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TMI Blog2024 (10) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... ical Services and attribution of profit - Did ITAT fall into error in concluding that the assessee separately had an independent agent PE, located in India? - ITAT justified in attributing as high as 35% of the profits to the alleged marketing activities and thereafter, attributing 75% of such 35% profits to the alleged PE of the Appellant in India - HELD THAT:- Fixed Place PE and DAPE are concerned, the Court had, in the previous round of litigation, by way of a detailed determination ultimately come to hold against the appellant. That decision has undoubtedly attained finality. While it is true that the principles of res judicata may not, and strictly speaking, be applicable to tax litigation, we cannot completely ignore the precepts of consistency which are of equal significance be it from the point of the Revenue or for that matter the assessee. This assumes added importance where the assessee abjectly fails to advert to any set of facts or allude to any circumstance which may distinguish the position that may obtain in a particular assessment year warranting separate or independent evaluation. Although the appeal and the writ petition were heard over a course of time, the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer [ AO ] in exercising jurisdiction under Section 147/148 of the Income Tax Act, 1961 [ Act ] and assessing the income of the appellant for Assessment Year [ AY ] 2009-10 even in the absence of any material whatsoever in the possession of the AO relating to the relevant AY? B. Whether on facts and in the circumstances of the case and in law, the ITAT was justified in upholding the finding of the AO that the appellant herein had a fixed place permanent establishment [ PE ] in India under Article 5 (1) of the Double Taxation Avoidance Agreement [ DTAA ]? C. Whether on facts and in the circumstances of the case and in law, the ITAT erred in was in upholding the finding of the Dispute Resolution Panel [ DRP ] and AO that the appellant herein had a dependant agent permanent establishment [ DAPE ] in India under Article 5 (4) of the DTAA? D. Whether on the facts and circumstances of the case and in law, the ITAT while dealing with the issue of attribution of profits erred in relying upon a Judgment which had been reversed by the Hon'ble Supreme Court? 2. The appellant is principally aggrieved by the order of the Income Tax Appellate Tribunal [ITAT] dated 01 January ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion from the AO, adverse inference was liable to be drawn and, consequently, the reassessment proceedings were not liable to be interdicted on that score. 8. While rendering judgment on that appeal, the Tribunal upheld the findings of the lower authorities of a Fixed Place PE having come into existence in India, a DAPE also being present and consequentially holding that 75% of the profits from the sales activities could be attributed to those entities. Following the aforesaid order, the Tribunal disposed of the appeals for AYs 2001-02 to 2008-09. 9. The aforesaid order of the Tribunal was thereafter challenged before this Court in terms of an appeal under Section 260A of the Act. That appeal in terms of an order dated 13.09.2017 was remitted back to the Tribunal for adjudication on various issues including PE, ad hoc attribution between sales and services and taxability of income as Fee for Technical Services. 10. Pursuant to the remit, the Tribunal answered those issues in terms of its judgment dated 31 January 2018 against the assessees . This saw the institution of another set of appeals before this Court pertaining to AYs 2001-02 to 2008-09. 11. Those appeals came to be admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, there is not even an iota of doubt that GE India was fully involved in proposal development. 28.9.1. The Id. AR submitted for the third stage of 'Bid approval and negotiations', that the assessee stated before the AO that once the proposal/bid/tender have been put together as described in Stage 2 above, it is approved by the senior management during the Stage 3 and, thereafter, submitted to the end customer. Subsequently, GE Overseas may carry out negotiations with the customer, which may entail addressing queries, if any, raised by the end-customer, seeking/providing clarifications regarding work scope, pricing, etc required by the end customer. For the fourth stage of 'Final contract development and approval', the assessee stated that GE Overseas discusses the outcome of the negotiation process internally amongst its various overseas functional heads/approving authorities (operations, finance, legal, etc.) so as to decide whether or not to go-ahead with the contract on the agreed terms and conditions with the customer. If the negotiated contract terms are approved and accepted both by GE Overseas and the end-customer, the contract documents are prepared and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct through its various group companies, in several segments of the economy (gas and energy, railways, power, etc.) was not simple. As noticed by the tribunal, entering into contract with stakeholders (mainly service providers in these segments) involved a complex matrix of technical specifications, commercial terms, financial terms and other policies of GE. To address these, GE had stationed several employees and officials: high ranking, and in middle level. At one end of the spectrum of their activities was information gathering and analysis-which helped develop business and commercial opportunities. At the other end was intensive negotiations with respect to change of technical parameters of specific goods and products, which had to be made to suit the customers. Standard off the shelf goods or even standard terms of contract, were inapplicable. In this setting, a potential seller of equipment - like GE, had to create intricate and nuanced platforms to address the needs of customers identified by it, in the first instance. After the first step, of gathering information, GE had to commence the process of marketing its product, understanding the needs of Indian clients, giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong with GE's India employees and its experts, had to intensely negotiate the intricacies of the technical and commercial parameters of the articles. This also involved discussing the contractual terms and the associated consideration payable, the warranty and other commercial terms. No doubt, at later stages of contract negotiations, the India office could not take a final decision, but had to await the final word from headquarters. But that did not mean that the India office was just for mute data collection and information dissemination. The discharge of vital responsibilities relating to finalization of commercial terms, or at least a prominent involvement in the contract finalization process, discussed by the revenue authorities, in the present case, clearly revealed that the GE carried on business in India through its fixed place of business (i.e the premises), through the premises. xxxx xxxx xxxx 62. With respect to this question of law ,the ITAT relied on a two-part framing to see if Agency PE is met, that is para 4 of the DTAA, especially 4 (a) lays down framework for when something is an agency PE and the exception to the application of 4 (a) laid out in Para 5, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in negotiations will not be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise. The revenue responded by clarifying that India had clarified its position that it does not agree with the above portions of Para 33 commentary. The position of India is that : a person has attended or participated in negotiations in a State between an enterprise and a client, can, in certain circumstances, be sufficient, by itself to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise; and that a person who is authorized to negotiate the. essential elements of contract, and not necessarily all the elements, can be said to exercise the authority to conclude contracts. 65. The ITAT noted that India's position has a binding effect on all conventions entered after the date but does not retrospectively apply to conventions entered before the date. And, therefore, the Indian commentary (which serves as: a reservation) cannot modify bilateral treaties prior to 2008 such as the US-India DTAA. At the same time, it cannot be said that every line of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... After holding that the assessee had business connection in India, the Tribunal adverted to the question as to whether there was any PE in India within the meaning of Article 5 of the Indo-UK DTAA. The Tribunal extracted the provisions of Article 5 and stated the legal position that emerged therefrom. Thereafter, it referred to various documents in para 22 and narrated its effect in detail. Our purpose would be served by extracting para 23 of the impugned order which reads as under:- 23. It is also seen that the appellant has a dependent agent in India in the form of RRIL. The fact that RRIL is totally dependent upon the appellant is not denied. However, the contention of the appellant is that even though RRIL is a dependent agent and such agency is to be deemed as PE, so long such dependent agent has no authority to negotiate and enter into contracts, under Article 5 (4), there is no PE in India. It is to be noted that Article 5 (4) has three clauses, namely, a, b c. Thus, even if one has to hold that the dependent agent has no authority to negotiate and enter into contracts for and on behalf of appellant, still as per clause (c) of sub Article (4), it is found that RRIL habituall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to have a PE in India within the meaning of Article 5 (1) 5 (2) and 5 (4) of the Indo UK DTAA. Since we have found that the appellant 49612008~ 49712008, 49812008,498/2008 58412008, 64712008, 64812008, 64912008, 65012008,663/2008 has a business connection in India as well as PE in India, the income arising from its operation in India are chargeable to tax in India. 17. We are thus convinced that there is a detailed discussion after taking into consideration all the relevant aspects while holding that RRlL constituted PE of the assessee in India. While undertaking critical analysis of the material on record, the Tribunal kept in mind the objections filed by the assessee as well as the documents on which it wanted to rely upon. Those objections were duly met and answered. 18. We thus, do not find any need to remand the case back to the Tribunal for this purpose which was the plea raised by the learned Counsel for the appellant/assessee. Agreeing with the view taken by the ITAT in the impugned order as well as in the Misc. Application, we answer questions no. 2 4 against the assessee. As a result, we find no merits in the appeals of the assessee which are accordingly dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to Attribution of Profit: 77. The Revenue authorities carried out a two-part analysis on this aspect, i.e. attribution of income based upon the profits derived by the assessee. By this analysis, 10% of the' sales income made in India is attributed as the basis of total profit of GE overseas entities in India. Upon that figure, the attribution of profit to the marketing activity, which the Assessing Officer applied, was 35%. In this regard, the contentions of the assessee were that the arbitrary and high and that the application of principles in Galileo International Inc. (supra) were not automatic. Learned counsel had stressed that each case would involve an intensive factual analysis to arrive at a figure that would fit in the concept of total profits accruing to the overseas entities from Indian activities and that the further refinement of that into a broad percentage cannot be a matter of precedent. 78. This Court notices that the analysis carried out by the Revenue - not merely by the ITAT but also by the AO in the assessment order, was after considering the relevant decisions - including Rolls Royce Plc - where 35% profits were attributable to marketing activities in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a P.E.) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the P.E. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise, in such a case, there would be need to attribute profits to the P.E. for those functions/risks that have not been considered. The entire exercise ultimately is to' ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. (Emphasis supplied) Reference is also made to the DECO Commentary on Article 7, which reads as below: Where, under paragraph 5 of Article 5, a permanent establishment of an enterprise of a Contracting State is deemed to exist in the other Contracting State by reason of the activities of a so-called dependent agent (see paragraph 32 of the Commentary on Article 5), the same principles used to attribute profits to other types of permanent establishment will apply to attribute profits to that deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributed by taking them together. 16.5 It is stated that the assessee cannot take a plea that the payments to GEIIPL, requires to be allowed as deduction from the profits worked out in this order, because the global expenses including expenses incurred in India have already been considered while working out the profits. Once the profits are worked out, the expenses cannot be allowed further, because it will lead to double allowance of the expenses. It is not the revenue, which is attributed in this case, but the profits, which takes care of global expenses, including Indian expenses. xxxx xxxx xxxx 79. We notice that in Galileo International Inc. (supra) as well as in Hukum Chand v. UOl 1976 (103) ITR 548 , it was stressed that what are the proportions of profit of sales attributable to the profits carried on in a national jurisdiction is essentially where all facts are dependent upon circumstances of the case. It was further noticed in these decisions that absence of statutory or other formal framework render the task dependent on some extent on guess work and that the endeavor will only be to approximate the correct figure. The Court stated in Hukum Chand (supra) that there ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various documents were obtained and statements of various GE Overseas entities (including the assessee), employees working from the liaison office of General Electric Information Operation Company Inc., Liaison office ( GEIOC ), roles and responsibilities of various employees etc. 2. On the basis of various documents found during the course of survey in the form of agreements/ purchases order/ copies of contracts the assessments were completed in this case for AY 2001-02 to AY 2008-09, wherein it was held that the assessee was having business connection as well as Permanent establishment ( PE ) in India and the PE was engaged in activities which cannot be termed as auxiliary and preparatory. Further, it was held that 35% of the total business profits pertain to marketing activities carried out in India (the business profits were calculated @ 10% on the sales prices to the customers in India). Accordingly, 3.5% of the total sales in India was taxed as business profits in India. Further the income declared as FTS was taxed u/s 44DA as the same was held as effectively connected to the PE. The reasons for completing these assessments were as under: i. It is seen that GE Group is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment proceedings for AY 2011-12, income of the assessee was again assessed on the same lines as the assessee was continuing with the same type of business. The finding that there was no activities change in business activities gets support with the submission of the assessee, during the course of the DRP Proceedings, that it had sought assistance from M/s GE India Industrial Pvt.Ltd. ( GEIPL ) i.e., an associated entity of the Asessee (established as PE as referred above), for providing local marketing support for which it had adequately remunerated GEIPL. 4. It is further gathered that during the course of assessment proceedings for AY 201-13, the Assessee has submitted that there has been no change in their business activities since the earlier years. In view of the above, it is evident that the assessee had a business connection as well as PE in India for AY 2009-10 also. The assessee filed the return of income without disclosing full particulars of income attributable to the PE of the assessee in India. Accordingly, I have reasons to believe that during the AY 2009-10, the assessee had earned income from the business activities which was, attributable to the established PE of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on making sales for assessee, even prior to years under consideration through GEIIPL, which has already held to be Fixed place PE for all GE Overseas entities, and having business connection through GEIIPL in terms of Article 5 (4) (5) of India-Italy DTAA, there is no Income that could be deemed to have accrued or arisen in India under Sec.9 of the Act. 9.2. Admittedly assessee was engaged in various sales activities in India through expats with support staff provided by GEIIPL during preceding years as well as year under consideration. From draft assessment order passed by Ld.AO, it is observed that assessee was called upon to file figures of offshore supply for year under consideration and it was submitted by assessee that, due to change in accounting software figures of offshore supply for year was not available. These documents/materials found during survey which has been related to assessee by Ld. CIT DR sufficiently establishes existence of sales team, _ formed by employees of GEIIPL and expat of assessee, which secured orders in India for non-resident assessee, thereby constituting a dependent agent PE. 9.3. Admittedly, onshore supply services received have been offered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng escaped assessment, for year under consideration, as per Explanation 2(b) to Section 147 of the Act. 18. Before us, the appellants sought to assail the view as taken by the Tribunal by principally contending that the entire reassessment action was based upon the survey report and material which had been gathered and collated for AYs other than 2009-10 and thus could not have justifiably formed the basis for invocation of Section 148. 19. We, however, note that in the course of the reassessment proceedings, the appellant at no point in time appears to have asserted or taken a position that the facts as they obtained in 2009-10, were distinct or distinguishable from those which had fallen for detailed examination of the respondents in the litigation which had ensued and had ultimately culminated in the passing of a judgment by this Court on 21 December 2018. 20. Mr. Bhatia, learned counsel, rightly highlights this aspect and draws our attention to the contents of some of the replies which were submitted by the petitioner in this respect in the course of the reassessment proceedings and which clearly appear to be a mere repetition of the stand which had been taken in the earlier ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise due to market competition and pricing pressures, change in demand pattern and inability to develop/ penetrate the market, non-performance of a product to generally accepted standards, etc. Further, GE India neither maintains inventory nor takes inventory related decisions and consequently is not exposed to inventory risk. GE India employs minimal work-force and is thus exposed to minimal manpower risk. GE India is not exposed to credit risk as it does not book the sales. GE India is not involved in research and development efforts and accordingly, does not bear research and development related risks. [Annexure A, PDF page no. 1119.] xxxx xxxx xxxx 41. In view of the above, the crucial question for determining whether there is a PE or not, is whether the premises could be occupied as a matter of right by the Assessee or its employees. It is respectfully submitted that premises at AIFACS or premises of GEIIPL ' are not at the disposal of GE Overseas entity or its employees and the same stands fully supported by the following facts: (i) As mentioned earlier in this submission, GEIIPL provides certain marketing support services through its employees to GEIOC and its affiliat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y independent since it is not wholly or almost wholly dependent on GE Overseas for its business survival. On similar consideration, GEII expatriates will also qualify as being economically independent of the Assessee. [Annexure A, PDF page no. 1138.] 21. We consequently find no justification to interfere with the view taken by the Tribunal insofar as invocation of Section 148 is concerned. Regard must be had to the indubitable fact that a challenge to commencement of reassessment is liable to be tested on the threshold of a jurisdictional error and the assumption of authority itself being liable to be faulted on a failure to meet the preconditions which stand statutorily erected. Tested on those basic precepts, we find no merit in the challenge which stands raised on that score. 22. Insofar as the issues pertaining to Fixed Place PE and DAPE are concerned, the Court had, in the previous round of litigation, by way of a detailed determination ultimately come to hold against the appellant. That decision has undoubtedly attained finality. While it is true that the principles of res judicata may not, and strictly speaking, be applicable to tax litigation, we cannot completely ignore th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon survey materials and post survey enquiries gathered by Department, to ascertain facts for year under consideration, Ld.AO called upon various details and issued notice dated 15/02/16 under section 142 (1), along with questionnaire to assessee. 2.7. In response to questionnaire, assessee vide letter dated 10/03/16 and 22/03/16 submitted that; Assessee is a Company incorporated in Italy and is a tax resident of Italy. It was further submitted that assessee is entitled to avail beneficial provisions of DTAA between India Italy. Further assessee submitted that it has earned income from various Indian customers being: receipts in respect of on-shore services; receipts from off-shore supply of equipment parts. Assessee submitted that out of above, receipts from on-shore services had been duly offered to tax as Fee for technical services @ 20% in original return. Assessee placed reliance on Sec. 9 (1) (i) of the Act and submitted that, any income earned directly or indirectly through or from any Business connection would only deem to be accrue or arise in India and would be taxable in India. Assessee thus submitted that as it did not have business connection in India, off shore suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income originally filed by assessee and it deserves to be attributed to GEIIPL. 2.12. Thereafter, for purposes of attribution, Ld. A.O called for various details regarding sales of offshore supply for year under consideration. Assessee did not file relevant information, by submitting that, due to change in accounting software, figures of offshore supply for year under consideration were not available, and therefore, assessee proposed offshore supply amounting to be Rs.2,36,86,40,268/-, for year under consideration on the basis of average sales for preceding 8 years, i.e. from 2001-02 to 2008-09. Ld.AO rejected working provided by assessee, and attributed income to GEIIPL being Agency PE, for offshore supplies for year under consideration as under: Total expenses of all the project offices (Ahmedabad, Haldia Delhi) of the assessee for A. Y. 2007-08 and 2008-09. Rs. 1,82,17,590/- Total offshore sale for A.Y. 2007-08 and 2008-09 Rs. 14,68,14,73,794/- Total expense for A. Y. 2009-10 of all the project offices (Ahmd, Haldia Del) Rs. 77,47,448/ - Hence the total offshore supply for A.Y. 2009-10 = Rs. 14,68,14,73,794 * 77,47,448/1,82,17,590 Rs. 6,24,36,33,476/- 2.13. From above working, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE in India resulting in generation of income, may vary from case to case, and attribution of income has to be in line with the extent of activities of PE in India. 26.5. Considering all relevant facts and adopting a holistic approach, we hold that GE India conducted core activities and the extent of activities by assessee in making sales in India is roughly one fourth of total marketing effort. We, thus estimate 26% of total profit in India as attributable to operations carried out by PE in India. Therefore, as against Ld. AO applying 3.5% to sales made by assessee in India, we direct Ld.AO to apply 2.6% on total sales for working out profits attributable to PE in India. 28. The conclusions as arrived at by the Tribunal are clearly unexceptionable bearing in mind the findings that this Court had rendered in its earlier judgment and which has attained finality. We consequently find no merit in the challenge that stands raised in this respect. 29. The connected writ petition seeks to question the order passed by the Tribunal on the Miscellaneous Application that was moved by the appellant. While disposing of that Miscellaneous Application, the Tribunal has held as under: 2. Apart f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies, assessee was called upon to produce all details regarding sales made to the parties in India. Admittedly the same was not done and therefore estimation of income based upon sales determined for immediately two preceding years were considered by Ld.AO, by invoking rule 10 (iii). He submitted that assessee filed relevant details at the end of DRP proceedings which were not considered by DRP. 24. We have perused submissions advanced by both sides in light of records placed before us. 25. The primary argument advanced by Ld. Counsel was in respect of attribution made by Ld. AO of income from offshore supply as well as marketing activities in hands of PE in India assessee has remunerated GEIIPL for international transactions undertaken with assessee at arm's length price. While doing so, he placed reliance upon decision of Hon'ble Supreme Court in case of a DDIT vs E Funds [2017J 86 taxmann.com 240]. 25.1. He also argued that authorities below erred in applying force of attraction rule to bring to tax, profits of assessee, from its offshore supplies/sales, without appreciating that said rule was not applicable in present case, as it does not encompass offshore supplies. [A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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