M/S. LANDMARK RETAIL INVESTMENT CO. LLC,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION)CIRCLE 1(2), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against order of CIT(A)-12, Bengaluru passed u/s 250 of the Act dated 20.12.2022 for the assessment year 2018-19. The assessee has raised following grounds of appeal:

Erroneous addition of salary cost reimbursement to the total income of the Appellant considering the same as business profit. 1.1. The Learned Commissioner of Income Tax (Appeals) ("CIT(A)") and Learned Assessing Officer ["Learned AO") has erred in treating salary cost reimbursement of INR 55,09,787 received by the Appellant from its group entity (Lifestyle International Private Limited ["Lifestyle"]) as business profits, without appreciating that the Appellant does not have a Permanent-Establishment ("PE") in India.

IT(IT)A No.86/Bang/2023 Landmark Retail Investment Co. LLC, Bangalore Page 2 of 9 1.2. The Learned CIT(A) and the Learned AO failed to appreciate that even if the impugned transaction is to be considered as services rendered by the Appellant, the said transaction is not taxable in absence of Fee for Technical services ["FTS"] clause in the India-UAE tax treaty.

1.3. The Learned CIT(A) and Learned AO has erred in not accepting that salary cost from Lifestyle was cost to cost reimbursement merely due to absence of agreement, without appreciating that the Appellant has only recovered salary cost from Lifestyle without any profit element. 1.4. The Learned CIT(A) and the Learned AO erred in not appreciating that in view of Article 22 "Other Income" of the India-UAE tax treaty, the impugned transaction is not taxable in India.

1.5. Having accepted the submission of the Appellant that it does not have a PE in India in respect of other transaction(s) in the same year, the Learned CIT(A) and Learned AO has grossly erred in taking a contrary position for the aforesaid transaction, which is bad in law.

1.6. The Learned CIT(A) and the Learned AO has erred in considering that it is not required for personnel to travel to India for triggering a service PE without appreciating the position upheld by the Apex Court in the case of ADIT v. E-Funds IT Solutions Inc [2017] 86 taxmann.com 240 (SC).

1.7. The Learned CIT(A) has erred in concluding that the services rendered by the Appellant continued for a year based on the email correspondence without appreciating that the duration of service is not relevant as employees did not travel to India.

1.8. The Learned CIT(A) failed to appreciate that subject line does not determine the characterization of the income. 1.9. Notwithstanding and without prejudice to the above, even if the impugned transaction is to be considered as business profits, the Learned CIT(A) and Learned AO failed to appreciate that business profits cannot be subjected to gross basis of taxation and expenses are ought to be allowed based on the details placed on record. The Learned CIT(A) and Learned AO ought to have appreciated that gross receipts equal payment in the case of the Appellant and accordingly, the question of taxation in absence of profits does not arise. 1.10. The Learned CIT(A) and Learned AO has erred in not appreciating the principles laid down by a plethora of rulings on the above matters. 1.11. The Learned CIT(A) and Learned AO failed to appreciate that case law relied upon by the Learned CIT(A) and the Learned AO is not applicable to the Appellant's case.

IT(IT)A No.86/Bang/2023 Landmark Retail Investment Co. LLC, Bangalore Page 3 of 9 The Appellant craves for leave to add, to alter, to amend, to rescind or to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal.

IT(IT)A No.86/Bang/2023 Landmark Retail Investment Co. LLC, Bangalore Page 4 of 9 provided by the assessee's employee as part of the sourcing support team. The AO in para 4.1 held that even though the said employee did not exclusively travel to India for rendering his services, he qualified to be termed as a Service PE of the assessee and therefore the salary reimbursement constituted the business profits of the assessee. The AO completed the assessment proceedings for A.Y. 2016-17 by considering the reimbursement of salary expenses of Rs.55,09,787/- as business profit. 3. The ld. CIT(A) observed that the services rendered by the employee, Shri Srinivas Narayanan, were the nature of consultancy services in the sourcing department of “LIPL”. The employee was Head, Sourcing, Quality and Business Improvement of the assessee and had the domain expertise, based on which he rendered consultancy services to “LIPL”. Though there is no written agreement, the other documents prove that Shri Narayan remained an employee of the assessee and cannot be said to have been acting independently as claimed by the assessee in its submissions. The email correspondence is between “LIPL” and the assessee and not directly with the employee. The subject of the email dated 30.1.2018 is 'RE: Srini, Max MESourcing head-India assignment reimbursement.' This also proves that the employee was deputed by the assessee. That being the case, the AO was right in holding that Shri Narayanan constituted a Service PE of the assessee in India, even if he may not have travelled to India for the purpose of rendering the services. Therefore, the payments made by “LIPL” to the assessee would constitute business profits of the latter in terms of the provisions of Article 7 of the treaty.

3.1 He further observed that as regards the assessee's alternate claim that expenses should be netted from the business profits, as no details of the same have been provided, there is no basis for reducing the amount treated as business profits.

IT(IT)A No.86/Bang/2023 Landmark Retail Investment Co. LLC, Bangalore Page 5 of 9

3.2 Further, he observed that the other claim by the assessee is that the payment received by it from “LIPL” was mere reimbursement without any profit element. As far as the case laws relied on by the assessee in this regard are concerned, they all deal with a situation in which employees were seconded to a group entity as per a secondment agreement. In the assessee's case, there is no written agreement and hence the nature of the transaction is determined on the basis of the available information submitted by the assessee. Once it has been established on the basis of such information read with the provisions of the treaty that the assessee had a Service PE in India, then the payment received by it takes on the character of business profits. 3.3 He further observed that the assessee has also challenged the AO's findings on the grounds that in the case of Oracle Software License Charges and Service Charges, it had been held that there was no PE of the assessee in India. It is noted that the Software License Charges were examined from the standpoint of-taxability of royalty while the Service Charges were received from another group entity and not “LIPL”. Hence this argument of the assessee is also without merit. 3.4 The ld. CIT(A) further observed that the assessee has also relied on certain case laws in support of its argument that in the absence of an Article relating to FTS in the treaty, the payments can be treated as business profits only in the event of the assessee having a PE in the Contracting State. These case laws are on a different footing from the facts of the assessee's case as detailed above. In Zynga Game Networks India (P.) Ltd. Vs ACIT [2018] 97 taxmann.com 44 relied upon by the assessee, the issue was whether the payment could be characterized as royalty under the India- Philippines DTAA. The nature and terms of service in the assessee's case have been examined in the light of the provisions of the India- UAE DTAA (supra) and the existence of a Service PE in terms of the

IT(IT)A No.86/Bang/2023 Landmark Retail Investment Co. LLC, Bangalore Page 6 of 9 treaty provisions is observed. To sum up, the ld. CIT(A) observed that the rendering of services by the assessee's employee over a period of one year, constituted a Service PE of the assessee in terms of Article 5 of the India-UAE-DTAA and hence the payments received by the assessee are to be treated as business profits under the treaty. The findings of the AO in this regard are upheld by the ld. CIT(A). The addition of business profits of Rs.55,09,787/- to the returned income of Rs.5,69,55,979/- is sustained by him and decided that the grounds of appeal raised by the assessee fail. Against this assessee is in appeal before us.

4.1 The ld. A.O. however, notes that although the employee did not exclusively travelled to India for rendering his services, he clearly qualifies to be termed as a service PE of assessee for disallowing the alleged salary cost reimbursement. There is no evidence that has been called upon and verified by the ld. AO to come to such conclusion.

IT(IT)A No.86/Bang/2023 Landmark Retail Investment Co. LLC, Bangalore Page 7 of 9 4.2 Even before the ld. CIT(A), we do not find any kind of evidences/documents being called for to uphold the view of the ld. AO.

4.3 If we examine the Article 5 of DTAA, then it is clear that the requirement of Article 5(1) of the treaty, namely, that there should be a fixed place of business and secondly, the business of the enterprise should he carried on wholly or partly through that place. The fixed place of business is necessary for a PE under Article 5(1) of the DTAA. But if we look into the Article 5(2), which is an inclusive provision, it includes various activities enumerated in clauses (a) to (1). Nature of places are specified in clauses (a) to (h), whereas in clause (i) of Article 5(2), reads as under :

"(i) 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."

4.4 Paragraph 3 of Article 5 specifically provides the circumstances in which the PE shall not include various activities. Paragraphs 4 and 5 are complementary and mentions of a person or agent of an independent status who is working on behalf of such enterprises in another contracting state, then such enterprises has been deemed to have a PE in the other contracting state. Similarly, if an enterprise carrying on the business in the other State through broker, general commission etc., in ordinary course of business, then the enterprise shall not be deemed to have a PE, However, when the activities of such, a broker /agent are almost devoted wholly on behalf of that enterprise, then the agent will not be considered to have an independent status within the meaning of Article.

IT(IT)A No.86/Bang/2023 Landmark Retail Investment Co. LLC, Bangalore Page 8 of 9 4.5 If we read clause (2)(i) of Article 5 of the DTAA, then it is clear that for the purpose of service PE, the following ingredients are required to exist :

(i) That the enterprise furnishing services including consultancy services of the other contracting state;

(ii) The said services were; furnished through the 'employees or other personnel in the other contracting State;

(iii) Such activities continued for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period.

4.6 In order to make out a case of service PE, the necessary ingredients of Article-5(2)(i) needs to be established. There is no dispute that Shri Narayanan, the employee of assessee was providing services to “LIPL” and it is also an admitted fact that there is no agreement between the Indian company and the assessee for such services being rendered by the employee of the assessee. It is necessary to bring out on record the basis on which the services were rendered, the nature of services rendered by Shri Narayanan and the manner in which the services were rendered based on evidences, communications and compliances that may have been carried out in the process. In the interest of justice, we remit this issue to the ld. CIT(A) to verify the above facts vis-à-vis the requirements under Article 5(2)(i) and then to decide the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard must be granted to the assessee.

Accordingly, the grounds raised by assessee stands allowed for statistical purposes.

IT(IT)A No.86/Bang/2023 Landmark Retail Investment Co. LLC, Bangalore Page 9 of 9

5, In the result, assessee’s appeal is allowed for statistical purposes.

Order pronounced in the open court on 31st Aug, 2023

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 31st Aug, 2023. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.