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TMI Blog2024 (12) TMI 814X X X X Extracts X X X X X X X X Extracts X X X X ..... nd services, for which SanDisk India received fees. As further observed that the survey materials used against the appellant assessee were also utilized by the Revenue Authorities in making assessments in the hands of SanDisk Ireland. Based on the same materials and employee statements from SanDisk India, the Revenue Authorities held that SanDisk India constituted a Dependent Agency Permanent Establishment (DAPE) of SanDisk Ireland, and consequently, the income of SanDisk Ireland was deemed taxable in India. Assessments were accordingly made in the case of SanDisk Ireland for the Assessment Years (AYs) 2012-13 to 2017-18. The dispute in the case of SanDisk Ireland was brought before this Tribunal in the assessee's appeals [ 2023 (8) TMI 1587 - ITAT BANGALORE] wherein after analyzing the statements recorded, referenced materials, and agreements, concluded that the activities carried out by SanDisk India for SanDisk Ireland did not constitute a DAPE. In view of the above, we hereby set aside the order of the ld. DRP/ AO with the direction not to hold M/s SanDisk India as dependent Agency PE and consequently the assessee income is not chargeable to tax in India. Hence, the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y proceedings under Section 270A, 271A, 271AA and 271BA of the Income Tax Act. The penalty proceedings are premature at this stage; therefore, these are dismissed accordingly as infructuous. 5. The issue raised by the assessee in Grounds Nos. 2 and 4 of the appeal is that the ld. AO/ Ld. DRP erred in treating M/s SanDisk India as a Dependent Agency Permanent Establishment (PE) of the assessee and, consequently, the taxation of the assessee's income in India. 6. The facts in brief are as follows: the assessee is a foreign company based in California, United States. SanDisk India Device Design Centre Pvt. Ltd. (now known as Western Digital India, hereinafter referred to as SanDisk India) became part of the assessee s group by virtue of the acquisition of its parent company, SanDisk USA LLC, in May 2016. 6.1 The assessee is engaged in several transactions with SanDisk India and other Indian entities during the year under review but did not file a return of income in India. Subsequently, SanDisk India was subjected to a survey proceeding on January 16 and 17, 2019 at its office premise. During the survey operation, various documentary materials, emails, and statements of several em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... model involving distributors and resellers, with its activities extending beyond basic support functions. These activities include marketing strategies, distributor reward programs, customer identification, and supplier negotiations. SanDisk India is heavily involved in price negotiations and customer interactions, fulfilling customer requirements. However, procurement, product delivery, and payment collection are handled by the Ireland office. The Ireland office manages supplier interactions, shipment arrangements, and payment handling. While the Indian teams carry out critical business processes, the revenue is recognized by the Ireland office, which also issues the final purchase orders. Products are shipped directly from overseas warehouses to customers in India. Sales and performance targets are provided by the Ireland/USA offices. The Indian operations actively support these processes but avoid direct involvement in procurement or payment collection to maintain a specific operational structure. 6.3 This framework led the AO to conclude that SanDisk India s involvement in various stages of the business and sales processes classifies it as a Dependent Agency PE of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP rejected the assessee s contentions and upheld the Assessing Officer's (AO) findings. The DRP aligned its decision with the observations made by the AO, thereby confirming the existence of a Dependent Agency PE and the related tax implications. 9. Being aggrieved by the order of the learned DRP and AO, the assessee is in appeal before us. 10. The learned AR before us filed a paper book running from pages 1 to 355 and contended that there was no transaction between the assessee and SanDisk India in relation to marketing selling or distribution of its product in India. Accordingly, the question of dependent agency permanent establishment does not arise for calculating the income chargeable to tax in the hands of the assessee being a foreign company. 11. The learned DR supported the findings of the AO and the DRP, asserting that SanDisk India played a significant role in facilitating the assessee s business in India , as evidenced by the survey findings. The DR highlighted that the activities of SanDisk India such as price negotiations, customer support, and marketing were not ancillary but integral to the sales process. 11.1 The ld. DR further contended that the AO and DRP had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise ; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. 12.3 Clauses 4 and 5 of Article 5 outline the circumstances under which a dependent agent creates a permanent establishment for a foreign enterprise. A key criterion is the authority of the agent to conclude contracts on behalf of the foreign company. If the agent habitual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e conditions specified above, an Indian entity will be considered a Dependent Agency Permanent Establishment (DAPE) of the foreign enterprise. Nevertheless, there are no transactions occurring between the two parties i.e. assessee and SanDisk that satisfy the criteria outlined, therefore, there is no basis for treating the Indian entity as a dependent agent capable of creating a PE. 12.9 In simple terms, if the Indian company (SanDisk India) has not provided any services or entered into any agreement to provide services related to the sales or marketing of the foreign company's (assessee's) products, the concept of a Dependent Agency PE does not arise. As noted earlier from the observations made by the Assessing Officer (AO), which were based on materials found during the survey proceedings, SanDisk India was, to some extent, involved in the sales made by SanDisk Ireland. The materials on record also indicate that there was a formal agreement between SanDisk India and SanDisk Ireland for providing market research support and services, for which SanDisk India received fees. 12.10. It is further observed that the survey materials used against the appellant assessee were also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyee relationship between SanDisk India and the seconded employees. Instead, the AO concluded that the contractual relationship existed between the assessee company and SanDisk India, with the seconded employees providing services on behalf of the assessee. 14.1 The AO further determined that the services rendered by the seconded employees were technical, managerial, and administrative, thereby qualifying as FTS under Section 9(1)(vii) of the Act. The AO also concluded that the arrangement fulfilled the make available clause under the Double Taxation Avoidance Agreement (DTAA), as the expertise shared by the seconded employees with SanDisk India was intended to enable the latter to use such knowledge independently in future operations. The AO relied on the judgment of the Delhi High Court in the case of Centrica India Offshore Pvt. Ltd. [44 taxmann.com 300] to support this conclusion. 14.2 The AO rejected the assessee's argument that the payments were mere reimbursements of salary on which TDS under Section 192 had been duly deducted by SanDisk India. It was held that the amount received by the assessee from SanDisk India constituted income in the nature of FTS and was taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to Tax Deducted at Source (TDS) under the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The Article 12 of the DTAA between India and the USA deals with Fees for Technical Services (FTS) 20.1 Article 12 of the India-US DTAA deals with the taxation of fees for technical services (FTS). It provides specific rules for taxing FTS, which are payments made for services that are technical or advisory in nature. Article 12(1) General Rule for FTS 20.2 Under Article 12(1) of the DTAA, the country of the source of income (i.e., India) has the right to tax fees for technical services, subject to the provisions of the agreement. This means that if a US based company is providing technical services to an Indian entity, India has the right to tax these fees, provided certain conditions are met. Payments of fees for technical services may be taxed in the Contracting State in which the services are rendered. Article 12(2) Definition of Fees for Technical Services 20.3 The DTAA defines technical services as services that: Are of a technical or consultancy nature, Typically involve skills, expertise, or knowledge in specific fields like engineering, architecture, or scient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w turning to the facts of the present case, we note that the ld. AR before us submitted that agreement between the assessee and the SanDisk India is of indefinite period which implies that the assessee did not make available the technical know-how to the SanDisk. Hence, there was no reason for deducting the TDS under the provisions of section 195 of the Act read with DTAA (between India and USA). 20.9 In our considered view, an agreement of indefinite may indicate that the recipient is dependent on the service provider, as there is no point at which the recipient is equipped to handle the services independently. In such cases, payments under the agreement are unlikely to qualify as FTS under the Make Available clause. In view of the above, we hold that the amount received by the assessee against the services rendered to SanDisk India cannot be classified as FTS under the provisions of the DTAA and therefore the same cannot be made subject to the provisions of tax in the hands of the assessee. However, in the absence of the relevant agreement to justify indefinite period, we are accordingly, inclined to set aside the finding of the ld. DRP and remit the issue to the file of the AO f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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