Facts
A US based company (assessee), engaged in the business of developing and selling hybrid plant seeds around the world had a liaison office in India. The liaison office was converted into a branch office to undertake the two following activities:
- conduct agri-genetic research for the development of new products;
- Production of parent seeds and its sales to the joint venture company under an arrangement.
The agricultural research conducted by the research unit in India results in development of parent breeder / foundation seeds in small quantities and these breeder / foundation seeds are used as inputs as seed for multiplication and sale of parent seeds. The expenses incurred in relation to the research unit are fully reimbursed at cost by the US head office.
The Assessing Officer (AO) held that the research activities created a Permanent Establishment (PE) of the assessee in India and the profits attributable to the research unit were taxable in India. The AO worked out the estimated offshore income that was attributable to the Indian research unit based on the sales and net income of the commercial unit of the Indian branch and expenses of research unit.
Contentions of the Assessee
- The research activity is in-house and exclusive, and the research material and know-how are neither sold nor licensed or otherwise transferred to any third party including production unit of the Indian branch.
- The research activity is preparatory and auxiliary activity to the main business of assessee company and hence covered by exclusionary clause of Article 5(3) (e) of the India-USA Tax Treaty.
- The assessee has not earned income of any nature from sale of research activities per se carried in India.
- ·The Article 7(3) of the India-USA Tax Treaty provides that no estimate of attributable profits shall be made in respect of the information that is shared bilaterally between head office and the PE.
Contentions of the Revenue
