M/S. REDINGTON DISTRIBUTION PTE LTD.,SINGAPORE vs. ACIT , INTL TAXATION CIRCLE-2(1), CHENNAI

4. Being aggrieved, the assessee carried the matter in appeal before this Tribunal. It was brought to our notice that the Tribunal vide their order in IT(TP) No. 14/Chny/2020 dated 16.11.2022 confirmed the findings of the lower authorities that the assessee had a PE in India. The Tribunal however is noted to have disregarded the manner of attribution of profits to the PE and remitted back the issue to the file of the AO to redo the attribution in light of the decisions of the Hon’ble Madras High Court in the cases of Anamallais Timber Trust Ltd (18 ITR 333) and the Special Bench of this Tribunal at Delhi in the case of Motora Inc (95 ITD 269). The Tribunal further directed that, the audited financial statements and the profit margin of the assessee be used as the starting point for attribution.

5. The assessee is noted to have preferred a Miscellaneous Application (‘MA’) before the Tribunal against the appellate order on 14.02.2023.

During the pendency of the MA, the AO passed the draft assessment order pursuant to the directions of the Tribunal on 28.02.2023. In the meanwhile, the assessee is noted to have filed an appeal before the Hon’ble Madras High Court against the order of the Tribunal and also inter alia sought interim stay against the draft assessment order dated to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 5 ::

28.02.2023 passed by the AO. It is observed that the Hon’ble Madras High Court granted interim stay by observing as under:

“2. The impugned order is a draft order under Section 144C (1) of the Income Tax Act, 1961 (in short 'Act). This order has been passed consequent upon a remand by the Income Tax Appellate Tribunal (in short "Tribunal/ITAT) on 16.11.2022. The Tribunal has, therein, confirmed the findings of the Assessing Officer to the effect that the petitioner has a Permanent Establishment (PE) in India. However, the question of attribution of profits to the PE has been remanded for fresh consideration.

3. The petitioner has received a notice on 10.01.2023 to which a reply has been filed on 18.01.2023. Immediately thereafter, the petitioner appears to have been of the view that certain clarifications were required from the Tribunal in respect of order dated 16.11.2022 and has filed a Miscellaneous Petition before the Tribunal on 14.02.2023.

6. The Hon’ble High Court was also pleased to admit the substantial question of law framed by the assessee by their order dated 28.03.2023 in TCA No. 166 of 2023 wherein their Lordships observed as under:

“3.This tax case appeal is admitted on the following substantial questions of law:

1. Whether in the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the Appellant has a fixed place Permanent Establishment ("PE") in India under Article 5(1) of the India-Singapore DTAA and thus, the income of the Appellant is liable to tax in India for the subject Assessment Year?

2. Whether in the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the Appellant has a dependant agent Permanent Establishment ("DAPE") in India under Article 5(8) of the India-Singapore DTAA and thus, the income of the Appellant is liable to tax in India for the subject Assessment Year?"

to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 6 ::

“2. Agreed Terms

The CAs have agreed to disagree on the question of existence of a permanent establishment of RDPL in India, and further agreed to set aside the same to arrive at the following terms of resolution:

(i) The adjustment to RDPL's income in India shall be reduced to 25% of the profits derived from the turnover of RDPL in India from channel partner sales and direct sales made in India. A downward corresponding to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. adjustment to RDPL to the extent of 15% of such profits shall be provided in Singapore.

(ii) The profits on such turnover shall be derived by using RDPL's profit margin on total sales for the relevant financial year, based on its audited financial statements.

(iii) Such profits shall be taxed in India as business profits under provisions of India's domestic law and the India-Singapore DTAA.

Financial Original Adjustment to Adjustment Corresponding Year adjustment in be withdrawn to be adjustment to India (INR) in India (INR) sustained in be provided in India (INR) Singapore (USD) 2010-11 17,61,12,836 15,42,93,858 2,18,18,978 287,327 2011-12 8,92,01,621 5,59,28,041 3,32,73,580 416,589 2012-13 4,85,68,988 85,99,964 3,99,69,024 440,755 2013-14 49,10,65,170 43,73,89,604 5,37,75,566 533,295 2014-15 90,05,08,224 81,37,54,883 8,67,53,341 851,308 2015-16 99,23,27,286 86,03,36,759 13,19,90,527 1,209,655 Total 2,69,77,84,125 2,33,02,03,109 36,75,81,016 9,738,929

*As on the date of signing of this MA, the assessment order in India for financial year 2010-11 stands stayed by a domestic court in India. However, the CAs agree that whenever the said stay is revoked and the original order becomes operational, the terms as agreed above would apply to financial year 2010-11 also.

3. Implementation The outcome of the MA was arrived at as a compromise in the interest of settling the case. Therefore, both the outcome and the method applied do not establish any precedent for RDPL or any other taxpayer.”

Rs.269.77 crores made across AYs 2011-12 to 2016-17, it was agreed that adjustment only to the extent of Rs.36.75 crores would be sustained, which was lesser than 15% of the original addition made by the AO. The Ld. Sr Counsel submitted that, pursuant to the MAP resolution, the pending appeal before the Hon’ble High Court became academic. The AO also passed an order giving effect to the MAP resolution wherein he brought down the original adjustment of Rs.17,61,12,836/- made in AY 2011-12 to Rs. 2,18,18,978/-.

9. The AO thereafter initiated and levied penalty u/s 271(1)(c) in relation to the addition finally confirmed under the MAP resolution on the premise that the assessee did not offer the said income in its original return of income. The AO was of the view that, the MAP resolution did not reduce the adjustment to NIL which shows that, the assessee had furnished inaccurate particulars of income in India. Relying upon the decision of the Hon’ble Karnataka High Court in the case of Toyota Kirloskar Motor (P) Ltd vs. Union of India (422 ITR 138), the AO levied penalty of 100% of the tax arising on the income added pursuant to the MAP resolution being Rs.92,14,154/-.

“5.5.6 It is relevant to note that the Honourable ITAT in IT (TP) A No.14/Chny/2020 for AY 2011-12 held based on the facts, that the Dollar Team of the Indian Holding Company assisted the Singapore Subsidiary le the appellant in seeking orders, giving quotes to customers, vendor negotiations, and concluding the terms of sales Only documents like the packing list, the airway bill, etc., were prepared by the Singapore company. The premises of the Indian Holding Company were at the disposal of the appellant, and the Dollar Team carried out their functions from the premises of the Indian Holding Company. Given that the services rendered by the Dollar Team were neither preparatory nor auxiliary services but main functions of a group business, it was held that the appellant had a fixed place PE in India. As the Dollar Team of the Indian Holding Company concluded contracts on behalf of the appellant, the activities undertaken by the Dollar Team also constituted an agency PE of the Singapore company in India. In relation to tax on the profits attributable to the PE, the matter was set aside to the assessing officer for re-examination, based on available audited financial statements of the Singapore Subsidiary, the appellant. It is to be noted that the ITAT is the final fact finding authority. The Honourable ITAT has upheld the AO's finding based on TDS survey that the appellant has a PE in India. It can safely be understood that but for the TDS survey and the incontrovertible evidence unearthed therein, the appellant would not have come forward for a MAP resolution. Thus the case law relied on by the appellant namely Raytheon Company supra is distinguishable from the facts of the present appeal.

5.5.7 Further, as has been clarified in the MAP guidance, where Hon'ble ITAT has passed a final order, the CAs of India shall not deviate from such order and MAP in such cases shall be closed as resolved under domestic remedy. Thus the contentions of the appellant that PE was only presumed to exist are rejected.

5.5.8 To sum up, the appellant had a PE in India as was detected during the course of survey and upheld by the Honourable ITAT The MAP resolution was in respect of the profits attributable to the PE in India. Such profits were not declared in the return of income if any filed by the appellant and hence not disclosed to the AO. Thus the AO was right in initiating penalty u/s 271(1)(c) for furnishing inaccurate particulars in the facts and circumstances of the case. There is no bar as per the DTAA or the ITA in imposing penalty even when the dispute is settled under MAP resolution as held by the Honourable High Court of Karnataka in Toyota Kirloskar Motor Private Limited(supra). Order passed under MAP does not bar the levy of penalty if it is liveable otherwise. In view of these discussions, ground no’s 3, 4, 8 and 10 are dismissed.

5.6 Ground No 5: to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 10 ::

As per this ground, the appellant states that the question of law on the existence of PE was admitted by the Honourable High Court of Madras. It is pertinent to note that as per Rule 44G (8), the assessee's acceptance of the resolution shall be accompanied by proof of withdrawal of appeal, if any, pending on the issues that were the subject matter of the resolution arrived at under sub-rule (4). Thus ground no 5 has become infructuous and is accordingly dismissed.

5.7 Ground Nos 6 and 7:

As per these grounds, the appellant contends that the existence of PE was only a change of opinion and that all facts relevant to the dispute were provided during the assessment proceedings. As discussed in the preceding paras, the existence of PE in India was brought to light in the wake of a TDS survey that unearthed documentary evidence that the appellant was operating in India through the Dollar Team and the premises of the Indian Holding Company. This was upheld by the Honourable Tribunal. The existence of PE was never admitted by the appellant in its return of income nor was corresponding taxes on the Indian profits of the appellant being paid in India. There was no disclosure whatsoever of these facts in its return or before the AO in the subsequent proceedings. The financials of the appellant were not made available to the AO and the assessment as a PE in India materialised only because of the survey. The factum of the existence of PE has now become final for the assessment year concerned. In the absence of any material whatsoever in the knowledge of the AO regarding these facts prior to the survey, it cannot be contended that the finding regarding existence of PE was a change of opinion. For want of adequate disclosures by the appellant, the AD did not have occasion to consider the same. It is also to be noted that the assessment was completed on the basis of the documentary evidence collected as a result of survey. In view of these discussions, it is held that the AO had rightly held that the appellant had furnished inaccurate particulars warranting the imposition of penalty u/s 271 (1) (c). Accordingly, ground no’s 6 and 7 are dismissed.”

Percy Pardiwala pointed out that, the impugned issue under dispute was not settled on merits through an appeal route but rather through an to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. alternate dispute resolution by way of negotiations between the competent authorities of both the countries. He pointed out that, the question whether there existed a PE in India or not, had not been settled in as much as this very question was admitted by the Hon’ble High Court by way of substantial question of law. According to him, the fact that the impugned issue was admitted as a subject matter before the Hon’ble High Court showed that, it was a debatable issue involving complexities of law.

He relied on the following decisions in which, it was inter alia held that, when the issue on which penalty is being sought to be levied, had been admitted as a substantial question of law by the Hon’ble High Court shows that the issue is debatable in nature and therefore, penalty on such issue cannot be levied.

− CIT v. Liquid Investment & Trading Co. (ITA No. 240 of 2009) (Del HC) − Nayan Builders & Developer [2014]368 ITR 722 (Bom HC) − Harsh International (P.) Ltd.,[2021] 431 ITR 118(Delhi HC) − Thomson Press India Ltd.,2014 (3) TMI 1174,(Delhi HC); − Dr. Harsha N. Biliangady (379 ITR 529) (Kar HC) − Perot Systems TSI (India) (P.) Ltd. [(2018) 94 taxmann.com 625] (Delhi ITAT) − TTK Healthcare Limited (ITA No. 2028/Mds/2011) (Chennai ITAT) − Smt. Hemalatha Rajan (ITA No. 2/Mds/2016) (Chennai ITAT) 13. The Ld. Sr Counsel further submitted that, it was not a case that the assessee had furnished any inaccurate particulars of income. Rather, according to him, the assessee was under a bonafide belief that the to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. ancilliary support services received from the employees of RIL in India did not result in any fixed place or dependent agent PE in India. The Ld. Counsel took us through the decisions of the Hon’ble Supreme Court in the cases of E-Funds IT Solution Inc (399 ITR 34) & Morgan Stanley & Co (292 ITR 416), basis which the assessee had formed a view that it did not have a PE in India. Narrating the facts involved in the assessee’s case, the Ld. Sr Counsel argued that, the view entertained by the assessee that it did not have a PE in India was a plausible one and thus the assessee cannot be held to be guilty for furnishing inaccurate particulars of income. To substantiate the bonafides of the assessee, he pointed out that the assessee had been offering the royalty income to tax in India even though two views were possible at the material time when the returns of income were filed, and that later on, the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.)

Ltd (432 ITR 471) had held that such royalty income is not subject to tax in India. This contemporaneous fact, according to the Ld. Senior Counsel demonstrated the bonafide of the assessee while offering income to tax in India, which it believed was subject to be taxed in India and which was not.

Raytheon Company (ITA Nos. 1383 to 1392 / Del / 2023), wherein according to him, on similar facts, this Tribunal had deleted the penalty levied on the addition agreed and retained under MAP resolution. The Ld. Senior Counsel also filed written submissions in support of his arguments which has been taken on record. to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 14 ::

“1. Whether in the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the Appellant has a fixed place Permanent Establishment ("PE") in India under Article 5(1) of the India- Singapore DTAA and thus, the income of the Appellant is liable to tax in India for the subject Assessment Year?

2. Whether in the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the Appellant has a dependant agent Permanent Establishment ("DAPE") in India under Article 5(8) of the India-Singapore DTAA and thus, the income of the Appellant is liable to tax in India for the subject Assessment Year?"

(supra) wherein the Hon’ble High Court deleted the penalty levied by the AO by observing that the substantive appeal against the addition made in the quantum proceedings had been admitted by the Hon’ble High Court, which itself showed that the issue is debatable. The relevant portion of the judgment is as follows:

"Both the CIT(A) as well as the ITAT have set aside the penalty imposed by the Assessing Officer under section 271(1)(c) of the Income-tax Act. 1961 on the ground that the issue of deduction under section 14A of the Act was a debatable issue. We may also note that against the quantum assessment whereunder deduction under section 14A of the Act was prescribed to the appellant. The appellant has preferred an appeal in this Court under section 260A of the Act which has also been admitted and substantial question of law framed. This itself shows that the issue is debatable. For these reasons. we are of the opinion that no question of law arises in the present case. This appeal is accordingly dismissed.”

Having perused the said judgment, it is noted that, in the decided case, the assessee had filed a writ petition against the validity of initiation of penalty by the AO on the addition which was confirmed under a MAP resolution. The Hon’ble High Court is noted to have dismissed the writ petition challenging the constitutional validity of Section 271(1)(c) in so far as it related to imposition of penalty on the amount determined to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. pursuant to mutual agreement in terms of the DTAA. The Hon’ble High Court only held that, the AO is not prohibited from initiating penalty in relation to amount adjusted after incorporating the decision under MAP resolution. The Hon’ble High Court at the same time is noted to have clarified that, the penalty proceedings are distinct and independent from the assessment proceedings and it remained open for the assessee to show that the addition confirmed in MAP resolution was not due to concealment of income or furnishing of inaccurate particulars and therefore, it was not liable to penalty. In our considered view, on the given facts before us, this decision is of no assistance to the Revenue.

Rather, it supports the case of the assessee, as the Hon’ble High Court had observed that, only because an adjustment is made pursuant to MAP resolution, will not automatically lead to penalty. As noted by us above, the assessee has made out a case that, there was no inaccurate reporting of particulars qua the adjustment made pursuant to MAP resolution, and for that reason, we hold the imposition of penalty to be unjustified.

“5. We observe that the assessee in all these assessment years filed returns declaring NIL income. The assessments were completed by the AO treating the amounts received by the assessee for report maintenance support services, supply of spares, supply of hardware software and installation and training services, repair support, software maintenance support, etc. as royalty on the ground that the assessee has existence of PE in India. However, the Ld.CIT(A) deleted the additions made in all these assessment years holding that there is no existence of PE in India for the assessee. Assessee under MAP approached the authorities to settle the issues. Meanwhile the Hon’ble Supreme Court in the case of Engineering Analysis Center of Excellence (P) Ltd. Vs. CIT (supra) held that supply of software and documentation did not constitute.

corroborative evidence is brought on record by the Revenue Authorities to suggest that the assessee has PE in India. Further the Ld.CIT(A) in all these assessment years in fact deleted the additions holding that Assessee does not have a PE in India.

……….

8. The Ld.CIT(A) has considered all the aspects of the material and concluded that the assessee has disclosed all material facts during the assessment as well as MAP proceedings and has not concealed any particulars of income. We see no infirmity in the order passed. We further observe that at best it is only a difference of opinion as to whether there exists PE in India for Assessee or not. There is no conclusive proof that the assessee has PE in India. In the penalty proceedings the AO simply relied on the MAP proceedings in holding that the assessee has PE in India which in fact is not correct. As we said earlier it is only on assumption that the assessee has PE in India and by way of deeming fiction the profits were attributed for such assumed PE by the authorities in the MAP proceedings.

10. In the circumstances, we hold that there is no concealment of income or furnishing inaccurate particulars of such income by the assessee in any of these assessment years and thus, we sustain the order of the Ld.CIT(A) for the assessment years 2004-05 to 2011-12 and 2014-15 to 2016-17.”