TMI Blog2011 (4) TMI 1469X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the Dy. Director of Incometax (International Taxation)-I, Pune, ( AO ) erred in proposing and the Dispute Resolution Panel ( DRP ) further erred in not interfering with the conclusion f the AO that the appellant s two Indian subsidiaries constitute its Business Connection in India under section 9(1)(i) of the Income-tax Act, 1961 ( the Act ) or a Permanent Establishment ( PE ) in India under various provisions of Article 5 including Articles 5(1), 5(2), 5(5) and 5(6) of the India-Germany Tax Treaty ( Tax Treaty ). 1.2 The AO and the DRP failed to appreciate that the appellant operates entirely from outside India, has no fixed place of business in India as envisaged under section 9(1)(i) of the Act or Article 5(1) or 5(2) of the Tax Treaty directly or in the form its two Indian Subsidiaries and further Article 5(5) and 5(6) of the Tax Treaty do not apply to its case as they relate only to local Indian agents engaged in buying and selling goods in India on behalf of their Overseas Principal which is not the fact in the case of the appellant and the appellant claims relief accordingly. Ground No. 2 No attribution of income deemed to accrue/arise in India possi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000/- Income for providing IT support, Marketing Support sales support (i.e. Fee for technical Services) 8,86,69,000/- Interest income on loan 5,06,43,000/- Total 15,03,22,000/- 2. The aforesaid payments were offered to tax at 10% on gross basis under Article 11 12 of the Indo-German tax treaty. 3. The AO held that the subsidiary of the appellant company constitutes its Permanent Establishment under article 5 of the treaty and that therefore, the income received by the appellant is not taxable under the heads of royalty, FTS or interest income but as business profits attributable to PE under Article 7 of the treaty. Accordingly, the AO taxed the said income u/s 115A (in case of interest) and u/s 115A r.w.s. 44DA of the Act (in case of royalty and FTS) at 20% without allowing ay deduction in respect of any expenditure or allowance. 4. The Hon ble ITAT in the appellant s own case for AY 2003-04 on identical facts accepted the stand of the appellant of offering the aforesaid incomes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that there is a decision by this Tribunal in the case of the assessee for the assessment year 2003-04 in the background of the fact that order of the CIT (A) was not accepted by the Revenue. There is no DRP for the period relevant to the assessment year 2003-04. Therefore, the order then challenged was passed by the CIT (A) and the said order was confirmed by the Tribunal upholding the non-existence of PE. In this regard, we find it relevant to reproduce paras 39 to 41.1 of the Tribunal s order as under: Is it necessary that the PE can only be said to exist, under the basic rule, when core business activity is carried out by the PE? 39. We quite agree with the stand of the Revenue authorities to the extent that as long as an economic activity is carried out in the fixed place of business available to foreign enterprise, whether such an activity is a core activity or a peripheral activity, it has to be concluded that the foreign enterprise has a PE in the source jurisdiction. Model Convention Commentary states that the activity carried out by the PE may not be a productive character, though the commentary does recognize that it could perhaps be argued that in the gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality. Viewed in this perspective, and bearing in mind the fact that by no stretch of logic it could be held that any significant or critical business activity by the Epcos AG was carried out in India, even if there is a PE in India, that will be wholly academic and will not lead to any taxability of income. Not only the work done in India, if at all, did not constitute significant or critical business activity, the assessee company did not earn any revenues as a result of the activities so carried out by the employees of Indian subsidiaries and, therefore, no part of the revenues actually generated by the assessee company could be said to be attributable to the PE. The question of existence of PE of the assessee company, in these circumstances, has no impact of taxability of the assessee company. 41. The requirements of exclusion clause under art. 15(5) also highlight this aspect of profit attribution. While we were examining interplay between art. 12 and art. 7, we had noticed that this exclusion clause has twin requirements of (a) existence of the PE through which business is carried out; and of (b) existence of effective connection between such a PE and the rights, proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d surprisingly, they have not even distinguished. They simply ignored stating that the said order is not accepted by the Revenue and the matter is pending before the Hon ble High Court of Bombay. Considering the above, we are of the considered opinion that there is no case for sending the files to the Revenue. In fact it is the case of the assessee that the facts are identical vis- vis the facts of the assessment year 2003-04. In these circumstances, we are of the opinion that the decision comprised in para 41.2 is equally relevant for the year under consideration in respect of Ground No. 1. Accordingly, Ground No. 1 raised by the assessee is allowed. 10. The issue raised in Ground No. 2 relates to non-attribution of income deemed to accrue or arise in India. Conclusion on the second issue i.e. taxability @ 20 per cent in terms s. 44DS r/w s.115A in case PE is found to be in existence: 47. In our considered view, in terms of Indo German tax treaty provisions, it will have to be demonstrated that such royalties and fees for technical services ha e a live economic nexus with the PE and only then exclusion clause under art. 12(5) as also taxability under arts. 7(1) and 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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