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TMI Blog2023 (3) TMI 1088X X X X Extracts X X X X X X X X Extracts X X X X ..... perations 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the Appellant has not received any refund nor has it received any intimation under Section 245 of IT Act for adjustment of refund. Rs. 6,317/- 11. On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the IT Act. - Total tax effect (see note below) Rs. 1,11,41,845/- 2. Brief facts of the case are that this appeal filed by the assessee, incorporated in Switzerland. The assessee is engaged in business of maintenance, repair and overhaul for aircrafts, engines and components. The assessee also provides components and spare engines on lease. The assessee's principle place of business is Zurich, Switzerland. The assessee filed its return of income electronically declaring total income of Rs. 9, 23, 94,201/- on 31-03-2017. Assessee's case was assessed u/s 143(3) r.w.s. 144C (13) on 24-09-2018 at Rs. 10, 53, 15,412/-. Aggrieved with this order of AO, assessee preferred present appeal before us. 3. During the year assessee had following three lines of revenues stream as under: Name of the Party Types of Contract Lease Charges Repairs and Maintenance including piece repairs Integrated compo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance and ICS/SCS contract total to Rs. 30,15,19,760/-. Profits to be attributed to the PE of assessee in India = Rs. 30, 15, 19,750/- * 5% = Rs. 1, 50, 75,988/-. 6. Against, this order of AO passed u/s 143(3) r.w.s. 144C (13) of the IT Act, assessee preferred this present appeal before us. We have gone through the directions of DRP-2, submissions of the assessee and the order of AO. We observe that assessee has a subsidiary company in Switzerland, i.e. SR Techniques Management Ltd., Zurich, Switzerland. This subsidiary has a Liaison Office (LO) in India. The LO was permitted to be set up by the RBI. The AO held that the LO was subsidiary constitute a PE of the assessee in India in terms of Article 5(2) (1) (Service PE) and Article 5(5) (Agency PE of the India-Switzerland DTAA). 7. In our observation following facts that emerge out of various orders and submissions of the assessee are as under: a. As per the RBI approval letter the LO was allowed to Act only as communication channel with parties in India (Vide page no. 199 to 201 of the paper book). This approval was further renewed vide letter dated 04-12-2012. b. This liaison office pertains to the subsidiary namely M/s. SR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Master Directions under the list of permitted activities for a LO in India. 3. The management of SRT ML is subservient to the management of the assessee in India. Hence, LO has an automatic obligation towards the assessee in all its business activities in India, even though it may belong to separate legal entity. SRT ML acts as a legal buffer between the assessee and the LO to shield it from any direct tax impact. The AO has ignored the facts of case under consideration which is that the LO is merely a communication channel or coordinator between the assessee in Switzerland and the Indian airline companies. The LO does not carry out any repair, maintenance and ICS/SCS activities in India. Further. LO does not conclude any contract on behalf of the assessee in India. Based on these facts, the LO does not create any PE of the assessee in India and hence, there is no tax liability as such. 4 Based on the perusal of financial statement of LO, the AO in Para 6 of the impugned draft assessment order has stated the following: * It is reasonably clear that the LO is incurring huge expenses on account of salaries, motor car and travelling and conveyance. Such expenses do not appear to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iations or (iii) conclusion of contracts with Indian airline companies. Such activities are performed entirely from outside India, i.e., in Zurich. Thus, the employees of LO assist the assessee in undertaking marketing activities in India. No evidence has been brought on record by the AO to support that the LO is not merely communication/ coordination office. It is submitted that the communication with the assessee is performed by the employees of the LO through telephone calls/emails for which the assessee has incurred such expense. The cost of such expenses is as levied by the third party vendors and is as per the prevailing market standards for availing such communication services. Hence, a simple comparison of communication and salary not appropriate. As per the regulatory provisions governing LO, the LO is required to meet all its expenses by way of inward remittance from its head office. The LO is prohibited from conducting any income generating activity and as such, does not have any external revenues as evident from the financial statements of the LO on record. Hence, to this extent, the LO is necessarily required to be dependent upon its head office, which fact by no mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission of bids/responses to Indian airline companies, negotiations relating to contracts, discussions on commercial considerations, conclusion of contract price, etc., which are the key activities of any business are carried by the assessee from Switzerland only. The role of LO's employee is merely limited to provision of tender/RFP related information to the assessee, that too based on publicly available information. No evidence has been brought on record by the AO to demonstrate that the contracts are executed by the LO, whereas the facts and the documents placed on record clearly prove, substantiate the otherwise correct position of the assessee. 9. The facts discussed in the table reproduced (supra) has to be read with the fact that the assessee was adhering to the conditions imposed by the RBI for running a LO, and the RBI had accepted the functioning of the assessee's LO for over the years, points out to the fact that the assessee has complied to the conditions, one of which was that it could not carry on any business or trading activity in the LO. 10. The activities carried out by the employees of LO are merely communication/coordination function. It is settled posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not constitute PE in India under Article 5 of India Switzerland DTAA because: The 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. The 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. Further, as per Article 5(7) of India Switzerland DTAA, merely because an Indian company in controlled by a Switzerland company or fact that Switzerland Company carries business in India, does not result in Indian company being considered as a PE of Switzerland Company in India. Thus, it is submitted that SRT India cannot be regarded as a PE of the assessee merely because it is controlled by the assessee or merely because the assessee carries on business activities in India. 11. In addition to above, we hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... removal plan, as per clause A-71, provided that the Engine arrives at SR Technics maintenance facility at Zurich Airport during the week previously agreed between Spice Jet and SR Technics. Unscheduled Shop Visits For unscheduled shop visits, SR Technics will do its utmost to induct the Engine into the shop as soon as possible but no later than 10 days and TAT will start no later than fifteen (15) calendar days after SR Technics has been notified by Spice Jet provided that Engines have arrived at SR Technics maintenance facility at Zurich Airport within the agreed time frame. A-7.2 Program management SR Technics nominates a dedicated account manager in Zurich to Spice jet who is the focal point for communication between the parties. The account manager shall be appointed for ensuring that all rework instructions are properly performed and to monitor all of Spice Jet interests within the overhaul shop. Following key responsibilities are related to this position: Ensures overall contract performance and acts as focal point to Spice Jet Responsible to issue and maintain the Procedure Reference Manual (PRM) that outlines all the procedures and process required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the OEM engine shop manual specification and requirements related to transportation of an Engine by either air, land or ship. All cost arising from damages sustained due to the improper shipment preparation of the Engines; and any losses, damages, liabilities, claims and penalties that may be brought against SR Technics by third parties or Government Entities resulting from Spice jet's failure to comply with aforesaid obligations shall be borne solely by Spice jet. D-4.2 Shipping marks Each shipment to SR Technics shall be marked as follows: SR Technics Switzerland Ltd. Hangarstrasse / Gate 140 Material Receiving SRT CH-8302 Kloten, Switzerland 2. Local SR Technics Representative If mutually agreed, SR Technics shall assign a local representative, who shall only act as technical and commercial Interface between Spice jet and SR Technics in respect to the Fulfilment of the Agreement, specifically in regard to the following matters: (a) Disruptions, if any, due to engine problems (b) Engine removals (c) Work scopes (d) Engine transportation (e) On site support The representative shall regularly report and follow-up on technical and/o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions imposed by the RBI, the case of the Revenue cannot stand on its own feet. 13. Statute empowers AO to conduct enquiry under section 131 and 133(6) to strengthen his allegations about non-fulfilment of the conditions imposed by the RBI on the LO by summoning and direct interaction with the parties like Air India, Spice jet Ltd. and Jet Airways Ltd. Instead of following this procedure to substantiate his allegation, AO rather worked on the documents available on record supplied by the assessee that is too by applying wrong principles on the given set of facts. 14. AO worked on an assumption that simply by having a liaison office in India would result in setting up a PE within the meaning of DTAA, this assumption of the AO in these circumstances (conditions imposed by RBI) being contrary to the well-established principles as well as provisions of law. Once an activity (as can be confirmed with reference to conditions imposed by RBI while granting the licence to open LO) once an activity is construed as being subsidiary or in aid or support of the main activity, it would fall within the category of preparatory or often auxiliary character. 15. In the light of facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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