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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 ..... e returning the income for the year. 1:2 The Appellant craves leave to add, alter, amend and/or substitute all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 2:0 Re: Validity of the Order passed u/s. 143(3) r.w.s. 144C(1): 2:1 The Appellant submits that the Notice u/s. 143(2) of the Income-tax Act, 1961 ("ITA") issued in its case was invalid, without jurisdiction and bad in law and consequently, the Assessment Order passed ought to be struck down as such. 2:2 The Appellant submits that the Notice u/s. 143(2) of the ITA has been issued by the National Faceless Assessment Centre ("NaFAC") which did not have the jurisdiction to assess the Appellant and hence, the whole proceedings and the consequential Order is bad in law and ought to be struck down. 3:0 Re.: Holding that the Appellant has a 'Permanent Establishment" ("PE") in India: 3:1 The Assessing Officer/ the Dispute Resolution Panel have erred in holding that Appellant has a 'Permanent Establishment' ("PE") in India. 3:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, it has no PE in India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing: 6:0 Re.: Estimation of gross profit: 6:1 The Assessing Officer/ the Dispute Resolution Panel have erred in holding that the 20.31% of the receipts attributable to the alleged Indian operations ought to be considered as profits of the PE taxable in India. 6:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, even if it is held that the Appellant has a PE in India no further income can be taxed in India as the alleged PE has been remunerated at an arm's length and hence the stand taken by the Assessing Officer / the Dispute Resolution Panel in respect thereof is incorrect, erroneous, misconceived and illegal and hence ought to be struck down. 6:3 The Appellant submits that the Assessing Officer be directed to accept the total income as returned. 7:0 Re.: Treating the "royalty" received during the year u/s, 44DA of the Income-tax Act, 1961; 7:1 The Assessing Officer/ the Dispute Resolution Panel have erred in holding that the royalty income is "effectively connected" with the alleged PE of the Appellant in India and is therefore taxable u/s. 44DA of the Income-tax Act, 1961. 7:2 The Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income and tax thereon accordingly. 10:0 Re: Restricting the taxation of royalty income effectively connected to the PE: 10: 1 The Appellant submits that in case it is held that any part of royalty income is effectively connected to the alleged PE of the Appellant then such amount should be restricted to the amount which is in accordance with the APA, if any, entered into by GIA India Laboratory Private Limited with the CBDT. 10:2 The Appellant submits that considering the facts and circumstances of its case, and the law prevailing on the subject, the amount of royalty, if held to be connected to the alleged PE, should be restricted to the amount in accordance with the APA. 10: 3 The Appellant submits that the Assessing Officer be directed to consider the royalty income, if any, connected to the alleged PE, to be restricted to the amount which is determined in accordance with the APA and to re-compute its total income and tax thereon accordingly." 4. Ld. Counsel for the assessee submitted that the above additional grounds of appeal are purely legal grounds and do not require any fresh examination of facts. Therefore, Ld. Counsel for the assessee prayed it may be admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the claim of the assessee is in the nature of secondary adjustment since it pertains to the associated enterprise as a result of the primary adjustment, but proviso to Section 92C(4) lays down the principle that "where the total income of an associated enterprise is computed under this sub-section on the determination of the arms length price paid to another associated enterprise from which tax has been deducted or was deductible under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reasons of such determination of arms length price in the case of the first mentioned enterprise." Hence, the claim of the assessee that its royalty income (total income declared by the assessee in its ITR) be recomputed in terms of ongoing APA between GIA India and CBDT is not correct and should not be entertained by the Hon'ble ITAT." 6. Considered the rival submissions and material placed on record, we observe that as the said additional grounds are legal grounds, wherein, the facts are on record and facts do not require fresh investigation, following the decision of Hon'ble Supreme Court in the case of National Thermal Power Co., Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speaking, it is evident that the on perusal of the agreements, the transaction of grading services between assessee company and GIA India Lab cannot be considered to be in the nature of a joint venture, since GIA India Lab has its own independent expertise but only due to its technology/capacity constraints, it forwards the stones to the assessee company for grading purposes; it is not an arrangement between two parties where each party contributes its share in order to undertake an economic activity which is subjected to joint control; in fact, the arrangement is akin to an assignment or sub-contracting of grading services to the assessee company, wherever GIA India Lab does not have the requisite expertise or technology or capacity for carrying out the grading services; further, the aforesaid arrangement has also been accepted as a mere rendering of grading services by the Transfer Pricing Officer both in the case of GIA India Lab and the assessee company. In this background, we may now proceed to decide as to whether the Indian Subsidiary GIA India Lab can be construed as a PE under any of the aspects contained in Article 5 of India-USA DTAA. 10. Firstly, we may examine wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany to GIA India Lab since it is GIA India Lab who enters into agreement with the client and bears all the risks including credit risks, client facing risks, etc. Also, in terms of the agreement, GIA India Lab bears the risk of loss or damage to articles while in transit to and from the assessee company and also during the time when the articles are at or in the assessee company's facilities. Therefore, the economic risks of the gem grading services rendered by the assessee company vis-à-vis stones/diamonds of customers of GIA India Lab shipped to it are borne by GIA India Lab and hence, there is no joint venture arrangement whatsoever between the assessee company and GIA India Lab. In terms of Article 5(6) of the India USA DTAA, it is provided that the mere fact that a company has controlling interest in the other company does not by itself construe the other company to be its PE. Accordingly, the assessee company is not having a 'fixed place' PE in India. 12. In terms of Article 5 (1) of the India - USA DTAA, a service PE arises on the furnishing of services in India by the assessee company through employees or other personnel, but only if: activities of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 India wholly or almost wholly for the enterprise. 14. The definition excludes from the ambit of a PE any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status acts in the ordinary course of its business. The OECD Commentary deals with the concept of 'Independent Agent' in paragraphs 36 to 39. In terms of paragraph 37 of the OECD Commentary, a person will be regarded as an independent agent (i.e. it will not constitute a PE of the enterprise on whose behalf it acts) only if: - He is independent of the enterprise both legally and economically, and - He acts in the ordinary course of his business when acting on behalf of the enterprise. In other words, Article 5(5) of the India- USA DTAA stipulates the following conditions which are required to be satisfied in order that an agent may be said to be an independent agent, i.e., - Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced by the Ld. DR on the judgment in the case of Formula One World Championship Ltd. (supra). In that case, the assessee was a U.K tax resident who obtained licence over all commercial rights in FIA Formula One World Championship. For this purpose, the assessee (foreign tax payer) entered into a contract with J.P. Sports (an Indian concern) by way of which it granted to J.P. Sports the right to host, stage and promote Formula One Grand Prix of India event at Motor racing Circuit owned by J.P. Sports. After examining all the relevant agreements, the case of the Revenue was that the Circuit located in India constituted a PE of assessee (i.e. the foreign tax payer) in India. The Hon'ble High Court concluded that since the assessee (foreign tax payer) had full access to the Circuit and could dictate as to who was authorised to access the Circuit and organising any other event on the Circuit was not permitted, the said Circuit constituted a PE of the foreign tax payer, i.e. Formula One World Championship Ltd., in India. The said decision of the Hon'ble High Court was approved by the Hon'ble Supreme Court. The aforesaid decision, in our view, stands on an entirely different fact-situatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r coordinated the collection of diamonds from India, and the assessee graded the diamonds and issued grading reports. It was agreed between the parties to the consolidator arrangement that the cost to the consumers would be divided in the ratio of 90:10 (90 for the assessee and 10 for the consolidator). This arrangement continues to exist to date even after formation of GIA India Lab. However, the ratio w.e.f. 12 September 2011 is 88 : 12 (88 for the assessee and 12 for the consolidator). It is important to appreciate that after GIA India Lab was set up, this agreement also requires that the cost to the consumer would remain the same whether diamonds were graded by GIA India Lab or through the consolidator. 4.2. During the year under consideration, GIA India Lab graded diamonds, stones or pearls weighing from 0.15 carats to 3.99 carats. However, due to technical limitations, the diamonds or stones weighing larger than 3.99 carats or colored stones are referred to the assessee for grading which includes testing, analyzing, examining and inscribing and issuing reports. Further, in the case of capacity constraints, normal grading process are also referred to associated enterprises. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue in assessee's favour by holding that the assessee does not have any PE in India. The relevant operative portion of the said Tribunal Order is hereby reproduced 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 that the on perusal of the agreements, the transaction of grading services between assessee company and GIA India Lab cannot be considered to be in the nature of a joint venture, since GIA India Lab has its own independent expertise but only due to its technology/capacity constraint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-à-vis gem grading services rendered by the assessee company to GIA India Lab since it is GIA India Lab who enters into agreement with the client and bears all the risks including credit risks, client facing risks, etc. Also, in terms of the agreement, GIA India Lab bears the risk of loss or damage to articles while in transit to and from the assessee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 behalf of the enterprise have contributed to the sale of the goods or merchandise ; or (c) he habitually secures orders in India wholly or almost wholly for the enterprise. 14. The definition excludes from the ambit of a PE any business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that case, the assessee was a U.K tax resident who obtained licence over all commercial rights in FIA Formula One World Championship. For this purpose, the assessee (foreign tax payer) ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 grounds raised by the assessee. Accordingly, grounds raised by the assessee in Ground Nos. 3 & 4 are allowed. 16. With regard to Ground Nos. 5, 6 & 7 raised by the assessee, the same relates to alternative plea of attribution of profits and estimation of gross profit. Since, we have already allowed the Ground No.3 & 4 of the appeal holding that assessee does not have a PE in India and thus income of the assessee is not allowable to be taxed in India, the aforesaid grounds of appeal are rendered academic and infructuous. 17. With regard to Ground No. 6 which is in respect of levy of interest u/s.234A of the Act, we are inclined to remit this issue back to the file of Assessing Officer with a direction to verify the records submitted by the assessee on merit and as per law. It is needless to say that assessee may be given a proper opportunity of being heard. Accordingly, Ground No. 8 is remitted back to the file of Assessing Officer for statistical purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady 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 dtd. 22.06.2023, comments of the Hon'ble ITAT was also conveyed by the CIT(DR) that the issues raised in the additional grounds of appeal are covered by the decision of Tribunal in earlier years. With respect to the same, it is stated that the said decision of the Hon'ble ITAT has not been accepted by the Department and appeals u/s 260A have been filed in all the earlier A.Ys. before the Hon'ble Bombay High Court. The following questions of law have been raised before the Hon'ble High Court in connection with the decision of the Tribunal on the issues in additional grounds of appeal: 1. "Whether on the facts of the case and in law, the Hon'ble ITAT is justified in allowing the impact of APA in computation of income in the hands of assessee without appreciating that APA in the case of GIA India Lab does not have binding force on computation of Royalty income in the hands of the assessee." 2. "Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X
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