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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
ORDER PER GAGAN GOYAL, A.M: This appeal by the assessee is directed against the order of ACIT(IT-4(2)(2), Mumbai, [hereinafter referred to as [‘ACIT’] dated 24.09.2018 passed under section 143(3) read with section 144(C)(13) of the Income Tax Act, 1961 (hereinafter referred to as [‘the Act’] for the Assessment Year (AY) 2015-16. The assessee has raised the following grounds of appeal:
-S.R. Technics Switzerland Limited. Sr.No. Grounds of appeal Tax dispute amount (in Rs.)
1. On the facts and in the circumstances of the - case and in law. the Learned Assessing Officer (Ld. AO) and Hon'ble Dispute Resolution Panel (Hon'ble DRP) erred in concluding that the Liaison Office (LO) of the Appellant constitutes a business connection of Appellant in India as per provisions of Section 9(1)(1) of the Income- tax Act, 1961 (IT Act).
2. On the facts and in the circumstances of the - case and in law, the Ld. AO and Hon'ble DRP erred in concluding that the Appellant has a Permanent Establishment (PE) in India under Article 5 of the India - Switzerland Double Taxation Avoidance Agreement (DTAA) and thereby erred in charging to tax, the business profits of the Appellant in India under Article 7 of the India - Switzerland DTAA.
3. On the facts and in the circumstances of the - case and in law, the learned AO and Hon'ble DRP erred in concluding that the Appellant has a Service PE in India under Article 5(2)(1) of the India - Switzerland DTAA.
4. On the facts and in the circumstances of the - case and in law, the learned AO and Hon'ble DRP erred in concluding that the Appellant has an Agency PE in India under Article 5(5) of the India- Switzerland DTAA.
5. On the facts and circumstances of the case and Rs. 66,86,211 in law, the learned AO and Hon'ble DRP erred in arbitrarily computing the business income at Rs. 1,50,75,988 from repair, maintenance and integrated component services (including Single Component Services) activities by estimating an adhoc profit rate of 10% and thereafter arbitrarily attributing 50% of income to the alleged PE.
-S.R. Technics Switzerland Limited.
6. On the facts and circumstances of the case and Rs. 10,46,424/- in law, the Ld. AO erred in computing consequential interest under Section 234B of the IT Act.
7. On the facts and circumstances of the case and Rs. 32,89,584/- in law, the Ld. AO erred in computing consequential interest under Section 234B of the IT Act. 8. On the facts and circumstances of the case and Rs. 23,068/- in law, the Ld. AO erred in computing interest under Section 234C of the IT Act of Rs. 4, 78,770 instead of Rs. 4, 55,702 as computed on returned income. 9. On the facts and circumstances of the case and Rs. 90,240/- in law, the Ld. AO erred in computing tax liability, without appreciating the fact that the Appellant has not received any refund of Rs. 90,240 nor has it received any intimation under Section 245 of IT Act for adjustment of refund. 10. On the facts and circumstances of the case and Rs. 6,317/- in law, the Ld. AO erred in levying interest under Section 234D of the IT Act, without appreciating the fact that the Appellant has not received any refund nor has it received any intimation under Section 245 of IT Act for adjustment of refund. 11. On the facts and circumstances of the case and - in law, the Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the IT Act. Total tax effect (see note below) Rs. 1,11,41,845/-
Brief facts of the case are that this appeal filed by the assessee, incorporated in Switzerland. The assessee is engaged in business of maintenance, repair and overhaul for aircrafts, engines and components. The assessee also -S.R. Technics Switzerland Limited. provides components and spare engines on lease. The assessee’s principle place of business is Zurich, Switzerland. The assessee filed its return of income electronically declaring total income of Rs. 9, 23, 94,201/- on 31-03-2017. Assessee’s case was assessed u/s 143(3) r.w.s. 144C (13) on 24-09-2018 at Rs. 10, 53, 15,412/-. Aggrieved with this order of AO, assessee preferred present appeal before us.
3. During the year assessee had following three lines of revenues stream as under:
Types of Contract Integrated component series Name of the Lease Charges Repairs and including single Party Maintenance component including services piece repairs Air India Ltd 2,67,546 11,27,08,962 Air India Charters 1,09,53,301 21,11,989 Ltd. Spice Jet Ltd. 09,02,39,424 16,52,57,027 99,69,674 Jet Airways Ltd 2,51,262 Total 09,02,39,424 17,64,77,874 12,50,41,887
Out of above streams of the revenue, assessee offered only lease charges to tax in India as royalty @10% on gross basis as per Article 12(2) of the India- Switzerland DTAA. Rest of the streams of revenue from repairs and maintenance; and form integrated component services, have not been offered to tax, by claiming benefit of DTAA saying that the balance services are not in the nature of technical services and hence neither taxable under section 9(1) (vii) of the Income -S.R. Technics Switzerland Limited.
Tax Act, 1961 nor Article 12 the DTAA. It also claims that it does not have a Permanent Establishment in India.
5. However, AO was of the opinion that assessee has a Liaison Office (LO) as a Service PE or Dependent Agency Permanent Establishment (DAPE), there is no option but to perforce resort to estimation of the taxable profits of the assessee as per Rule 10 of the Income Tax Rules. The AO held Rule 10(ii) will not be applicable in the instant case since the global profits and gains of the assessee have not been computed in accordance with the provisions of the Indian Income Tax Act. The income of the assessee is, therefore, liable to be computed as per Rule 10(i) read with rule 10(iii) of the Income Tax Rules, which provides that income of the assessee may be determined at a reasonable percentage of the turnover. As per global profitability details submitted by the assessee, it is observed that during year end December 2014 and December 2015, the average profit percentage is 2.645. However, the global profit and loss statement submitted by the assessee does not give a break up of profit region wise. Based on Rule 10 of the Income-Tax Rules, 1962, 10% is considered as an appropriate profit percentage. Further, since actual MRO operations have been carried out in the respective country of residence Switzerland, it is also reasonable to estimate that the residence and source country (India) have a 50:50 right over the income so received by the assessee. Hence, 50% of income is attributable to India. 10% of that is profit chargeable u/s 9(1) (i) of the Income Tax Act, 1961. The receipts of the assessee from repairs and maintenance and ICS/SCS contract total to Rs. 30,15,19,760/-. Profits to be attributed to the PE of assessee in India = Rs. 30, 15, 19,750/- * 5% = Rs. 1, 50, 75,988/-.
-S.R. Technics Switzerland Limited.
6. Against, this order of AO passed u/s 143(3) r.w.s. 144C (13) of the IT Act, assessee preferred this present appeal before us. We have gone through the directions of DRP-2, submissions of the assessee and the order of AO. We observe that assessee has a subsidiary company in Switzerland, i.e. SR Techniques Management Ltd., Zurich, Switzerland. This subsidiary has a Liaison Office (LO) in India. The LO was permitted to be set up by the RBI. The AO held that the LO was subsidiary constitute a PE of the assessee in India in terms of Article 5(2) (1) (Service PE) and Article 5(5) (Agency PE of the India-Switzerland DTAA).
In our observation following facts that emerge out of various orders and submissions of the assessee are as under: a. As per the RBI approval letter the LO was allowed to Act only as communication channel with parties in India (Vide page no. 199 to 201 of the paper book). This approval was further renewed vide letter dated 04-12-2012. b. This liaison office pertains to the subsidiary namely M/s. SR Techniques Management Ltd. and not to the assessee c. As per the approval of the RBI LO of the subsidiary can perform following activities (i) Representing the parent company/group companies in India (ii) Promoting export/import from/to India (iii) Promoting technical/financial collaborations between parent/group companies and companies in India. (iv) Acting as a communication channel between the parent company and Indian companies.
The assessee’s subsidiary in India i.e. SR Technics India Private Limited has not carried any business activities/operations in India. It is a dormant company since incorporation and does not have any employees. This is evident from the fact that its name was struck of the Companies Register in India by the Registrar.
-S.R. Technics Switzerland Limited.
We are further reproducing a table narrating the contentions of the AO and assessee’s rebuttal thereon as under: Sr. AO’s contentions Assessee’s rebuttal No.
The AO has stated that the assessee At the outset, it is submitted that has a LO with the address at B-206, the LO is not of the assessee, but of City-point, AK Road, Andheri (E), its subsidiary company, SRT ML. For Mumbai 400059 in India as reasons the Reasons already stated above, already stated above, the LO the LO does not result in any tax mentioned on its website itself. The obligations of the assessee for its AO observed that "it is surprising business income earned from Indian that the assessee has not mentioned customers. Nevertheless, upon a even an iota of information about specific show cause, the assessee it’s LO in India". sought the details and promptly provided it to the AO for the purpose of the assessment proceedings.
2. The LO belongs to the assessee and The LO provides coordination and it renders services over and above communication activities. The LO is co- ordination and communication neither authorised nor has services. As such the LO is actively negotiated/conclusion contracts involved in the business activities with Indian customers. These facts such as negotiating and entering are also supported as per following into contracts for and on behalf of regulatory documents and the assessee in India. provisions, which the LO is in compliance of * RBI approval letter dated 10 January 2007 * Extension letter issued by the authorised dealer bank dated 4 December 2012 and * As per Annexure C of the Master Directions under the list of permitted activities for a LO in India.
The management of SRT ML is The AO has ignored the facts of case subservient to the management of under consideration which is that the assessee in India. Hence, LO has the LO is merely a communication -S.R. Technics Switzerland Limited.
an automatic obligation towards the channel or coordinator between the assessee in all its business activities assessee in Switzerland and the in India, even though it may belong Indian airline companies. The LO to separate legal entity. SRT ML acts does not carry out any repair, as a legal buffer between the maintenance and ICS/SCS activities assessee and the LO to shield it from in India. Further. LO does not any direct tax impact. conclude any contract on behalf of the assessee in India. Based on these facts, the LO does not create any PE of the assessee in India and hence, there is no tax liability as such.
4. Based on the perusal of financial The AO has erred in referring to the statement of LO, the AO in Para 6 of amount of expenses incurred by the the impugned draft assessment LO to conclude that LO does not order has stated the following: merely act as a communication channel/render coordination * It is reasonably clear that the LO is services. It is submitted that the incurring huge expenses on account quantum of expenses incurred of salaries, motor car and travelling cannot be a criterion to decide the and conveyance. Such expenses do nature of activities carried by the LO not appear to be solely incurred for for the assessee. It is submitted that the purpose of mere coordination/ the expenses incurred by the LO are communication activities, which can for their daily business be performed even without making considerations and that they are or incurring such expenses. incurred only for the purpose of carrying communication/ * Average salary of the employees of coordination function for the LO is about Rs. 4, 00,000/- each assessee. month. This figure is absurdly high for any employee who is merely As submitted earlier, the activities doing coordination/communication conducted by employees of LO are activity (or rather just acting like a communication/coordination post office). Paying high amount of function between the assessee and salaries implies that the assessee is Indian airline companies. To conduct extracting professional services out these communication activities, the of the employees who are well LO employs personnel with industry qualified and thereby paying them specific knowledge. Considering the reasonably handsome amount of business requirements and the salaries. knowledge and skills possessed by the employees, the salary paid to * The high amount of motor car and the employees of LO are in one with travelling expenses also leads to a the market for the maintenance, conclusion that the assessee's LO is repair and overhaul industry. acting in the area of business -S.R. Technics Switzerland Limited.
development and day-to-day It is submitted that the employees of activities for conducting the business LO are neither authorised to and not in India, rather than just being a take any (1) commercial decisions, communication channel. (ii) negotiations or (iii) conclusion of contracts with Indian airline * The cost on communication companies. Such activities are charges is very low at Rs. 3, 21,548/- performed entirely from outside which is about Rs. 27,000 every India, i.e., in Zurich. Thus, the month. If the LO was a mere employees of LO assist the assessee communication office, then its in undertaking marketing activities communication expenses should in India. No evidence has been have been the highest, as opposed brought on record by the AO to to salary or travelling and motor car. support that the LO is not merely communication/ coordination office. * The LO is completely dependent on the assessee for its financial It is submitted that the requirements. communication with the assessee is performed by the employees of the Thus, the AO has held that the LO LO through telephone calls/emails does not merely act as a for which the assessee has incurred communication office. such expense. The cost of such expenses is as levied by the third party vendors and is as per the prevailing market standards for availing such communication services. Hence, a simple comparison of communication and salary not appropriate. As per the regulatory provisions governing LO, the LO is required to meet all its expenses by way of inward remittance from its head office. The LO is prohibited from conducting any income generating activity and as such, does not have any external revenues as evident from the financial statements of the LO on record. Hence, to this extent, the LO is necessarily required to be dependent upon its head office, which fact by no means results in any tax implication for revenues earned by the assessee.
-S.R. Technics Switzerland Limited.
The assessee provides MRO services As discussed above and as is evident to the clients in India through LO. from various clauses of the contract placed on record, the MRO services are rendered from outside India, i.e. in Zurich. For example, we wish to draw your attention to recital A (page 3). Para 2.2 (page 7), Para 1.6- 3 (page 23). A-12.1 (page 25) and A- 12.3 (page 25) of the Repairs and Maintenance contract which clearly provide that the repair activities are performed in Zurich. A similar fact is also clear from Para 1 (page 4), Para 14.6 (page 12), Para A-4.1 (page 22) and Para C-8.5-5 (page 38) of the ICS contract. These contracts are filed in assessment proceedings. At the cost of repetition it is clarified that the Assessee does not have any employees/ assets/tools/facility in India from or through which the repair activities under the contract can be performed.
Considering the business activities The assessee submits that it has not carried by the LO, being market sent any employees to India to intelligence and administrative render technical services to Indian support, the learned AO held that airline companies. As such the the LO renders technical services to assessee is not rendering any the assessee under clause 5(2) (1) of technical services in India. Further, India Switzerland DTAA and thus as per the provisions of Article 5(2) creates a Service PE of the assessee (1) of India Switzerland DTAA, a in India. Service PE is constituted if the assessee furnishes services and not when the services are rendered by the LO to assessee as erroneously held by the AO. Thus, the question of existence of Service PE under Article 5(2) (1) of India Switzerland DTAA does not arise. 7. LO performs all core activities on All the activities relating LO behalf of the assessee in India and submission of bids/responses to the final entry into contracts though Indian airline companies, undertaken de facto by the assessee negotiations relating to contracts, on paper, in reality, is based on the discussions on commercial -S.R. Technics Switzerland Limited.
vital inputs and functions performed considerations, conclusion of by LO in India and there hardly contract price, etc., which are the remains any further critical function key activities of any business are to be performed outside India carried by the assessee from except for signing the contract. The Switzerland only. The role of LO's learned AO has also held that the LO employee is merely limited to exercises indirect authority to provision of tender/RFP related negotiate and enter into a contract information to the assessee, that too to or on behalf of the assessee and based on publicly available the LO habitually secures orders for information. No evidence has been or on behalf of the assessee. brought on record by the AO to demonstrate that the contracts are executed by the LO, whereas the facts and the documents placed on record clearly prove, substantiate the otherwise correct position of the assessee.
The facts discussed in the table reproduced (supra) has to be read with the fact that the assessee was adhering to the conditions imposed by the RBI for running a LO, and the RBI had accepted the functioning of the assessee’s LO for over the years, points out to the fact that the assessee has complied to the conditions, one of which was that it could not carry on any business or trading activity in the LO.
The activities carried out by the employees of LO are merely communication/coordination function. It is settled position that such support activities fall within the exclusionary provisions under Article 5(3) (d)/5(3)(e) of India Switzerland DTAA, i.e. they are preparatory/auxiliary in nature. The relevant provisions of Article 5(3) of India Switzerland DTAA are reproduced below for ready reference:
-S.R. Technics Switzerland Limited.
The term "permanent establishment" shall not be deemed to include: (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display: (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade or business of the enterprise; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character..." (Emphasis supplied) In light of the above and the judicial precedents (which are binding and squarely applicable to the facts of case) discussed in detail below, it is observed that the communication/coordination activity as done by the employees of the LO fall within the preparatory/auxiliary activities and hence, the LO does not constitute a PE of the assessee in India. In connection with the above observations we place reliance on the principles arising from following judicial precedents, which are squarely applicable to facts of case: U.A.E. Exchange Centre Ltd. vs. Union of India [313 ITR 94 (Delhi HC)] DIT vs. Mitsui & Co. [84 taxmann.com 3 (Delhi HC)] -S.R. Technics Switzerland Limited.
Columbia Sportswear Company vs. DIT [235 Taxman 349 (Kar HC)] ADIT vs. J. Ray Mc Dermott Eastern Hemisphere Ltd. [180 TTJ 660 (Mumbai ITAT)] Analysis in facts of case In light of the above facts and legal submissions, we observe that the LO in India does not constitute PE in India under Article 5 of India Switzerland DTAA because: The LO does not constitute a fixed place through which business of assessee is carried out in India. Employees of the LO do not negotiate, finalise or discuss the mechanics of contracts including pricing with the assessee's customers. As such the employees of LO merely act as a communication link between the assessee and the airline companies. The LO did not carry any activity, beyond that permitted by the RBI. The activities carried by the LO are thus, preparatory (auxiliary) in nature. The activities/operations of the assessee in connection with the contracts are carried from outside India. Further, as per Article 5(7) of India Switzerland DTAA, merely because an Indian company in controlled by a Switzerland company or fact that Switzerland Company carries business in India, does not result in Indian company being considered as a PE of Switzerland Company in India. Thus, it is submitted that SRT India cannot be regarded as a PE of the assessee merely because it is controlled by the assessee or merely because the assessee carries on business activities in India.
11. In addition to above, we have gone through the sample engine repair and maintenance agreement and invoices thereto and sample integrated component solution agreement and invoices thereto. As submitted vide page no. 46 to 185 of -S.R. Technics Switzerland Limited.
Paper Book dated 10.02.2020. The relevant clauses of both the agreements are reproduced below to appreciate the factual matrix of the case as under: “Clause-2 vide page no. 56 of Paper Book of sample engine repair and maintenance agreement” 2.1 SR Technics shall perform services with respect to the Engines listed in the Indicative Fleet Plan as per Annex G (as may be revised by mutual agreement from time to time) as specified in the scope of services in Annex A on the terms of this Agreement. 2.2 SR Technics shall (a) perform the work in workshops at Zurich Airport or at other FAA & EASA approved location per MOE using appropriate tools and other equipment and (b) shall provide, inspect and calibrate all tooling and equipment required to accomplish the work. A-5 Engine maintenance, modification and repair SR Technics shall perform Engine maintenance in accordance with applicable manufactures standards, manuals and publications. These services shall include: Incoming inspection bore scope inspection and report of findings. Performance of as-received Engine test, if required or requested by Spice jet QEC removal, repair as necessary and reinstallation Engine and module disassembly, module and Engine reassembly Repair, replacement or exchange of Engine Parts Incorporation of modifications/performance of inspections to fulfil AD's Incorporation of OEM and Vendor SB's at Engine shop visit Engine Component bench test, overhaul and/or repair and incorporation of requested modifications during Engine shop visit Engine testing Preservation of the Engine (for 12 month)
-S.R. Technics Switzerland Limited.
Preparation for shipment including bore scope inspection Rates and charges: For the services of this clause shall be included in the fixed prices in Annex C. Note: Spice Jet shall be responsible for the on-wing maintenance, on-wing trouble shooting and trouble rectification, engine removal and installation and accomplishment of core water wash procedures as mutually agreed between the parties. A-6.3 Slot Availability Scheduled Shop Visits For scheduled shop visits the Engines shall be inducted in accordance with the mutually agreed engine removal plan, as per clause A-71, provided that the Engine arrives at SR Technics maintenance facility at Zurich Airport during the week previously agreed between Spice Jet and SR Technics. Unscheduled Shop Visits For unscheduled shop visits, SR Technics will do its utmost to induct the Engine into the shop as soon as possible but no later than 10 days and TAT will start no later than fifteen (15) calendar days after SR Technics has been notified by Spice Jet provided that Engines have arrived at SR Technics maintenance facility at Zurich Airport within the agreed time frame. A-7.2 Program management SR Technics nominates a dedicated account manager in Zurich to Spice jet who is the focal point for communication between the parties. The account manager shall be appointed for ensuring that all rework instructions are properly performed and to monitor all of Spice Jet interests within the overhaul shop. Following key responsibilities are related to this position: Ensures overall contract performance and acts as focal point to Spice Jet Responsible to issue and maintain the Procedure Reference Manual (PRM) that outlines all the procedures and process required to fulfil the contract Handles all contract related issues between Spice Jet and SR Technics -S.R. Technics Switzerland Limited.
Ensures service delivery with special focus on services that are not directly shop visit related (e.g. shop visit-, removal-and spare engine planning) Defines and drives continuous improvement initiatives Ensures transparency on shop visit performance and communicates event status: Tracks and records all elements that may affect timely engine redelivery Assess spare engine situation Provide recommendations for preventive maintenance actions based on EHM data and bore scope findings Follows-up on technical issues, changes in work scope supervises engine documentation including invoicing To follow up on any other requirement as per the agreement A-12 Delivery and Redelivery A-12.1 Delivery of the Engine from Spice Jet to SR Technics Spice Jet shall deliver the Engine FCA to respective pick up location on-time to meet the agreed shop induction date as per clause A-6.3 and SR Technics shall organize the transportation of the Engine from the respective pick up location to SR Technics maintenance facility at Zurich Airport, Switzerland The respective pick up location shall be any airport where Spice Jet is operating A-12.2 Redelivery of the Engine from SR Technics to Spice jet SR Technics shall organize the redelivery and Spice Jet shall accept the Engine CPT arrival at a suitable scheduled freighter destination as advised by Spice jet A-12.3 Delivery of documents and Engine Parts from Spice Jet to SR Technics Spice Jet shall deliver the documentation and if applicable Spice Jet supplied Engine Parts, DAP SR Technics maintenance facility at Zurich Airport. D-4 Logistics D-4.1 Preparation, packaging and transportation requirements Spice jet shall prepare any Engines removed for shipment to the SR Technics by (a) capping and plugging all openings of the Engine; (b) completely sealing the Engine with heavy gauge vinyl plastic; (c) using OEM recommended transportation stand (d) otherwise preparing the Engine in accordance with the CFM's specifications and -S.R. Technics Switzerland Limited. requirements relating to such transportation as stipulated by the International Air Transport Association (IATA) for safe and secure shipment of Engines and Engine Components (e) transport (in case of unqualified Shop Visits) the Engine or Engine Components in accordance with the OEM engine shop manual specification and requirements related to transportation of an Engine by either air, land or ship. All cost arising from damages sustained due to the improper shipment preparation of the Engines; and any losses, damages, liabilities, claims and penalties that may be brought against SR Technics by third parties or Government Entities resulting from Spice jet's failure to comply with aforesaid obligations shall be borne solely by Spice jet. D-4.2 Shipping marks Each shipment to SR Technics shall be marked as follows: SR Technics Switzerland Ltd. Hangarstrasse / Gate 140 Material Receiving SRT CH-8302 Kloten, Switzerland 2. Local SR Technics Representative If mutually agreed, SR Technics shall assign a local representative, who shall only act as technical and commercial Interface between Spice jet and SR Technics in respect to the Fulfilment of the Agreement, specifically in regard to the following matters: (a) Disruptions, if any, due to engine problems (b) Engine removals (c) Work scopes (d) Engine transportation (e) On site support The representative shall regularly report and follow-up on technical and/or commercial issues Rates and charges: The services in this clause 2 are included in the RBS FHR stated in the Agreement. As per Article 7(1) of India Switzerland DTAA, if business is carried on through a PE, profits from business to the extent attributable to the PE in India is taxable in India. As discussed above, the assessee does not carry any activity through LO other than routine communication and client coordination, which can be called to constitute a PE in India. Therefore, in absence of any PE of the assessee in India, the business income earned by the assessee is not taxable under Article 7 of the India Switzerland DTAA.”
-S.R. Technics Switzerland Limited.
We have thoroughly considered the whole issue with reference to the order of AO, proceedings of DRP, submissions of the assessee and Paper Book submitted. It is an established fact that Revenue streams not offered by assessee were not chargeable to tax in India (accepted by AO also) until unless assessee has a PE in India. After a thorough study of assessment order, the foundation of allegations laid down by the AO to prove LO of subsidiary company as PE of assessee, no substantive and cogent evidence were produced on record. All the allegations and working done in that regard were merely a guess work and looks to be a conclusion drawn on conjunctions, surmises and wrong application of law on the given set of facts.
Here it is pertinent to mention that LO did not have any infrastructure, facilities and relevant stocks of spare parts to carry out repairs and maintenance, piece part repairs, integrated component service and replacement of parts. Moreover, the staff exist at India were not of that level in the hierarchy of such a big giant who can negotiate with the customers, sign and finalize the contracts and run the office of the assessee at their own. The fact that the LO was adhering to the conditions imposed by the RBI and the RBI had accepted the functioning of the LO for quite some time points out to the fact that the LO has complied to the condition one of which was that it could not carry on any business or trading activity. This fact about conditions imposed on LO are nowhere under challenge by the AO. This, itself weakens the case of the Revenue that they are not able to bring on record any material which proves that conditions imposed on LO were actually not complied with. Till the time LO is fulfilling the conditions imposed by the RBI, the case of the Revenue cannot stand on its own feet.
-S.R. Technics Switzerland Limited.
Statute empowers AO to conduct enquiry under section 131 and 133(6) to strengthen his allegations about non-fulfilment of the conditions imposed by the RBI on the LO by summoning and direct interaction with the parties like Air India, Spice jet Ltd. and Jet Airways Ltd. Instead of following this procedure to substantiate his allegation, AO rather worked on the documents available on record supplied by the assessee that is too by applying wrong principles on the given set of facts.
AO worked on an assumption that simply by having a liaison office in India would result in setting up a PE within the meaning of DTAA, this assumption of the AO in these circumstances (conditions imposed by RBI) being contrary to the well-established principles as well as provisions of law. Once an activity (as can be confirmed with reference to conditions imposed by RBI while granting the licence to open LO) once an activity is construed as being subsidiary or in aid or support of the main activity, it would fall within the category of preparatory or often auxiliary character. 15. In the light of facts of the case discussed above, we are of the opinion that the LO in India does not constitute PE in India under Article 5 of India Switzerland DTAA because. The LO does not constitute a fixed place through which business of assessee is carried out in India. Employees of the LO do not negotiate, finalise or discuss the mechanics of contracts including pricing with the assessee's customers. As such the employees of LO merely act as a communication link between the assessee and the airline companies. The LO did not carry any activity, beyond that permitted by the RBI. The activities carried by the LO are -S.R. Technics Switzerland Limited. thus, preparatory (auxiliary in nature). The activities/operations of the assessee in connection with the contracts are carried from outside India. 16. In view of the above findings, Ground No.1 to 4 raised by assessee are allowed and held that LO of subsidiary of assessee does not constitute a PE in the case of assessee, hence, addition on this ground made by AO is directed to be deleted. 17. In view of our findings for ground nos. 1 to 4 above, ground No.5 to 11 became academic in nature, no further adjudication is required. 18. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 25th day of November, 2022.