SANDISK INTERNATIONAL LIMITED,IRELAND vs. ASSISTANT COMMISSIONER OF INCOME TAX, (INTERNATIONAL TAXATION), CIRCLE-2(1), BENGALURU

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ITITA 766/BANG/2022Status: DisposedITAT Bangalore25 August 2023AY 2015-1612 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the assessee does not have a Permanent Establishment (PE) in India. For AY 2017-18, the ground regarding the non-issuance of a notice under section 143(2) was rejected as it was not pressed. Regarding the PE issue, the Tribunal found that the Revenue failed to establish with credible evidence that SanDisk India habitually exercised the authority to conclude contracts on behalf of the assessee. The inter-company agreement explicitly denied such authority, and no evidence was presented by the Revenue to the contrary. The Tribunal also noted that purchase orders were placed by third-party distributors directly with the assessee, and any receipt of these orders by SanDisk India was merely for facilitation. The Tribunal distinguished the Jebon Corporation case relied upon by the Revenue. Consequently, the addition made by the AO for AY 2017-18 was deleted, and the appeal for this year was partly allowed. For Assessment Years 2012-13 to 2016-17, the facts were identical, and thus, the appeals were allowed.

What were the facts?

The assessee, M/s. SanDisk International Ltd., an Irish company, is appealing against final assessment orders for Assessment Years 2012-13 to 2017-18. The Revenue, represented by the Assistant Commissioner of Income Tax, initiated reassessment proceedings based on a survey at SanDisk India Device Design Centre Private Limited ('SanDisk India'). The survey indicated that SanDisk India's activities, under a market research and support services agreement with the assessee, extended beyond the agreement's scope. The Assessing Officer (AO) concluded that SanDisk India constituted an agency Permanent Establishment (PE) in India, leading to an addition of Rs. 27,26,12,355/- for AY 2017-18. The Dispute Resolution Panel (DRP) concurred with the AO. For AY 2017-18, the assessee also raised a ground regarding the non-issuance of a notice under section 143(2), which was not pressed.

What were the issues?

1. Whether SanDisk India's marketing support services constitute an agency PE for the assessee in India under Article 5(5) of the India-Ireland Double Taxation Avoidance Agreement (DTAA), considering the assessee's contention that SanDisk India merely provides support and does not conclude contracts, while the Revenue argues SanDisk India is fully accountable for sales activities. 2. Whether, assuming an agency PE exists, the attribution of profits to India is justified, given the assessee's argument that an arm's length remuneration to the Indian agent extinguishes further profit attribution, and the AO's alleged failure to provide a basis for distribution and administrative costs. Assessee's arguments: SanDisk India is prohibited from negotiating and concluding contracts; it only provides marketing support, with the assessee directly involved in price and contract negotiations. Sales are made through third-party distributors. Statements of SanDisk India employees align with permitted activities. Reliance is placed on the case of Net App B.V. for similar facts where no PE was found. Revenue's arguments: Based on employee statements during a survey, SanDisk India is fully accountable for the assessee's sales activities in India, creating an agency PE. The revenue relied on the judgment of the Hon'ble Karnataka High Court in Jebon Corporation, which was distinguished by the Tribunal.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 147,Section 144C(13),Section 9(1)(i),Section 148,Section 143(2)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “B” BENCH : BANGALORE

Before: SHRI GEORGE GEORGE K & SHRI LAXMI PRASAD SAHU

For Appellant: Shri. Ajay Rotti, CA
For Respondent: Shri. Sunil Kumar Singh, CIT-2(DR), ITAT, Bengaluru
Hearing: 10.08.2023Pronounced: 25.08.2023

Per Bench :

These appeals at the instance of the assessee are directed against six Final Assessment Orders passed under section 143(3) r.w.s. 147 r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) (all orders are dated 08.07.2022). The relevant Assessment Years are 2012-13 to 2017-18.

2.

Common issues are raised in these appeals; hence, they were heard together and are being disposed off by this consolidated order.

3.

Identical grounds are raised for all these Assessment Years except for Assessment Year 2017-18. For the Assessment Year 2017-18, assessee has raised one additional issue vide ground No.2. The issue raised in ground No.2

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for Assessment Year 2017-18 is that reassessment proceedings is bad in law for non-issuance of notice under section 143(2) of the Act. However, during the course of hearing, the learned AR did not press for adjudication ground No.2, hence the same is rejected. The effective grounds and the sub-grounds are with regard to the issue whether there is Permanent Establishment (PE) for the assessee in India and the attribution of profits. The ground relating to the above two issues concerning Assessment Year 2017-18 reads as follows:

2.

Permanent Establishment 3.1. The Hon'ble Panel erred in upholding the action of the Assistant Commissioner of Income Tax International Taxation. Circle — 2(1) ['the Learned Assessing officer' or 'the Ld. A01 in concluding that the marketing support services rendered by SanDisk India Device Design Centre Private Limited ('SanDisk India') constitutes an agency PE of the Appellant in India. 3.2. The Ld. AO erred in law and on facts in stating that there is a business connection in terms of Section 9(1)(i) of the Act without appreciating that Explanation 2 to Section 9(1)(i) of the Act has to be interpreted as a clarification and not an enlargement of the scope of Section 9 itself. 3.3. The Hon'ble Panel erred in facts by upholding the action of the Ld. AO, in stating that the sales and marketing team of SanDisk India was involved in every stage from product development to the final delivery of the product and that there is no role that the Appellant plays in the entire sale activity. 3.4. The Ld. AO erred in facts in stating that the marketing support service team of SanDisk India is involved in negotiating prices for the products sold to customers and in conclusion of contracts. 3.5. The Ld. AO erred in facts in stating that targets provided to the marketing support service team of SanDisk India indicates that actual sale is being done by SanDisk India on behalf of the Appellant. 3.6. The Ld. AO erred in law and on facts by considering the concept of 'common control' in determining the agency PE as per the provisions of the India-Ireland Double Taxation Avoidance Agreement. 3.7. The Ld. AO erred in law and on facts in stating that Service PE could also be applicable given that the distribution cost as appearing in the Financial Statements of the Appellant includes travel cost of marketing personnel. 3.8. Without prejudice to all other grounds. that the Appellant does not have a PE in India, the Ld. AO erred in law and on facts in disregarding the fact once the marketing support services transaction of SanDisk India is at arm's length, then no further attribution could be made as a PE

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3.

Margin to be attributed 4.1. Without prejudice to all other grounds raised, the Hon'ble Panel erred upholding the action of the Ld. AO by not considering the contentions of the Appellant with respect to attribution. 4.2. Without prejudice all other grounds raised, the Ld. AO erred in not considering that an Indian agent being remunerated at an arms' length extinguishes any further profits to be attributed to the agency PE and hence. no amount should have been brought to tax in the hands of the Appellant. 4.3. Without prejudice to all other grounds raised, the Ld. AO erred in not providing the basis of arriving at distribution and administrative costs. 4.4. Without prejudice to all other grounds raised, the Ld. AO erred in deducting administrative costs incorrectly while computing the taxable income of the Appellant. 4. The facts pertaining to Assessment Year 2017-18 are as follows:

The assessee is a company incorporated in Ireland and is a tax resident of Ireland. The assessee has entered into a market research and support services agreement with San Disk India Device Design Centre Private Limited (`SanDisk India'), dated 18.12.2015 (with effect from 01.04.2015). Under the aforesaid agreement, SanDisk India assists the assessee in promoting its products by, inter alia, conducting market research, gathering data, and performing other support services.

5.

A survey was conducted in the premises of SanDisk India on 16th and 17th of January, 2019. During the said survey, a number of documents and e- mails were verified and statements of employees of SanDisk India were recorded. This survey, according to the Revenue, revealed that the nature of activities performed by SanDisk India which were beyond what was prescribed under the aforesaid agreement. This led to a formation of belief by the Assessing Officer of the assessee that income chargeable to tax has escaped assessment for the year under consideration. A notice under section 148 of the Act was issued on 28.03.2019. The assessee filed a Nil return of income on 12.02.2021. During the course of assessment proceedings, the assessee contended that SanDisk India

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does not engage in concluding or securing orders in India on behalf of it and is merely involved in provision of marketing support services in India. The Assessing Officer, on the contrary, relied on the statements of employees of SanDisk India recorded in the course of survey. It was inferred from such statements that SanDisk India is fully accountable for the assessee’s sales activities in India. The Assessing Officer ultimately concluded that the activities of SanDisk India create an 'Agency permanent establishment' and thus the appropriate portion of business profits are liable to be taxed in India. Accordingly, adopting the global gross profit rate of 4.19% and after reducing admissible expenditure, a sum of Rs.27,26,12,355/- was brought to tax in the draft assessment order dated 29.09.2021.

6.

The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP passed its directions on 10.06.2022 concurring with the findings of the Assessing Officer in the draft Assessment Order. The impugned Final Assessment Order was passed by the Assessing Officer on 08.07.2022 making the aforesaid addition. 7. Aggrieved by the said Final Assessment Order, the assessee has filed the present appeal before the Tribunal. The learned authorized representative highlighted that SanDisk India is prohibited from negotiating, concluding a contract as mentioned in clause 1.2 of the agreement with the assessee. It was submitted that SanDisk India merely provides marketing support services and once a potential customer is interested in SanDisk products, the assessee would get involved in terms of price negotiations, contract negotiation and contract conclusions. It was thus submitted that activities of SanDisk India do not create an agency PE of the assessee in India. The process of procuring orders was explained whereby SanDisk India communicates with potential customers in order to educate them of SanDisk products, via presentations, brochures, etc., once a user opts to purchase a product, the third-party distributors place order with the assessee. It was submitted that all sales of SanDisk products in India are undertaken through third-party distributors. The copies of sample purchaser

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orders placed by distributors on the assessee were brought on record. With regard to the statements recorded of employees of SanDisk India, the learned AR submitted that such statements are in consonance with the permitted activities mentioned in the inter-company agreement. The learned AR took us through the statements made by each employee and mapped them to the various permitted activities under the agreement. In essence, it was submitted that the functions performed by SanDisk India as per the agreement are in line with the statements recorded of the employees. It was also submitted that SanDisk India earns a majority (90%) of its revenue from software development services and information technology enabled services rendered to its other associated enterprises. It was thus submitted that SanDisk India is legally and economically independent. The learned AR placed reliance on the decision in the case of Net App B.V v DCIT (2017) 78 taxmann.com 97 (Del) and in the case of Swiss Re- insurance company Ltd v DDIT [ITA No. 1667/Mum/2014, order dated 13-02-2015].

8.

The learned DR relied on the findings of the Assessing Officer in the final assessment order passed. The learned DR took us through various portions in the final assessment order highlighting the correctness of the conclusion reached by the Assessing Officer. The learned DR also relied upon the judgment of the Hon’ble Karnataka High Court in Jebon Corporation India v CIT reported in (2012) 10 taxmann.com 119 (Kar).

9.

We have heard the rival submissions and perused the material on record. The entire dispute arises on whether the operations of SanDisk India constitute a permanent establishment of the assessee in India. Section 9 of the Act deems certain incomes to accrue or arise in India. One of them include income arising through or from any business connection in India. Explanation 2 to section 9 (as prevalent during the year under consideration) clarified the scope of business connection and the same reads as under:

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Explanation 2.—For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident,— (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non- resident/ or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly .for the non- resident or for that nonresident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:

10.

The definition of permanent establishment under Article 6 of the India- Ireland Treaty is similar to the above extracted definition under the Act. The agreement between SanDisk India and the assessee prohibits the former entity from negotiating, concluding, signing, executing or in any other manner, accepting sales or other contracts in the name of or on behalf of the latter entity. SanDisk India does not or more particularly, cannot engage in securing, negotiating or concluding contracts on behalf of the assessee. It is also evident from the agreement and the statements recorded from employee of SanDisk India (which we shall discuss subsequently) that the orders are secured by the independent distributors and not by the SanDisk India. Therefore, clauses (a) and (c) of Explanation 2 above are not attracted thereby. The Assessing Officer in the final assessment order, at page 47, has recorded that SanDisk India does not procure goods, neither delivers them and nor collect the payments. This will eliminate the applicability of clause (b) of Explanation 2 also.

11.

Therefore, at first appearance, it does not reveal that the activities of SanDisk India create a permanent establishment of the assessee in India. The Assessing Officer has extensively and exclusively relied on the statements

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recorded of employees of SanDisk India, during the course of survey. The Assessing Officer has drawn certain inferences from such statements to buttress his belief that SanDisk India is fully accountable for sales activities of the assessee in India. Apart from the above, there is no other cogent material brought on record to support his conclusion. On the contrary, the learned AR has sought to demonstrate that the statements of employees actually reflect the permitted activities under the agreement. The decision therefore hinges on determining whose inference of the statements recorded, seems more acceptable. In this regard, we deem it appropriate to extract certain excerpts from the statements recorded of various employees of SanDisk India, as under: Shri Vivek Tyagi, Director, Sales, SanDisk India Excerpt from Answer to Q10. — "100% of our enterprise product sales in Indian market is executed via our global distributors and the agreement with these distributors is executed by WDT Inc." Excerpt from Answer to Q15. — "In this mail-trail, Acer India has reached out to SanDisk India asking for price and delivery of one of the WD hard disk drive. Our team has introduced our distributor Tech Data who have provided the quotes and concluded the order." Excerpt from Answer to Q16. — "In this case we have directly replied to Acer query on availability of our product, however the quotation and purchase order still has been done through Tech Data as evident from the same mail-trail." Shri Harsha Nagaraj, Business Development Manager, SanDisk India Excerpt from Answer to Q2. — "My role and responsibility in SanDisk India include identifying customers through the leads generated through Seminars held by Gartner/IDC, qualify the leads, and recommend customer the right product and Technology offered by WDT, and request appointed distributor to quote on behalf of WDT to the customer to close on our behalf"

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Excerpt from Answer to Q7. — "I engaged with the customer to identify the right product specification, and communicated the customer Target price to US business unit, who then sent the price cleared which was then communicated to our Distributor to send quote and close the business with Flipkart." Shri Khalid Wani, Director Business Development, SanDisk India Excerpt from Answer to Q8. — "The marketing team attend the conferences and give representation of the SanDisk/Western Digital products."

Excerpt from Answer to Q10. — "100% of our retail market product sales in Indian market is executed via our distributors and the agreement with these distributors is executed by WDT Inc."

Excerpt from Answer to Q14. — "If a potential reseller or a channel partner shows interest in our product, the sales team works on engaging them with our national distributors." Smt Veena Venkatesh, Sales-Operation Account Management, SanDisk India Excerpt from Answer to Q14. — "For SanDisk orders, distributors will address it to the Sales and account Management Team for the new orders copying HCL team." Mr. Leo Jose, Staff Engineer, Field Application Engineer, SanDisk The Assessing Officer highlights that the role of the aforementioned person is to interact with potential customers thereby helping the sales team achieve their targets. However, it is relevant to note the following question and its corresponding answer to get a better perspective. Q10. How the pricing of the SanDisk products are done? Is there any negotiation process involved in effecting Sales. Ans. I am not aware about these things as these are taken care by Sales Team which is headed by Mr. Vivek Tyagi.

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Therefore, it becomes evident that the aforesaid employee is not aware of who actually negotiates and concludes a contract. Shri Jaganathan Chelliah, Director Marketing, SanDisk India Excerpt from Answer to Q.15 — "As per my understanding the distributor's sales team engages with the interested customers and enters into a direct negotiation to finalize the sale or purchase."

12.

On a perusal of all the above statements, it is clear that sales of the assessee in India are effected through its distributors. The sales and marketing team of SanDisk India engage in educating the customers about SanDisk products. Once a customer is interested in a product, the distributors of the assessee are notified who would then negotiate the price and place the purchase order with the assessee. Therefore, it is not forthcoming from the statements recorded that SanDisk is totally responsible for concluding contracts on behalf of the assessee. As mentioned above, the Assessing Officer has not brought on record any other material to support his case. Therefore, reliance on the statements of employees of SanDisk India are not conclusive of existence of permanent establishment of the assessee in India.

13.

We further draw support from the decision in the case of Net App B.V (supra) wherein under similar facts and circumstances, the Tribunal concluded that the Indian company engaged in providing marketing support services with no authority to conclude contracts, did not constitute a permanent establishment of the foreign entity. The Tribunal also noted the fact that the Revenue had failed to establish that the Indian entity actually concluded contracts on behalf of the foreign entity. The relevant observations of the Tribunal are as follows:

“There is no evidence found by the Ld. assessing officer during the year that Indian company has concluded any contracts on behalf of appellant. For holding permanent establishment in terms of article 5(5) of the double taxation avoidance agreement, it is imperative that the agent has and is habitually exercising that authority to conclude contracts on behalf of

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appellant. According to us, Revenue has failed to establish with credible evidence that such authority is vested in Indian company and Indian company habitually exercises that authority. The contract placed before us emphatically denies any such authority with the agent and further in absence of any evidence placed before us by revenue, this argument of revenue does not find support from us. Therefore we are of the opinion that according to article 5(5) of double taxation avoidance agreement, assessee does not have permanent establishment in India. For an agent to be of an independent status, (1) the agent must be legally independent of the principal, (2) the agent must be economically independent of the principal; and (3) the agent must represent the principal in the ordinary course of business. Legal Independence of the agent must be tested on the line of agent's obligation. In the present case, the appellant has not brought it on record that the activities of the agents are subject to detailed instructions or comprehensive control. The only reason is that the company is managed by common directors. Further mere persuasive control is not enough. This sole fact in absence of other vital facts, which may depend on the facts of the each case, revenue should establish the comprehensive control over the entity. Further the income stream of the ICO itself suggests that its revenue is not wholly or substantially derived from the activities of the appellant but from other AEs also. It was submitted that 85% to 90 % of the revenue for the year of ICo is from IT/ ITEs services and not from marketing support services. Further the risk matrix of the Ico is also not brought on record by the Ld AO . Further, it is not the case of the revenue that ICO is performing wholly and exclusively for the assessee. Therefore, in absence of any evidence of economic and legal dependence of the agent the argument of revenue cannot be sustained. With respect to the purchase orders the Indian entity do not solicit or accept purchase orders on behalf of the appellant but the purchase orders raised on the appellant are through distributors. The receipt of the purchase orders by the Indian entity is only for facilitation for onward transmission to the appellant. In this aspect, the revenue has totally ignored the functions performed for getting purchase orders by the distributors. Even otherwise this function alone do not constitute permanent establishment under the provisions of the double taxation avoidance agreement.

14.

The learned DR has relied on the judgment of the Hon’ble Karnataka High Court in Jebon Corporation (supra). As rightly pointed out by the learned

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AR, this decision is not applicable in the present case as it has not dealt with the concept of agency PE. Further, this decision has also been distinguished by the Mumbai Bench of the Tribunal in Swiss re-insurance company (supra) for similar reasons. In view of the above, the addition made by the Assessing Officer in the final assessment order deserves to be deleted. Therefore, appeal filed by assessee for Assessment Year 2017-18 is partly allowed.

15.

Since facts pertaining to Assessment Years 2012-13 to 2016-17 are identical to the facts which has been discussed for Assessment Year 2017-18, our conclusion / finding in para 9 to 14 will apply mutatis mutandis for these Assessment Years also.

16.

Before concluding, it is to be mentioned that the explanation 2 to section 9(1)(i) of the Act was amended vide Finance Act, 2018, w.e.f. 01.04.2019. The amended clause (a) to Explanation (2) to section 9(1)(i) of the Act reads as under:

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts are – (i)……. (ii)…… (iii)…..

17.

Vide the above amendment, the following actions / authority could constitute agency business connection – (a) has and habitually exercises in India an authority to conclude contract on behalf of non- resident or (b) Habitually concludes contracts or (c) Habitually play the principal role leading to conclusion of contracts by that non-resident (emphasis supplied)

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18.

Similar amendments are also proposed to DTAA through MLI, which is not effective for the years under consideration. Even otherwise, it is settled principle that amendment to Act cannot be directly imported to the treaty, unless treaty itself is modified through protocol or MLI.

19.

In the result, appeals filed by the assessee for Assessment Years 2012-13 to 2016-17 are allowed and appeal filed for Assessment Year 2017-18 is partly allowed.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- (LAXMI PRASAD SAHU) (GEORGE GEORGE K) Accountant Member Vice President

Bangalore. Dated: 25.08.2023. /NS/*

Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, 6. DRP Bangalore 7. Guard file By order

Assistant Registrar, ITAT, Bangalore.

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