FCC Co. Ltd. Vs ACIT (ITAT Delhi)
ITAT had directed the assessee to file the description of services rendered by the employees of the assessee on their visit to India and the corresponding clause under the Agreement for Dispatch of Engineers under which such services would fall. In response, the assessee furnished Annexure 1 for AY 2014-15 and Annexure 2 for AY 2015-16 vide its written submission filed on 17.11.2021 providing the names of the employees who visited India along with the work performed by them giving reference of the relevant clause of the Agreement for Dispatch of Engineers along with Request for Technical Services (RFT) of the respective employee. The said Annexure 1 and Annexure 2 are on record.
Perusal of the above documents show that the employees of the assessee visited India to assist FRL in relation to supplies made by FRL/FCC Clutch to its customers; resolving problems relating to production, fixing of machines, maintenance of machines; checking safety status at the premises and suggesting ways for enhancing safety; support in quality control; IT related services; support for launch of new segment line; etc. In our considered opinion, none of these activities performed by the employees are in the nature of supervisory functions, supervision being the act of overseeing or watching over someone or something which is not reflected in the work done by the engineers in India for FRL.
Moreover, no installation or assembly project was on going at FRL’s premises. FRL is in the existing business since many years and no new line of business has been launched by FRL. The employees were not rendering any services in connection with building site or a construction project or an installation project or an assembly project. From the nature of the services rendered by the employees, it is amply clear that these activities were not in connection with a building site or construction installation or assembly project. Hence the issue of computation of period of six months also becomes academic. The employees are visiting India on year to year basis under the contract. In AY 2014-15 and AY 2015-16, the employees visited India to render certain technical services under the Licence Agreement read with Dispatch of Engineers Agreement which have been duly offered to tax by the assessee as FTS as per the provisions of India-Japan DTAA. We therefore hold that the there is no Supervisory PE of the assessee for the AYs under consideration.
FULL TEXT OF THE ORDER OF ITAT DELHI
These two appeals are filed by the assessee against the order of the Ld. Deputy/ Assistant Commissioner of Income-tax, International Taxation – 1(3)(1), New Delhi (“AO”) under section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 (“Act”) dated 31.10.2018 and 16.10.2019 pertaining to assessment year (“AY”) AY 2014-15 and AY 2015-16 respectively.
2. Since the issues are common in both the appeals they were heard together and are being disposed off by this common order.
3. The main issue common in both the appeals relates to the existence of the alleged Fixed Place Permanent Establishment (“Fixed Place PE”) and Supervisory Permanent Establishment (“Supervisory PE”) of the assessee in India under the provisions of Article 5 of the Double Taxation Avoidance Agreement entered into between India and Japan. (“India-Japan DTAA”). The other common issue relates to attribution of income from offshore supply of raw materials and components and supply of capital goods to the alleged PE of the assesee.
4. The assessee is a foreign company and a tax resident of Japan. It is governed by the provisions of the India-Japan DTAA being more beneficial. It is engaged in the business of manufacturing of clutch systems and facing for cars, motorcycles, utility vehicles, specialized tools and dies and molding and machining of plastics. The assessee entered into a joint venture agreement with Rico Auto Industries Limited (“Rico Auto”) and formed a JV company in India, namely FCC Rico Limited (“FRL”) in the year 1997. The assessee also incorporated a wholly owned subsidiary in India namely, FCC Clutch India Private Limited (“FCC Clutch”) on 7.11.2014. Both FRL and FCC Clutch are engaged in business of manufacturing and supply of automobile clutch assemblies. As a part of restructuring, Rico Auto exited FRL by transferring its stake to FCC Clutch and thereafter FRL was merged with FCC Clutch with effect from 1.1.2015. Consequently, as a part of merger, FRL ceased to exist and it stands dissolved from such date without being wound up.
5. In both the assessment years involved, the assessee received the following types of income from FRL:
(i) royalty income under the Licence Agreement, which was duly offered to tax @ 10% on gross basis under the provisions of India-Japan DTAA;
(ii) fees for technical services (“FTS”) under the Agreement for Dispatch of Engineers, which was duly offered to tax @ 10% on gross basis under the provisions of India-Japan DTAA;
(iii) Income from supply of raw material, components and capital goods under the Master Sales Agreement (“MSA”). Receipts from transactions under MSA were not offered to tax as the assessee treated them to be in the nature of business profit not taxable in India in the absence of a PE under the provisions of India-Japan DTAA.
6. The Ld. AO after due verification of details and evidence submitted by the assessee concluded that the assessee has a business connection in India in terms of section 9(1)(i) of the Act and a Fixed Place PE as well as Supervisory PE in India under Article 5 of the India-Japan DTAA. The Ld. AO held that FRL’s premises in addition to hosting the business activities of FRL, serve as a “branch” and an “office” of the assessee. Therefore, a Fixed Place PE is constituted. The Ld. AO after evaluating the key attributes of Fixed Place of business in the context of factual matrix in the present case concluded that the assessee deputed professionally qualified employees to the factory site of FRL in India and hence such factory site constituted a Fixed Place PE of the assessee in India. The Ld. AO also referred to certain clauses of the Licence Agreement viz-a-viz the facts of the present case and concluded that the employees visit in India were made to help FRL in setting up a new product line in India for which end-to-end supervision has been rendered by the assessee. Hence, the PE of the assessee in India under Article 5(4) of the India-Japan DTAA and a Fixed Place PE are clearly established. The Ld. AO arrived at his conclusion for the reason that certain employees of the assessee who visited India helped FRL in setting up a new product line in India for which end-to-end supervision has been rendered by the assessee. The period of stay of these employees in India exceeded 6 months and hence it constituted Supervisory PE of the assessee in India. Based on these reasoning, the Ld. AO proceeded to tax the receipts from sale of raw materials and capital goods by attributing 50% of the profits to the alleged PE.
7. Before the Hon’ble DRP, the objections raised by the assessee were rejected and the order of the Ld. AO was upheld by recording the following findings:
“3.3. The AO has elaborately discussed the issue in the draft assessment order holding that FCL constitutes a PE for the assessee under Article 5 of the India-Japan DTAA. The submissions made by the assessee before the Panel are the same which were submitted before the assessing officer and the Assessee has been unable to controvert the findings of the AO, holding that the assessee has an Fixed Place PE and Supervisory PE in India.
3.3.2 The Hon’ble ITAT in the case of HUAWEI TECHNOLOGIES CO LTD, China ,V. ADIT (ITA Nos. 5253/Del/2011, 5254/Del/2011, 5255/Del/2011 & 5256/Del/2011 dated 21/03/2014) – Del ITAT on the issue of existence of a PE held as under:
Fixed place PE On the basis of various information collected’ during the survey it was clear that the taxpayer was carrying out the business in India. The business of the taxpayer in India is being conducted with active involvement of the employees of Huawei India. Such employees of Huawei India along with employees of the taxpayer have jointly prepared bidding documents for contracts, negotiated and concluded the contract on behalf of the taxpayer with its Indian customers. The taxpayer has given power of attorney in favour of its employees for signing the contracts, conducting negotiation and executing all necessary matters for the project in India. The taxpayer’s business in India was carried out with the help of its employees, who regularly work from the premises of Huawei India. In view of the above, it was clear that the taxpayer, being tax residents of China, had fixed place PE in India in form of office premises of Huawei India. Agency PE The employees of Huawei India forms the sales teams of the taxpayer, such employees have habitually secured orders in India, wholly or almost wholly for the taxpayer. The documents in the form of agreements/purchase orders/copies of contracts also prove the active involvement of the employees of Indian company in the conclusion of contracts on behalf of the taxpayer. Huawei India was economically, technically and financially all dependent upon the taxpayer. Therefore, Huawei India also constitutes the agent other than an agent of independent status of Huawei China. This results into the creation of the dependent agent PE under the tax treaty and business connection under the Act Further, the process of joint bidding by the taxpayer and Huawei India constitutes Dependent Agent PE. Installation PE The taxpayer’s employees also visited India to perform activities relating to installation projects lasting for more than 180 days, which constitutes Installation PE. Service PE The statements recorded during the survey also show that the employees render technical services continuing for more than 183 days, constituting Service PE. The facts recorded by the AO and upheld by the DRP in their order have not been controverted before the Tribunal, Accordingly, the Tribunal held that taxpayer had PE in India.
The above decision is squarely applicable to the case of the assessee as, on examination of the TP Study Report of FCL, the Panel finds that
