activities such as finance. H.R, designing, training etc., Therefore, it is difficul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnology services. The AO's case thus is that the assesses has a fixed place of business, in the form of Indian subsidiaries, that the employees of these Indian subsidiaries have rendered services for which payment is actually made to the taxpayer company and that, for these reasons, the subsidiaries should be treated as PE of the taxpayer company. Did the assessee company have a PE in India? 36. There are several fallacies in the line of reasoning adopted by the AO. The taxpayer before us has received payments for support services and not the functions of the,, subsidiaries. It is not the case that the taxpayer company was supposed to handle entire marketing function or entire information technology function and a part of this work was delegated by the taxpayer company to the employees of the subsidiary. The payment which is made to the taxpayer company is only for the services rendered by the taxpayer company-either directly or through the intervention of a third party. This payment has two elements-one reimbursement of costs, plus, two, a mark up thereon for the indirect overheads. Admittedly, there is no reimbursement of costs incurred on any of the employees in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered by the foreign principal, therefore, cannot entitle him to any gains. Therefore, the situs and manner of rendering of services, by anyone other than the employees or sub-contractees of the foreign principal, cannot govern whether or not the foreign principal will have a PE in India. The entire discussion about the work done by the employees of Indian subsidiaries is not at all germane to the issue of foreign company's PE. 37. The concept of permanent establishment, as evident from the earlier discussions, is a result of compromise between residence rule and source rule of taxation, and it constitutes 'home' of a foreign enterprise abroad. The core of permanent establishment in the source country consists of (a) fixed place of business of foreign enterprise - its location, as also its permanence; and (b) the business activity of the foreign enterprise. The expression 'permanent establishment' in Article 5(1) of the Indo German tax treaty, as indeed in UN and OCED Model Conventions, is basically defined as a fixed place of business through which the business of the enterprise is wholly or partly carried on . The expression 'enterprise' in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India, has inferred that each and every activity is done under the active supervision of 'Epcos AG in India'. It is contended that a PE means a fixed place of business through which the business of the enterprise is wholly or partly carried out, and since business is being carried out wholly 'under the guidance and active supervision' and since the taxpayer company has a place of management by way of Indian subsidiaries, the taxpayer company has a PE in India. He has also stated that the Indian subsidiaries are to be treated as 'branches' but then there is no rationale basis for such an aggressive proposition. Undoubtedly, business is being carried out in Indian subsidiaries but the crucial question whose business is it. The expression 'carrying on of the business' can only refer to the conduct of the business of the foreign enterprise in the source jurisdiction, because the question of triggering tax liability by the virtue of a PE is relevant only for a foreign enterprise; the domestic enterprise is taxable anyway by the virtue of residence rule. What is being done by the Indian subsidiaries under the guidance and supervision of Epcos AG is bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of income in source country? 40. It is also important to bear in mind that a non resident company having a PE in India, by itself, does not lead to taxability in India; there must be some profit attributable to such a PE which alone could be taxed in India because of the existence of the PE. When the PE carries on an activity which does not serve overall purpose of the foreign enterprise, or which does not contribute to profits of the enterprise, the existence of such a PE is wholly academic and does not have any tax implications in the source jurisdiction. To that limited extent, there is an inherent contradiction in the OECD approach in as much as one on hand PE provides threshold limits for triggering taxation in the source country, on the other hand the existence of the PE is decided de hors the activity in the absence of which taxability of profits in the source country cannot be triggered at all. On the face of it, when a PE is not engaged in a critical activity having some contribution to overall profits of the enterprise or a revenue generating activity the exercise to ascertain whether or not a PE is in existence is a meaningless ritual and an empty formality. Vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have right to tax these receipts as business profits under Article 7. Of course, in the light of our finding that no revenues earned by the assessee company could be said to be attributable to the PE, even if one was to come to the conclusion that a PE existed, no taxability could arise under Article 7. The assessee has offered the royalties and fees for technical services for taxability in India under Article 12, and, to that extent, admitted tax liability exists. The overzealous approach of the AO has been rightly rejected by the CIT (A). We approve and confirm the stand of the CIT(A), and decline to interfere in the matter. 4.5. On careful consideration of the facts and circumstances available on record along with the applicable law, it is seen that the Assessing Officer, though has tried to strengthen his assessment order in the remand reports submitted during the course of appeal to counter the arguments made by the appellant through their submissions, but in the process the facts of this case has become par/- mater/a to other years including A.Y. 2006-07 wherein the issue of existence of PE was so elaborately discussed by the Assessing Officer in the draft assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. Therefore, the findings given by the Hon'ble ITAT has to be followed. Ground No. 1 of the appellant is accordingly allowed. 2.8 Aggrieved with such order of CIT(A), the Revenue is in appeal before us. 3. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer CIT(A) and the Paper Book filed on behalf of the assessee. We find following the order for A.Y. 2003-04 and 2006-07, the Tribunal in assessee s own case for A.Y. 2008-09 vide order dated 31-01-2014 has held as under : 2.2 Nothing contrary was brought to our knowledge on behalf of revenue. Facts being similar, so following the same reasoning, we are not inclined to concur with the finding of DRP. We are of the view that the assessee did not have any PE in India, much less a PE to which subject royalties and fees for technical services could be attributed. In terms of Indian-German DTAA, India does not have right to tax these receipts as business profit under Article 7. In the light of above finding that no revenue earned by the assessee could be said to be attributable to PE, even if one was to come to the conclusion that a PE existed, no taxability could a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment . 4.3 He observed that during the year under consideration, the assessee is in the receipt of the royalty income which is attributable to PE in India. Accordingly, the same income has to be taxed u/s.115A r.w.s. 44AD of the Act at 20% without allowing any deduction in respect of any expenditure or allowance under any of the sections from Sections 28 to 44C. He accordingly taxed the same @20% without allowing any expenditure is allowance under any of the provisions of section 28 to 44C. 4.4 In appeal the Ld.CIT(A) decided the issue in favour of the assessee by observing as under : 5.1 In respect of the above ground, my attention was further drawn to the finding of CIT(A)-II, Nasik given in A.Y. 2003-04 wherein it was shown that the Ld. CIT(A) has held in para 24, 25 and 29 that all activities relating to the income streams are carried on outside India and thus cannot be attributed to the alleged Indian PE. The finding given in para 29 is quoted below for ready reference : Thus, there is no basis on the A.O's co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company on this account meet the definition of 'royalties' and of fees for technical services' under Section 44D which, in turn, refers to Explanation. 2 to Section 9(1)(vi) and to Section 9(1)(vii) respectively. Accordingly, the limitation on deductions, as set out in Section 44D, does apply on the facts of the case, and entire amount is to be taxable on gross basis. However, in view of the provisions of Section 115A, the rate of tax on such income will indeed be 20%. 50. In view of the above discussions, the taxability of amounts received by the assessee company on account of 'royalties' and 'fees for technical services', on the facts of this case and under the Indian Income Tax Act, will be @ 20 % on gross basis, That aspect of the matter is, however, academic since we have already held that, on the facts of this case, source country does not have the right to tax income in question, except under Article 12(2) of the tax treaty and at a rate not exceeding 10 per cent. The assessee has already accepted tax liability to that extent, and there is no dispute so far as taxability under Article 12(2) is concerned. 5.3. In this context, the Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and fees for technical services ha e a live economic nexus with the PE and only then exclusion clause under art. 12(5) as also taxability under arts. 7(1) and 7(2), will come into play. It is only after these royalties and fees for technical services are so included in the business profits attributable to the PE that the provisions of sec. 44D and USA can be invoked. Therefore, even if we are to hold that the taxpayer had a PE in India, unless there is a categorical finding that entire receipts were attributable to that PE, entire business receipts of the taxpayer sourced from India would not have been taxable in India under art. 7. The provisions of s. 44D and s.115A do not, therefore, come into play only because there is a PE in India. Taxability under the domestic law: 48. The next thing to be examined is taxability of royalties and fees for technical services' earned by the assessee company in terms of the provisions of the Indian IT Act,1961. 49. There is no dispute on the basic facts. The amounts received by the assessee company on this account meet the definition of 'royalties' and of fees for technical services' under S.44D which, in turn, refers t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly dismissed. ITA No.787, 788, 789 and 790/PN/2012 (A.Y.2001-02, 2003-04, 2004- 05 2005-06) : 6. After hearing both the side, we find the grounds by the Revenue are identical to grounds of appeal in ITA No.786/PN/2012. We have already decided the issues and the grounds raised by the Revenue have been dismissed. Following the same ratio, the grounds raised by the Revenue in the above appeals are dismissed. CO Nos. 25 to 28/PN/2013 (By Assessee) (A.Y. 2000-01, 2001-02, 2002-03 2005-06) : 7. At the time of hearing the Ld. Counsel for the assessee submitted that grounds of appeal No. 1.1 and 1.3 are consequential in nature. Since the order of Ld.CIT(A) has been upheld, therefore, these grounds becomes academic in nature. Accordingly, these are dismissed. 7.1 Ground of cross appeal No.1.2 is regarding as to whether the interest u/s.234B is applicable or not. 7.2 Since the appeals filed by the Revenue are dismissed grounds of appeal No. 1.2 of the cross objections as to whether interest u/s.234B is applicable for residents become academic in nature and therefore the same is not being adjudicated. 8. In the result, the appeal filed by the Revenue and all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this fact was noticed on perusal of assessee's return of income wherein TDS certificates for the taxes withhold by the Indian WOS was enclosed. The Assessing Officer came to the conclusion that the agreement produced by the assessee itself is not sufficient to hold that the receipt was only reimbursement and not for I T services provided to the Indian subsidiaries. Rejecting the various explanations given by the assessee, the Assessing Officer concluded that the receipts on account of project MOVE are for services rendered by the assessee to its Indian subsidiaries, for which even the Indian subsidiaries deducted the tax at source treating the said payment as taxable in India being the income-of the assessee as per section 9(1) (vii)(b) of the IT. Act. The Assessing Officer thereafter proceeded to hold that the above receipt is taxable under Article 7 of DTAA. 9.3 Before the CIT(A) it was submitted that the assessee has filed the agreement relating to MOVE as well as a note and certain other documents in support of the claim that the receipt is only a reimbursement of expenses without any mark up and therefore, cannot be subjected to any tax in India. It was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nus of claim made that the receipts are of the nature of reimbursement having no elements of income. In fact, from the perusal of the agreement, it is apparent that the expenditure is for enhancing the operations of the group as a whole with emphasis on the appellant company which is the apex company. Therefore, it is difficult to hold that it is not for the technical services provided by the appellant company to its all WOSs. For providing this service the appellant might have taken services from a third party and would have paid the same also but in that case even the said expenditure, if so held would become ineligible as expenditure in the hands of the WOSs. Since that aspect is not before the undersigned, the same is ignored and the receipts for project MOVE is held to be of the nature of technical services on which tax @ 10% is required to be paid under Article 11 and 12 of DTAA. This further gets strength from the action of the WOSs, falling in the same management to withhold tax u/s 195 of the IT. Act. The case laws relied upon by the appellant were found to be not relevant to the facts of this case. In all these cases, relied upon by the appellant there was no dispute to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of MOVE project is placed at pages 38 to 55. The argument of the Ld. Counsel is based on the terms of the Agreement between the assessee company as a group leader and group companies/subsidiaries based at France, Spain, Portugal, Hungary, Czek Republic, Brazil, India etc. So far as India is concerned, it is the claim of the assessee that assessee has reimbursed the cost of the MOVE project from two of its subsidiaries, i.e. International Ferrides Ltd. and EPCOS India Ltd.. 10.3 We have perused the terms of the agreement. We have also perused the reasons given by both the authorities for rejecting the claim of the assessee. The Ld.CIT(A) has not gone into the details of the terms of the agreement. It is true that some mark up is there which has described as administrative surcharge to the extent of 3%. Prima-facie, it appears that the project MOVE undertaken by the assessee company is not as a business activity but to support the group companies worldwide to improve their efficiency. In our opinion, this issue needs fresh adjudication. We, therefore, consider it fit to restore the issue to the file of the Ld.CIT(A) for Denovo adjudication with direction that he should e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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