TMI Blog2023 (3) TMI 1088X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No. 6616/Mum/2018 - - - Dated:- 25-11-2022 - SHRI VIKAS AWASTHY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER For the Appellant : Sh. Dhanesh Bafna / Sh. Pratik Shah For the Respondent : Ms. Surabhi Sharma, CIT-DR ORDER PER GAGAN GOYAL, A.M: This appeal by the assessee is directed against the order of ACIT(IT-4(2)(2), Mumbai, [hereinafter referred to as [ ACIT ] dated 24.09.2018 passed under section 143(3) read with section 144(C)(13) of the Income Tax Act, 1961 (hereinafter referred to as [ the Act ] for the Assessment Year (AY) 2015-16. The assessee has raised the following grounds of appeal: Sr.No. Grounds of appeal Tax dispute amount (in Rs.) 1. On the facts and in the circumstances of the case and in law. the Learned Assessing Officer (Ld. AO) and Hon'ble Dispute Resolution Panel (Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On the facts and circumstances of the case and in law, the Ld. AO erred in computing tax liability, without appreciating the fact that the Appellant has not received any refund of Rs. 90,240 nor has it received any intimation under Section 245 of IT Act for adjustment of refund. Rs. 90,240/- 10. On the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under Section 234D of the IT Act, without appreciating the 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian Income Tax Act. The income of the assessee is, therefore, liable to be computed as per Rule 10(i) read with rule 10(iii) of the Income Tax Rules, which provides that income of the assessee may be determined at a reasonable percentage of the turnover. As per global profitability details submitted by the assessee, it is observed that during year end December 2014 and December 2015, the average profit percentage is 2.645. However, the global profit and loss statement submitted by the assessee does not give a break up of profit region wise. Based on Rule 10 of the Income-Tax Rules, 1962, 10% is considered as an appropriate profit percentage. Further, since actual MRO operations have been carried out in the respective country of residence Switzerland, it is also reasonable to estimate that the residence and source country (India) have a 50:50 right over the income so received by the assessee. Hence, 50% of income is attributable to India. 10% of that is profit chargeable u/s 9(1) (i) of the Income Tax Act, 1961. The receipts of the assessee from repairs and maintenance and ICS/SCS contract total to Rs. 30,15,19,760/-. Profits to be attributed to the PE of assessee in India = R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not mentioned even an iota of information about it s LO in India . At the outset, it is submitted that the LO is not of the assessee, but of its subsidiary company, SRT ML. For the Reasons already stated above, the LO does not result in any tax obligations of the assessee for its business income earned from Indian customers. Nevertheless, upon a specific show cause, the assessee sought the details and promptly provided it to the AO for the purpose of the assessment proceedings. 2. The LO belongs to the assessee and it renders services over and above co- ordination and communication services. As such the LO is actively involved in the business activities such as negotiating and entering into contracts for and on behalf of the assessee in India. The LO provides coordination and communication activities. The LO is neither authorised nor has negotiated/conclusion contracts with Indian customers. These facts are also supported as per following regulatory documents and provisions, which the LO is in compliance of * RBI approval letter dated 10 January 2007 * Extension letter issued by the authorised dealer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should have been the highest, as opposed to salary or travelling and motor car. * The LO is completely dependent on the assessee for its financial requirements. Thus, the AO has held that the LO does not merely act as a communication office. The AO has erred in referring to the amount of expenses incurred by the LO to conclude that LO does not merely act as a communication channel/render coordination services. It is submitted that the quantum of expenses incurred cannot be a criterion to decide the nature of activities carried by the LO for the assessee. It is submitted that the expenses incurred by the LO are for their daily business considerations and that they are incurred only for the purpose of carrying communication/ coordination function for the assessee. As submitted earlier, the activities conducted by employees of LO are communication/coordination function between the assessee and Indian airline companies. To conduct these communication activities, the LO employs personnel with industry specific knowledge. Considering the business requirements and the knowledge and skills possessed by the employees, the salary paid to the employees of LO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh which the repair activities under the contract can be performed. 6. Considering the business activities carried by the LO, being market intelligence and administrative support, the learned AO held that the LO renders technical services to the assessee under clause 5(2) (1) of India Switzerland DTAA and thus creates a Service PE of the assessee in India. The assessee submits that it has not sent any employees to India to render technical services to Indian airline companies. As such the assessee is not rendering any technical services in India. Further, as per the provisions of Article 5(2) (1) of India Switzerland DTAA, a Service PE is constituted if the assessee furnishes services and not when the services are rendered by the LO to assessee as erroneously held by the AO. Thus, the question of existence of Service PE under Article 5(2) (1) of India Switzerland DTAA does not arise. 7. LO performs all core activities on behalf of the assessee in India and the final entry into contracts though undertaken de facto by the assessee on paper, in reality, is based on the vital inputs and function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade or business of the enterprise; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character... (Emphasis supplied) In light of the above and the judicial precedents (which are binding and squarely applicable to the facts of case) discussed in detail below, it is observed that the communication/coordination activity as done by the employees of the LO fall within the preparatory/auxiliary activities and hence, the LO does not constitute a PE of the assessee in India. In connection with the above observations we place reliance on the principles arising from following judicial precedents, which are squarel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hops at Zurich Airport or at other FAA EASA approved location per MOE using appropriate tools and other equipment and (b) shall provide, inspect and calibrate all tooling and equipment required to accomplish the work. A-5 Engine maintenance, modification and repair SR Technics shall perform Engine maintenance in accordance with applicable manufactures standards, manuals and publications. These services shall include: Incoming inspection bore scope inspection and report of findings. Performance of as-received Engine test, if required or requested by Spice jet QEC removal, repair as necessary and reinstallation Engine and module disassembly, module and Engine reassembly Repair, replacement or exchange of Engine Parts Incorporation of modifications/performance of inspections to fulfil AD's Incorporation of OEM and Vendor SB's at Engine shop visit Engine Component bench test, overhaul and/or repair and incorporation of requested modifications during Engine shop visit Engine testing Preservation of the Engine (for 12 month) Preparation for shipment including bore scope inspection Rates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work scope supervises engine documentation including invoicing To follow up on any other requirement as per the agreement A-12 Delivery and Redelivery A-12.1 Delivery of the Engine from Spice Jet to SR Technics Spice Jet shall deliver the Engine FCA to respective pick up location on-time to meet the agreed shop induction date as per clause A-6.3 and SR Technics shall organize the transportation of the Engine from the respective pick up location to SR Technics maintenance facility at Zurich Airport, Switzerland The respective pick up location shall be any airport where Spice Jet is operating A-12.2 Redelivery of the Engine from SR Technics to Spice jet SR Technics shall organize the redelivery and Spice Jet shall accept the Engine CPT arrival at a suitable scheduled freighter destination as advised by Spice jet A-12.3 Delivery of documents and Engine Parts from Spice Jet to SR Technics Spice Jet shall deliver the documentation and if applicable Spice Jet supplied Engine Parts, DAP SR Technics maintenance facility at Zurich Airport. D-4 Logistics D-4.1 Preparation, packaging and transportation requirements Spice jet shall pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is not taxable under Article 7 of the India Switzerland DTAA. 11. We have thoroughly considered the whole issue with reference to the order of AO, proceedings of DRP, submissions of the assessee and Paper Book submitted. It is an established fact that Revenue streams not offered by assessee were not chargeable to tax in India (accepted by AO also) until unless assessee has a PE in India. After a thorough study of assessment order, the foundation of allegations laid down by the AO to prove LO of subsidiary company as PE of assessee, no substantive and cogent evidence were produced on record. All the allegations and working done in that regard were merely a guess work and looks to be a conclusion drawn on conjunctions, surmises and wrong application of law on the given set of facts. 12. Here it is pertinent to mention that LO did not have any infrastructure, facilities and relevant stocks of spare parts to carry out repairs and maintenance, piece part repairs, integrated component service and replacement of parts. Moreover, the staff exist at India were not of that level in the hierarchy of such a big giant who can negotiate with the customers, sign and finalize t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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