Case Law Details
Booz & Company (ME) FZ-LLC Vs DDIT (International Taxation) (ITAT Mumbai)
AAR Ruling Cannot Be Sole Basis to Hold Existence of Permanent Establishment; No Service PE Created as Employees Worked Less Than Nine Months in India; Fees From Indian AE Not Taxable Due to Absence of Fixed Place PE in India; ITAT Rejects Taxability of Consultancy Receipts Since Indian Entity Was Only Service Recipient; Foreign Consultancy Income Held Non-Taxable as DTAA Conditions for PE Were Not Met; ITAT Says PE Determination Requires Independent Examination of Facts and DTAA Provisions; No Dedicated Office Space in India Means No Fixed Place PE.
The Mumbai ITAT allowed the appeal filed by the assessee for Assessment Year 2011-12 and held that the fees received from its Indian associated enterprise were not taxable in India in the absence of a Permanent Establishment (PE) under the India-UAE Double Taxation Avoidance Agreement (DTAA). The assessee, a UAE-based company engaged in management and technical consultancy services, had provided technical and professional personnel to its Indian associated enterprise, Booz & Company India Private Limited, and received fees of ₹112.83 lakhs. The assessee treated the receipts as business income under the India-UAE DTAA and claimed that the same were not taxable in India since it did not have a PE in India.
The Assessing Officer relied on an Advance Ruling dated 14.2.2014 issued in respect of certain group companies, including Booz & Company (ME), where the Authority for Advance Ruling had held that the entities had a PE in India and their receipts were taxable as business profits. On that basis, the Assessing Officer concluded that the Indian associated enterprise constituted the assessee’s PE in India. The Assessing Officer also restricted the deduction of expenses claimed by the assessee due to lack of supporting documents and determined taxable income at ₹72.83 lakhs. The CIT(A) upheld the assessment.
Before the Tribunal, the assessee argued that the tax authorities incorrectly relied solely on the AAR ruling without independently examining the facts of the present case. It was submitted that the AAR ruling was binding only on the parties before it and that even as a persuasive precedent it did not examine essential aspects such as the form of PE or the specific provisions of the respective DTAAs applicable to different entities. The assessee further contended that its personnel were deputed to the Indian entity on a principal-to-principal basis and that the agreement specifically provided that no office premises or dedicated space in India was placed at the disposal or control of the assessee or its personnel.
The Tribunal accepted these submissions and held that the tax authorities should not have relied on the AAR ruling as the basis for determining the existence of a PE. The Tribunal noted that under Article 7 of the India-UAE DTAA, business income could be taxed in India only if the assessee had a PE in India. Referring to Article 5(2)(i) of the DTAA, the Tribunal observed that service PE would arise only if services continued for the same or connected projects for a period exceeding nine months within any twelve-month period. Based on the material placed on record, the Tribunal found that the assessee’s employees had worked in India for an aggregate period of only 156 solar days, which was less than nine months. Therefore, the conditions for service PE were not satisfied.
The Tribunal also held that no fixed place PE existed because the assessee did not have any fixed place of business in India and no premises were earmarked or placed under its control or disposal. Further, the Tribunal held that the concept of dependent agent PE was not applicable because the Indian company was merely the recipient of services from the assessee and was not providing services on behalf of the assessee.
Accordingly, the Tribunal concluded that the assessee did not have a PE in India and that the receipts from the Indian associated enterprise were not taxable in India. The orders of the lower authorities were set aside and the Assessing Officer was directed to delete the addition. The appeal of the assessee was allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The appeal filed by the assessee is directed against the order dated 24.3.2015 passed by the learned CIT(A)-55, Mumbai and it relates to A.Y. 2011-12. The assessee is aggrieved by the decision of the learned CIT(A) in upholding the assessment of fees received by the assessee from its Indian AE as business income of the assessee.
2. Facts relating to the issue are stated in brief. The assessee-company belongs to Booz group. It is engaged in the business of providing management and technical consultancy services. It is incorporated in United Arab Emirates (UAE). During the year under consideration the assessee provided technical/professional personnel to its Indian associated enterprise named Booz & Company India Private Limited (Booz India). The assessee received a fee of ` 112.83 lakhs from Booz India. The assessee did not offer the same for taxation. The assessee contended that it is governed DTAA entered between India and UAE. The said DTAA does not have any specific clause on taxability of fees for technical services and hence the said receipt is taxable as business income. However, since it did not have Permanent Establishment (PE) in India, above said fee is not taxable in India.
3. The Assessing Officer noticed that the Booz group is a global network group of companies having subsidiaries all over the world. He noticed that some of the group companies have approached Authority for Advance Ruling (AAR) in order to determine the taxability of their receipts from Indian entities. The AAR has given its Ruling on 14.2.2014 in AAR No. 1018 to 1027 of 2010, wherein the AAR has held that the above said companies are having “permanent establishment” in India and income received by them from Indian companies are taxable as business profit under Article 7 of Tax agreement of India and respective countries. The group of companies which obtained AAR ruling included M/s. Booz & Company (ME). The Assessing Officer noticed that the assessee herein is 100% subsidiary of Booz & Company (ME) Ltd., Hence the AO, by following the decision of AAR, held that ‘Booz India’ (Indian AE) to whom services were provided is the PE of the assessee. Accordingly the AO held that the income of ` 83 lakhs is taxable as business income of the assessee. The assessee had claimed expenses to the tune of ` 62.61 lakhs. Since the assessee did not furnish supporting documents, the Assessing Officer restricted deduction for expenses to the tune of ` 40 lakhs. Accordingly, he determined the total income of the assessee at ` 72.83 lakhs. The learned CIT(A) also confirmed the same and hence the assessee has filed the appeal before us.
4. The Ld A.R submitted that the tax authorities have mainly placed reliance on the ruling given by AAR in respect of certain group companies. He submitted that the question of availability of PE has to be examined on the basis of facts available in the present case and hence the tax authorities are not correct in merely placing reliance on the ruling of AAR without examining the facts available in the present case. He further submitted that the ruling given by the AAR is binding only on those parties and not on others. Even if it is considered that the same shall have persuasive value, a perusal of the ruling would show that it has been given without considering main aspects, such as, the Form of PE (whether fixed place PE, Service PE, Agency PE etc.), relevant provisions of DTAA country-wise etc. All the applicant companies before AAR were from different Countries, but the AAR has given a common ruling without making specific reference to the provisions of respective DTAA. Accordingly he submitted that the reliance placed upon the ruling of AAR is not justified.
5. We heard Ld D.R on this issue and perused the record. We find merit in the contentions of the assessee. Accordingly we hold that the ruling given by the AAR in the group concern’s case should not have been taken by the tax authorities as the basis for determining the existence or otherwise of PE of the assessee herein.
6. The Ld A.R submitted that the assessee has provided certain technical/professional personnel to M/s Booz India. Referring to the agreement entered between the assessee and M/s Booz India, the Ld A.R submitted that the said personnel were provided on “Principal to Principal” basis and further they shall not be entitled to work for any other projects. The agreement further clearly provides that no specific part of the office premises of Booz India or the premises of the client of Booz India is at the specific disposal of the technical/professional personnel of the assessee. Further Booz India is not under an obligation to earmark or provide a dedicated office or any other space to the personnel of the assessee. Accordingly he submitted that there is no fixed place of business in India through which the business of assessee was carried on in India. Accordingly he submitted that none of the conditions prescribed in Article 5 of the India-UAE treaty on PE shall be applicable to the assessee herein. In this regard, the Ld A.R placed reliance on the decision rendered by Hon’ble Supreme Court in the case of E-Funds IT Solutions Inc. (Civil Appeal No.6082 of 2015 dated 24-10-2017).
7. He also submitted that the employees of the assessee has worked for only 156 solar days only and hence there is no Service PE also in terms of Article 5 of DTAA. He further submitted that the concept of dependent agent PE is also not applicable since the Indian company (Booz India) is recipient of services from the assessee and not providing any service to the assessee. Accordingly he submitted that there is not PE in India and hence the income received by the assessee from Booz India is not taxable in India.
8. On the contrary, the Ld D.R strongly supported the order passed by the tax authorities.
9. We have heard the parties on this issue and perused the record. There is no dispute between the parties that the fees received by the assessee from M/z Booz India for provision of technical/professional personnel are in the nature of business receipts. As per article 7 of the Indian-UAE DTAA, the business receipts are taxable in India only if the assessee has PE in India. We have earlier noticed that the tax authorities have held that there is PE in India only on the basis of ruling given by AAR. In the earlier paragraph, we have held that the ruling given by AAR should not have been followed by the tax authorities for the reasons furnished by the Ld A.R.
10. The term “Permanent Establishment” is defined in Article 5 of the tax treaty. As per Article 5(2)(i), the PE includes
“the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve month period.”
The assessee has given working of mandays of employees provided by the assessee to M/z Booz India at page 53 of the paper book. As per the said working the employees have worked for an aggregate period of 156 solar days (on all projects taken together), meaning thereby, the period of working is less than 9 months. Hence the above said clause shall not apply.
11. The assessee has also stated that it does not have any fixed place of PE and also shown M/s Booz India has also not earmarked any specific place under the control or disposal of the assessee. Hence it cannot be said that the assessee did carry on any business in India through the Fixed place of business. Since the assessee has provided service to M/s Booz India and did not receive any service, the question of dependent agent PE also does not arise in India.
12. In view of the foregoing discussions, we are of the view that there is merit in the contentions of the assessee that there is no PE for it in India, in which case, the impugned receipt is not taxable in India. Accordingly, we set aside the orders passed by the tax authorities and direct the AO to delete the addition made by him.
13. In the result, the appeal of the assessee is allowed.
Order has been pronounced in the Court on 19.1.2018.
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