S.R. Technics Switzerland Limited Vs ACIT (International Taxation) (ITAT Mumbai)
The LO does not constitute a fixed place through which business of assessee is carried out in India. Employees of the LO do not negotiate, finalise or discuss the mechanics of contracts including pricing with the assessee’s customers. As such the employees of LO merely act as a communication link between the assessee and the airline companies. The LO did not carry any activity, beyond that permitted by the RBI. The activities carried by the LO are thus, preparatory (auxiliary) in nature. The activities/operations of the assessee in connection with the contracts are carried from outside India.
Further, as per Article 5(7) of India Switzerland DTAA, merely because an Indian company in controlled by a Switzerland company or fact that Switzerland Company carries business in India, does not result in Indian company being considered as a PE of Switzerland Company in India. Thus, it is submitted that SRT India cannot be regarded as a PE of the assessee merely because it is controlled by the assessee or merely because the assessee carries on business activities in India.
As per Article 7(1) of India Switzerland DTAA, if business is carried on through a PE, profits from business to the extent attributable to the PE in India is taxable in India. As discussed above, the assessee does not carry any activity through LO other than routine communication and client coordination, which can be called to constitute a PE in India. Therefore, in absence of any PE of the assessee in India, the business income earned by the assessee is not taxable under Article 7 of the India Switzerland DTAA.”
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.
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 the contracts and run the office of the assessee at their own. The fact that the LO was adhering to the conditions imposed by the RBI and the RBI had accepted the functioning of the LO for quite some time points out to the fact that the LO has complied to the condition one of which was that it could not carry on any business or trading activity. This fact about conditions imposed on LO are nowhere under challenge by the AO. This, itself weakens the case of the Revenue that they are not able to bring on record any material which proves that conditions imposed on LO were actually not complied with. Till the time LO is fulfilling the conditions imposed by the RBI, the case of the Revenue cannot stand on its own feet.
Statute empowers AO to conduct enquiry under section 131 and 133(6) to strengthen his allegations about non-fulfilment of the conditions imposed by the RBI on the LO by summoning and direct interaction with the parties like Air India, Spice jet Ltd. and Jet Airways Ltd. Instead of following this procedure to substantiate his allegation, AO rather worked on the documents available on record supplied by the assessee that is too by applying wrong principles on the given set of facts.
AO worked on an assumption that simply by having a liaison office in India would result in setting up a PE within the meaning of DTAA, this assumption of the AO in these circumstances (conditions imposed by RBI) being contrary to the well-established principles as well as provisions of law. Once an activity (as can be confirmed with reference to conditions imposed by RBI while granting the licence to open LO) once an activity is construed as being subsidiary or in aid or support of the main activity, it would fall within the category of preparatory or often auxiliary character.
In the light of facts of the case discussed above, we are of the opinion that the LO in India does not constitute PE in India under Article 5 of India Switzerland DTAA because. The LO does not constitute a fixed place through which business of assessee is carried out in India. Employees of the LO do not negotiate, finalise or discuss the mechanics of contracts including pricing with the assessee’s customers. As such the employees of LO merely act as a communication link between the assessee and the airline companies. The LO did not carry any activity, beyond that permitted by the RBI. The activities carried by the LO are thus, preparatory (auxiliary in nature). The activities/operations of the assessee in connection with the contracts are carried from outside India.
In view of the above findings, 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.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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:
