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TMI Blog2023 (8) TMI 1537X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted back to the file of AO for statistical purpose. Taxation of royalty income u/s. 44DA - We are inclined to remit this issue back to the file of AO with a direction to verify the records submitted by the assessee on merit and as per law. Assessing Officer is further directed to determine the royalty as per the direction of APA. Appeal filed by the assessee is partly allowed for statistical purpose. - SHRI AMIT SHUKLA, HON BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER For the Assessee : Shri. J.D. Mistry, Shri Niraj Sheth Shri Ketan Ved For the Department : Shri Hement Kumar C. Leuva ORDER PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against the final Assessment Order and directions of the Dispute Resolution Panel of Learned Commissioner of Income Tax (DRP-1), Mumbai -1 [hereinafter in short Ld.DRP ] dated 27.12.2022 for the A.Y. 2020-21 passed u/s. 144C(5) of Income-tax Act, 1961 (in short Act ). 2. Assessee has raised following grounds in its appeal: - 1:0 Re.: General: 1:1 The Assessing Officer/ the Dispute Resolution Panel have erred in assessing the total income of the Appellant at Rs. 4,30,87,11,440/- against the retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer/the Dispute Resolution Panel in this regard is erroneous, misconceived and not in accordance with law. 4.3 The Appellant submits that the Assessing Officer/the Dispute Resolution Panel has erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material to hold that the Appellant had a business connection in India. Further he also failed to consider the contrary material and evidence adduced by the Appellant. 4:4 The Appellant submits that the Assessing Officer/the Dispute Resolution Panel's stand that the Appellant has a business connection in India be struck down. Without prejudice to the foregoing 5:0 Re.: Attribution : 5:1 The Assessing Officer/ the Dispute Resolution Panel have erred in holding that 50% of its receipts are attributable to the alleged PE of the Appellant in India. 5:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no part whatsoever of its receipts are attributable to the alleged PE in India and the stand taken by the Assessing Officer/ the Dispute Resolution Panel in this regard is incorrect, illegal, arbitrary, baseless, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest u/s. 234A is livable and the stand taken by the Assessing Officer in this regard is misconceived, incorrect, erroneous and illegal. 8:3 The Appellant submits that the Assessing Officer be directed to delete the interest u/s. 234A so levied on it and to re-compute its tax liability accordingly. 3. Further, assessee has raised additional grounds which are reproduced below: - 9:0 Re: Taxation of royalty income: 9:1 The Appellant submits that the amount taxable in terms of section 115A of the Income-tax Act, 1961 and Article 12(2) of the India-USA Double Taxation Avoidance Agreement [DTAA] should be restricted to the amount which is determined in accordance with the Advanced Pricing Agreement (APA), if any, entered into by GIA India Laboratory Private Limited with the Central Board of Direct Taxes [CBDT] 9:2 The Appellant submits that considering the facts and circumstances of its case, and the law prevailing on the subject, the amount of royalty taxable in its hands for the year under consideration should be restricted to the amount in accordance with the APA. 9:3 The Appellant submits that the Assessing Officer be directed to consider the royalty income worked out in terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the APA, if any, entered into by GIA India with CBDT and requests the Hon'ble ITAT to direct the Assessing Officer to recompute its total income and tax thereon. 4. The Assessee, Gemological Institute of America, Inc. filed its return of income on 12.02.2021 for AY 2020-21, declaring total income of Rs. 3,78,49,90,580/-. In the assessment order, the said royalty income of Rs. 3,78,49,90,580/- was held to be received through the business connection /PE and squarely covered under the provision of section 44DA of the Act. The assessee has not filed any revised return of income revising its total income declared in the original return of income filed for the year, nor has the assessee made any such claim before the Assessing Officer during the assessment proceedings or before the Dispute Resolution Panel. Now, at this stage, the Assessee comes up with additional claim before the Hon'ble ITAT that its royalty income be revised or recomputed in terms of ongoing APA between GIA India (payer of the royalty income, AE of the Assessee as well as PE of the assessee) and CBDT. Hence, the said claims of the assessee are not acceptable. 4.1 Further, it is stated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on record. 12. On the other hand, Ld. DR has fairly accepted the submissions of the Ld.AR. 13. Considered the rival submissions and material placed on record, we observe from the record that identical issue is decided in favour of the assessee in the A.Y.2010-11 and held that assessee did not have a Permanent Establishment in India. While deciding the issue, the Coordinate Bench of the Tribunal in ITA.No. 1138/Mum/2015 dated 21.06.2019 held as under: - 9. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around as to whether or not the subsidiary of the assessee company i.e., GIA India Lab can be construed as its PE in India. The income-tax authorities have invoked section 9 of the Act and/or Article 5 of the India-US Treaty in order to say that the assessee company has a PE in India. On the contrary, as per the assessee, the impugned receipts are in the nature of business profits, and in the absence of any PE in India, the same are not taxable in India. Factually speaking, it is evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment of royalty transactions or e-Fund India providing support for carrying on core activities being performed by the taxpayer or associated transactions, cannot be the basis to construe the Indian subsidiary as PE of the foreign tax payer. Further, before the Hon'ble Delhi High Court, the Department had contended that the foreign company had a joint venture or partnership with Indian subsidiary as the businesses of the assessee company and the Indian subsidiary were inter-linked and closely connected (which is also contended in the case of the assessee before us) and therefore the Indian subsidiary was regarded as PE of foreign company in India. The aforesaid argument of the Revenue was repelled since the conditions under Article 5 of the DTAA were not met and it has been held that PE cannot be established merely because of transactions between associated enterprises or the principal sub-contracting or assigning the contract to the subsidiary. 11. Factually, in the case of the assessee company, there is no joint venture arrangement between the assessee company and GIA India Lab vis- -vis gem grading services rendered by the assessee company to GIA India Lab since it is GI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by e-fund India and they were working under control and supervision of e-fund India. In the facts of the instant case, since the said services are rendered outside India and none of the employees/ personnel of the assessee company has visited India and therefore, service PE is not triggered in the case of the assessee company. 13. In terms of Article 5(4) of the India US/DTAA, an agency PE is created where a person-other than an agent of an independent status to whom paragraph 5 applies - is acting in India on behalf of an enterprise of the USA, that enterprise shall be deemed to have a permanent establishment in India, if: (a) he has and habitually exercises in India an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company in India. Thus, GIA India Lab cannot be regarded as agency PE of the assessee company in India. 16. Before parting, we may also note the reference made by the Ld.Representative to the assessment concluded by the Assessing Officer for assessment year 2009-10. It was explained that during the assessment proceedings for assessment year 2009-10, a similar query i.e. why GIA India Lab should not be construed as PE of the assessee company in India was raised, but after considering the detailed response furnished by assessee vide reply letter dated 02 November 2012, no addition whatsoever was made, which is evident from the Assessment Order (AY 2009-10) dated 26 March 2013. Thus, in this background it was all the more incumbent upon the Revenue in this year to discharge its onus as to why a different stand is being adopted, especially in the face of the fact that the nature and source of income in question remains the same. Therefore, on this aspect also, we are not inclined to uphold the stand of the assessing authority. 17. Before parting, we may also refer to the reliance placed by the Ld. DR on the judgment in the case of Formula One World Championship Ltd. (supra). In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laring total income of Rs.597,75,36,450/-. Later a revised return was filed on 30/11/2018 declaring total income at Rs.348,35,96,480/-. The assessee is one of the companies of GIA group, a trusted name of gems and diamond grading and gemstone identification industry and is regarded as an authority in Gemology. During the year under consideration, the assessee has rendered diamond grading services to its associated enterprises in India i.e. GIA India Laboratory Pvt. Ltd., and to third parties. The assessee pleaded that it does not have any PE in India in terms of Article 5 of the Double Taxation Avoidance Agreement (DTAA) entered into and subsisting between India and USA. The Indian Company i.e. GIA India Laboratory Pvt. Ltd., which was set up on 26/09/2007, is a subsidiary of the assessee company. This subsidiary company set up a laboratory in India and since then engaged in the activity of gem grading in India. 4.1. Prior to setting up of the subsidiary, the assessee contracted with a third party consolidator called International Diamond Ltd arrangement, the consolidator coordinated the collection of diamonds from India, and the assessee graded the diamonds and issued grading repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the assessee company was determined at Rs.789,00,91,734/- which includes royalty income of Rs.348,35,96,482/-. Hence, the remaining receipts of Rs.440,64,95,252/- represents business receipts of the assessee. The ld. AO applied the profit ratio of 20.31% of 50% of such business receipts (Rs.440,64,95,252/-). Accordingly, the ld. AO determined the profit attributable to PE at Rs.44,74,79,593/- in the final assessment order pursuant to the directions of the ld. DRP. We find that the ld. DRP had given a categorical finding in 5.1 of its order that the contentions raised by the assessee during the year under consideration are identical to those raised by it in earlier assessment years and there is no change of facts involved in the year under consideration vis a vis earlier years. Infact, the ld. DRP while dismissing the contentions of the assessee, had merely placed reliance on the earlier year orders of the ld. DRP. We find that this Tribunal in assessee s own case for A.Y.2010-11 in ITA No.1138/Mum/2015 dated 21/06/2019 had decided the very same issue in assessee s favour by holding that the assessee does not have any PE in India. The relevant operative portion of the said Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E- Funds 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 company on the ground of a close association between the Indian subsidiary and the foreign taxpayer. In that case, it was noted that because various services were being provided by E-Fund India (Indian subsidiary) to the taxpayer or that the foreign tax payer was dependent upon Indian subsidiary (e- Fund India) for its earnings or assignment or sub-contract of contracts to e-Fund India or e-Fund India being reimbursed on a certain cost- plus basis or saving / reduction in cost by transferring business or back office operations to the Indian subsidiary or the manner and mode of the payment of royalty transactions or eFund India providing support for carrying on core activities being performed by the taxpayer or associated transactions, cannot be the basis to construe the Indian subsidiary as PE of the foreign tax payer. Further, before the Hon'ble Delhi High Court, the Department had contended that the foreign company had a joint venture or partnership with Indian subsidiary as the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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 assessee company renders 'grading services' and 'management services to GIA India Lab'. In fact, 2 graders who were earlier employed with the assessee company are now employed with GIA India Lab and are on the payrolls of GIA India Lab and are working under control and supervisions of GIA India Lab and therefore, no service PE is created in India in terms of India- US DTAA. The Supreme Court has affirmed the decision of the Delhi High Court in E- Funds (supra) wherein it has been held that two employees deputed to e-Fund India fund India did not create a service PE as the entire salary cost was borne by e-fund India and they were working under control and supervision of e-fund India. In the facts of the instant case, since the said services are rendered outside India and none of the employees/ personnel of the assessee company has visited India and therefore, service PE is not triggered in the case of the assessee company. 13. In terms of Article 5(4) of the India US/DTAA, an agency PE is created where a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (as has been recorded in the transfer pricing study report - which functional and risk analysis has been accepted by the Transfer Pricing Officer both in the case of GIA India Lab and in the case of the assessee company), GIA India Lab is an independent entity which is rendering grading services to its clients in India. GIA India Lab also bears service risk and all client facing risks vis- -vis the stones sent to the assessee company for grading purposes (as has been recorded in the Transfer Pricing Study Report). Hence, GIA India Lab is not acting in India on behalf of the assessee company. Further, GIA India Lab is 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. 16. Before parting, we may also note the reference made by the Ld. Representative to the assessment concluded by the Assessing Officer for assessment year 2009-10. It was explained that during the assessment proceedings for assessment year 2009- 10, a similar query i.e. why GIA India Lab should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (supra) is misplaced. 18. In view of the aforesaid discussion, in our considered view, the Assessing Officer 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. 4.6. Similar view was expressed by this Tribunal in assessee‟s own case for A.Yrs. 2011-12 to 2016-17 in ITA Nos.386/Mum/2016, 1836 and 7174/Mum/2017, 53,7739 and 7740/Mum/2019 dated 30/04/2021. 4.7. In view of the fact that there is no change in the facts and circumstances of the case, during the year under consideration vis -vis earlier years which has been admitted both by the ld. AO as well as ld. DRP, respectfully following the aforesaid decisions of the Tribunal, we hold that the ld. AO erred in invoking section 9 of the Act and / or Article 5 of the India USA DTAA in order to say that assessee has a PE in India. Accordingly, the ground No.2 raised by the assessee is allowed. 15. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee s own case for the A.Y. 2010-11 and 2017-18, we allow the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reducing the income chargeable to tax or increasing the loss with respect to any international transaction or specified domestic transactions, the provisions of section 92 shall not apply. The DRP further observed that the APA in the case of GIA India Laboratory does not have a binding force on computation of Royalty in the hands of the assessee since the APA proceedings in the case of GIA India Lab are entirely independent and cannot be imported into the computation of taxable amount of royalty in the hands of the assessee. Accordingly DRP held that amount of royalty received cannot be decreased in the hands of the assessee on the basis of APA in the case of GIA India Lab, and the additional ground of objection raised by the assessee before DRP was rejected. 4.3. Further, it is also brought to the notice that the additional ground of appeal raised by the assessee is beyond the scope of Section 253 to get into a question which already stands concluded by accepting the quantum of income that the assessee had offered to tax in ITR. Accordingly, it is requested before the Hon'ble Tribunal not to accept the said additional grounds of appeal raised by the Assessee. 4.4. Vide letter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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