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TMI Blog2019 (7) TMI 859X X X X Extracts X X X X X X X X Extracts X X X X ..... s not having any authority to conclude contracts and has neither concluded any contracts on behalf of the assessee company nor has it secured any orders for the assessee company in India. Thus, GIA India Lab cannot be regarded as agency PE of the assessee company in India. In view of the aforesaid discussion AO has erred in invoking section 9 of the Act and/or Article 5 of the India-USA DTAA in order to say that the assessee company has a PE in India. Thus, assessee succeeds on this issue. - ITA No. 1138/Mum/2015 - - - Dated:- 21-6-2019 - Shri P. P. Bhatt, President And Shri G.S. Pannu, Vice-President For Teh Applicant : Shri J.D. Mistry, And Shri Niraj Sheth For The Respondent : Shri V. Sreekar, CIT-DR ORDER PER G.S. PANNU, VICE PRESIDENT: The captioned appeal by the assessee is directed against the order of Assessing Officer dated 22.01.2015 passed under section 144C(13) r.w.s. 143(3) of the Income Tax Act, 1961 (in short the Act ), which is in terms of the directions issued by the Disputes Resolution Panel-III, Mumbai under section144C(5)of the Act dated 22.12.2014. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its of the PE taxable in India. 3:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, even if it is held that the Appellant has a PE in India no further income can be taxed in India as the alleged PE has been remunerated at an arm's length and hence the stand taken by the Assessing Officer/the Dispute Resolution Panel in respect thereof is incorrect, erroneous, misconceived and illegal and hence ought to be struck down. 3:3 The Appellant submits that the Assessing Officer be directed to recompute its total income accordingly. 4:0 Re. : Levy of interest u/s 234B of the Income-tax Act, 1961: 4:1 The Assessing Officer has erred in levying interest u/s. 234B of the Income-tax Act, 1961 on the Appellant. 4:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no interest u/s. 234B is leviable and the stand taken by the Assessing Officer in this regard is misconceived, incorrect, erroneous and illegal. 4:3 The Appellant submits that the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below and the material on record, the relevant facts and the basis adopted by the Assessing Officer to hold that assessee has a PE in India. In this context, it is notable that assessee is an organization dedicated to ensure that the public trust in gems and jewellery increases by upholding the highest standards in integrity, science, academics and professionalism. The Assessee continuously researches all aspects of its diamond grading processes, to uncompromisingly maintain its standards for grading diamonds. It has been explained at some length before us that the assessee has not only defined the standards in the field, but has also developed its own unique approach for grading gemstones. It has been pointed out that the name and mark of the assessee is recognized and well-regarded throughout the world. It has created global standards to accurately determine quality of diamonds (4Cs i.e., Cut, Colour, Clarity and Carat Weight), coloured stones and pearls. The grading certificate issued by the Assessee is recognized as the standard of excellence [ gold standard ] and a benchmark in the diamond/gemology industry. Explaining the background, Ld.Representative stated that given the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id agreement, there is a uniform pricing mechanism of 90:10 for grading services i.e. the entity of the Group which is requesting for the grading services retains 10% of the fees it collects from its customer and 90% of the said fees is paid to the entity which provides the grading activity. In the background of such an arrangement, the Assessing Officer held that the assessee has a PE in India viz., GIA India Lab through which it carries on its business in India. Accordingly, 50% of the gem grading fees received by the assessee from GIA India Lab has been held to be attributable to the Indian PE, and a profit percentage of 20.31% has been applied thereon to determine the total income of the appellant, which has been held to be taxable in India. 7. Before us, Ld.Counsel for the assessee has explained the key features of the agreement with GIA India Lab, agreement between assessee and International Diamond Ltd (i.e., the consolidator and an unrelated party) and agreement between customers and GIA India Lab. The Ld.Counsel also submitted that the Assessing Officer has misunderstood/misconceived the aforesaid agreements and has made various unsubstantiated allegations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherever GIA India Lab does not have the requisite expertise or technology or capacity for carrying out the grading services; further, the aforesaid arrangement has also been accepted as a mere rendering of grading services by the Transfer Pricing Officer both in the case of GIA India Lab and the assessee company. In this background, we may now proceed to decide as to whether the Indian Subsidiary GIA India Lab can be construed as a PE under any of the aspects contained in Article 5 of India-USA DTAA. 10. Firstly, we may examine whether GIA India Ltd. can be constituted as a fixed place PE of the assessee in terms of Article 5(1) of the India- USA DTAA. As per Article 5(1) of the Indo-USA DTAA, a fixed place PE arises when the foreign entity has a fixed place in India through which its business is wholly or partly carried on. In this context, the learned Counsel pointed out that a similar situation has been considered by the Hon'ble High Court of Delhi in the case of EFunds IT Solutions (supra), which has been upheld by the Hon'ble Supreme Court. In that case, it has been held that a subsidiary cannot be regarded as a 'fixed place PE' of the parent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t whatsoever between the assessee company and GIA India Lab. In terms of Article 5(6) of the India USA DTAA, it is provided that the mere fact that a company has controlling interest in the other company does not by itself construe the other company to be its PE. Accordingly, the assessee company is not having a 'fixed place' PE in India. 12. In terms of Article 5 (1) of the India - USA DTAA, a service PE arises on the furnishing of services in India by the assessee company through employees or other personnel, but only if: activities of that nature continue in India for a period or periods aggregating to more than 90 days within any twelve-month period; or the services are performed within India for a related enterprise. Hence, a service PE is triggered if the services (other than included services as defined in Article 12 'Royalties and Fees for Included Services') are rendered by the assessee company through employees or other personnel and activities of that nature continue in India for a period or periods aggregating to more than 90 days within any twelve-month period; or the services are performed within India for a related enterprise. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The OECD Commentary deals with the concept of 'Independent Agent' in paragraphs 36 to 39. In terms of paragraph 37 of the OECD Commentary, a person will be regarded as an independent agent (i.e. it will not constitute a PE of the enterprise on whose behalf it acts) only if: - He is independent of the enterprise both legally and economically, and - He acts in the ordinary course of his business when acting on behalf of the enterprise. In other words, Article 5(5) of the India- USA DTAA stipulates the following conditions which are required to be satisfied in order that an agent may be said to be an independent agent, i.e., - That he should be an agent of independent status; that, he should be acting in the ordinary course of his business; and, that his activities should not be devoted wholly or almost wholly on behalf of the foreign enterprise for whom he is acting as agent. 15. GIA India Lab is an independent/separate legal entity in India which is engaged in rendering of grading services. Further, considering the functions and the risks assumed by GIA India Lab vis - vis its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India event at Motor racing Circuit owned by J.P. Sports. After examining all the relevant agreements, the case of the Revenue was that the Circuit located in India constituted a PE of assessee (i.e. the foreign tax payer) in India. The Hon ble High Court concluded that since the assessee (foreign tax payer) had full access to the Circuit and could dictate as to who was authorised to access the Circuit and organising any other event on the Circuit was not permitted, the said Circuit constituted a PE of the foreign tax payer, i.e. Formula One World Championship Ltd., in India. The said decision of the Hon ble High Court was approved by the Hon ble Supreme Court. The aforesaid decision, in our view, stands on an entirely different fact-situation. In the present case, there is no material to show that the assessee dictates to the Indian subsidiary as to what activities it is authorised to engage in. We have also noted earlier that the Indian subsidiary is operating in an independent manner and there is nothing to show that factually speaking the Indian subsidiary constitutes a PE of the assessee in India. Thus, on account of difference in fact-situation, the reliance placed by the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X
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