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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI PRAMOD KUMAR & SHRI VIKAS AWASTHY
आदेश/ ORDER PER VIKAS AWASTHY, JM: These seven appeals by the assessee for assessment years 2010-11 to 2016-17 involve identical issues germinating from same set of facts, therefore, these appeals are taken up together for adjudication and are decided by this common order. For the sake of convenience facts are narrated from the appeal of assessee for assessment year 2010-11.
The assessee in appeal has raised following grounds: “
0. Re.: Validity of re-assessment proceedings: 1
1. The Assessing Officer / Dispute Resolution Panel has erred in re-opening the assessee’s assessment u/s. 148 of the Income-tax Act, 1961. 1
2. The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject the re-opening u/s.148 of the Income-tax Act, 1961 was in excess of jurisdiction and is also otherwise bad in law. 1
3. The Appellant submits that the proceedings u/s.148 of the Income-tax Act, 1961 were not in accordance with law and consequently ought to be struck down. Without prejudice to the foregoing: 2
0. Re.: Holding that the Appellant has a ‘Permanent Establishment’ “PE” in India: 2
1. The Assessing Officer/the Dispute Resolution Panel has erred in holding that the Appellant has a ‘Permanent Establishment’ (“PE”) in India. 2
2. The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, it has no PE in India and the stand taken by the Assessing Officer/the Dispute Resolution Panel in this regard is erroneous, misconceived and not in accordance with law. 2
3. The Appellant submits that the Assessing Officer has erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material to hold that the Appellant had a PE in India. Further he also failed to consider the contrary material and evidence adduced by the Appellant.
Gemological Research (Thailand) Company Ltd. (Group cases)
2:4 The Appellant submits that the Assessing Officer’s stand that the Appellant has a PE in India be struck down and he be directed not to tax the Appellant’s income. Without prejudice to the foregoing 3:0 Re.: Attribution: 3:1 The Assessing Officer/the Dispute Resolution Panel has erred in holding that 50% of receipts are attributable to the alleged PE of the Appellant in India. 3:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no part whatsoever of its receipts are attributable to India and the stand taken by the Assessing Officer/the Dispute Resolution Panel in this regard is incorrect, illegal, arbitrary, not in accordance with law and hence ought to be struck down. 3:3 The Appellant submits that the arbitrary action of the Assessing Officer/the Dispute Resolution Panel be struck down and the Assessing Officer be directed to accept the total income as returned. Without prejudice to the foregoing: 4:0 Re.: Estimation of gross profit: 4:1 The Assessing Officer/the Dispute Resolution Panel has erred in holding that the 20.31% of the receipts attributable to the alleged Indian operations ought to be considered as profits of the PE taxable in India. 4:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, even if it is held that the Appellant has a PE in India no further income can be taxed in India as the alleged PE has been remunerated at an arm’s length and hence the stand taken by the Assessing Officer/the Dispute Resolution Panel in respect thereof is incorrect, erroneous, misconceived and illegal and hence ought to be struck down. 4:3 The Appellant submits that the Assessing Officer be directed to accept the total income as returned. 5:0 Re.: Credit for tax deducted at source amounting to Rs.3,10,277/- not granted: 5:1 The Assessing Officer has erred in not granting the Appellant credit for tax deducted at source of Rs.3,10,277/-. 5:2 The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject it is entitled to full credit for Rs. 3,10,277/being tax deducted at source from its income for the year. 5:3 The Appellant submits that the Assessing Officer be directed to grant the credit of the tax deducted at source and re-compute its tax liability accordingly. 6:0 Re.: Levy of interest u/s 234A of the Income-tax Act 1961: 6:1 The Assessing Officer has erred in levying interest u/s. 234A of the Income-tax Act, 1961 on the Appellant. 6:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no interest u/s. 234A is leviable and the stand taken by the Assessing Officer in this regard is misconceived, incorrect, erroneous and illegal. 6:3 The Appellant submits that the Assessing Officer be directed to delete the interest u/s. 234A so levied on it and to re-compute its tax liability accordingly.
7. Re.: Levy of interest u/s 234B of the Income-tax Act 1961:
Gemological Research (Thailand) Company Ltd. (Group cases)
7:1 The Assessing Officer has erred in levying interest u/s. 234B of the Income-tax Act, 1961 on the Appellant. 7:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no interest u/s 234B is leviable and the stand taken by the Assessing Officer in this regard is misconceived, incorrect, erroneous and illegal. 7:3 The Appellant submits that the Assessing Officer be directed to delete the interest u/s. 234B so levied on it and to re-compute its tax liability accordingly. 8:0 Re.: Levy of interest u/s 234C of the Income-tax Act 1961: 8:1 The Assessing Officer has erred in levying interest u/s. 234C of the Income-tax Act, 1961 on the Appellant. 8:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no interest u/s. 234C is leviable and the stand taken by the Assessing Officer in this regard is misconceived, incorrect, erroneous and illegal. 8:3 The Appellant submits that the Assessing Officer be directed to delete the interest u/s. 234C so levied on it and to re-compute its tax liability accordingly. 9:0 Re,: General; The Assessing Officer / Dispute Resolution Panel have erred in assessing the total income of the Appellant at Rs.4,55,113/- against the returned income of Rs. Nil thereby determining a demand of Rs.1,67,298/- against the refund of Rs. 2,85,576/- while returning the income for the year. Each of the above grounds is without prejudice to the other.”
2. Shri J.D. Mistry, Sr. Advocate appearing on behalf of the assessee submitted that in all these bench of appeals the assessee has raised identical grounds, except for the appeal for assessment year 2010-11wherein the assessee has inter-alia challenged validity of reassessment and other grounds consequential to the addition made. The ld.Counsel for the assessee submitted that the primary issue assailed in all the appeals by the assessee is that the Assessing Officer and the Dispute Resolution Panel have erred in holding that the assesse is having ‘Permanent Establishment’ (PE) in India. If this issue is decided in favour of the assessee, the other alternate grounds viz. Attribution of Profit and Estimation of Gross Profit, raised without prejudice to the primary ground would become academic.
Sh. Mistry submitted that the assessee/appellant is a group company of Gemmological Institute of America Inc., USA (in short ‘GIA-US’). In the case of GIA- US, the Assessing Officer held that GIA India Laboratory Private Ltd. (a subsidiary of Gemological Research (Thailand) Company Ltd. (Group cases)
‘GIA-US’) is PE of the said company in India. The Tribunal in the case of Gemmological Institute of America Inc. vs. Addl.CIT, in for assessment year 2010-11 decided on 21/06/2019after examining the facts of the case and Article -5 of India – USDTAA held, that GIA-US is not having any PE or agency PE in India. The ld. Counsel for the assessee asserted that the facts and the nature of transaction in the present case are identical. The Assessing Officer while passing the draft assessment order has ditto the assessment order in the case of GIA-US for AY 2011-12. The Assessing Officer has verbatim adopted the findings of assessment order for AY 2011-12 in the case of GIA-US. The ld. Counsel further pointed that the Dispute Resolution Panel (DRP) has also observed that the facts in the case of assessee and that of GIA-USare similar. Now, that it is an established position that the facts in the case of assessee and GIA-US are similar, the case of assessee is squarely covered by the order of Tribunal in the case of GIA-US in ITA 1138/Mum/2015 (supra). Therefore, the assessment order is liable to set aside on the sole ground that the assessee is not having any PE in India.
2.1. The ld. Counsel for the assessee contended that if ground No.2 of appeal i.e. Whether the assessee is having PE in India, is decided in favour of the assessee, there would be no need to decide ground No.1 challenging validity of reassessment proceedings. Even the other grounds in appeal assailing attribution and estimation of gross profit, raised without prejudice to primary ground would become academic.
Shri Sanjay Singh representing the Department vehemently defended the impugned order. However, the ld.Departmental Representative fairly admitted that the main ground in the present set of appeals viz. appellant having PE in India has been adjudicated by the Tribunal in the case of Gemmological Institute of America Inc. vs. Addl. CIT (supra), a group concern of the assessee.
We have heard the submissions of rival sides and have examined the orders of authorities below. The appellant/assessee is incorporated in Thailand and is Gemological Research (Thailand) Company Ltd. (Group cases)
providing gem grading services. The assessee/appellant is a group concern of GIA-US. During the period relevant to the assessment year under appeal the assessee has rendered diamond grading services to its Associated Enterprise (AE) in India ie. GIA India Laboratories Pvt. Ltd. During the course of assessment proceedings the Assessing Officer formed an opinion that the assessee’s AE i.e. GIA India Lab. Pvt. Ltd. has all essential components of having PE of the assessee. We observe that in holding Indian AE as PE of the assessee, the Assessing Officer has placed extensive reliance on the assessment order for AY 2011-12 in the case of GIA-US. The Assessing Officer in draft assessment order has verbatim quoted afore said assessment order. In fact, the Assessing Officer has not given independent findings and has merely adopted the findings given in the assessment order for AY 2011-12 in the case of GIA- US stating similarity of facts.
We find that the DRP in para 3.3 of the Directions has reiterated the fact that the assessee’s case and that of GIA-US were found to be very similar. The DRP followed the Directions of DRP in assessee’s case for AY 2011-12 and 2012-13. We observe that in AY 2011-12 and 2012-13, the Assessing Officer has again relied on the assessment order for AY 2011-12 in the case of GIA-US. The DRP after considering the provisions of Article 5 of India – Thailand DTAA upheld the findings of Assessing Officer in draft assessment order. In the impugned assessment year, the DRP on the basis of findings by DRP in AY 2011-12 and 2012-13 has rejected objections of the assessee and confirmed the addition proposed in draft assessment order. In other words, in the case of present assessee no independent observations and findings have been recorded either by the Assessing Officer or by the DRP. The basis for holding Indian AE as PE of the assessee is the assessment order for AY 2011-12 in the case of GIA-US.
The Co-ordinate Bench of Tribunal in the case of Gemmological Institute of America Inc. vs. Additional CIT(supra), after threadbare examining business model of Gemological Research (Thailand) Company Ltd. (Group cases)
the assessee and the provision of Article – 5 of India –US DTAA held that GIA India Lab.Pvt. Ltd. is not PE of GIA-US in India. For the sake of completeness relevant extract of the findings of Tribunal are reproduced herein under:-
“9. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around as to whether or not the subsidiary of the assessee company i.e., GIA India Lab can be construed as its PE in India. The income-tax authorities have invoked section 9 of the Act and/or Article 5 of the India-US Treaty in order to say that the assessee company has a PE in India. On the contrary, as per the assessee, the impugned receipts are in the nature of business profits, and in the absence of any PE in India, the same are not taxable in India. Factually speaking, it is evident that the on perusal of the agreements, the transaction of grading services between assessee company and GIA India Lab cannot be considered to be in the nature of a joint venture, since GIA India Lab has its own independent expertise but only due to its technology/capacity constraints, it forwards the stones to the assessee company for grading purposes; it is not an arrangement between two parties where each party contributes its share in order to undertake an economic activity which is subjected to joint control; in fact, the arrangement is akin to an assignment or sub-contracting of grading services to the assessee company, wherever GIA India Lab does not have the requisite expertise or technology or capacity for carrying out the grading services; further, the aforesaid arrangement has also been accepted as a mere rendering of grading services by the Transfer Pricing Officer both in the case of GIA India Lab and the assessee company. In this background, we may now proceed to decide as to whether the Indian Subsidiary GIA India Lab can be construed as a PE under any of the aspects contained in Article 5 of India-USA DTAA.
Firstly, we may examine whether GIA India Ltd. can be constituted as a fixed place PE of the assessee in terms of Article 5(1) of the India- USA DTAA. As per Article 5(1) of the Indo-USA DTAA, a fixed place PE arises when the foreign entity has a fixed place in India through which its business is wholly or partly carried on. In this context, the learned Counsel pointed out that a similar situation has been considered by the Hon'ble High Court of Delhi in the case of EFunds IT Solutions (supra), which has been upheld by the Hon'ble Supreme Court. In that case, it has been held that a subsidiary cannot be regarded as a 'fixed place PE' of the parent company on the ground of a close association between the Indian subsidiary and the foreign taxpayer. In that case, it was noted that because various services were being provided by E-Fund India (Indian subsidiary) to the taxpayer or that the foreign tax payer was dependent upon Indian subsidiary (eFund India) for its earnings or assignment or sub-contract of contracts to e-Fund India or e-Fund India being reimbursed on a certain cost plus basis or saving / reduction in cost by transferring business or back office operations to the Indian subsidiary or the manner and mode of the payment of royalty transactions or e-Fund India providing support for carrying on core activities being
Gemological Research (Thailand) Company Ltd. (Group cases) performed by the taxpayer or associated transactions, cannot be the basis to construe the Indian subsidiary as PE of the foreign tax payer. Further, before the Hon'ble Delhi High Court, the Department had contended that the foreign company had a joint venture or partnership with Indian subsidiary as the businesses of the assessee company and the Indian subsidiary were inter-linked and closely connected (which is also contended in the case of the assessee before us) and therefore the Indian subsidiary was regarded as PE of foreign company in India. The aforesaid argument of the Revenue was repelled since the conditions under Article 5 of the DTAA were not met and it has been held that PE cannot be established merely because of transactions between associated enterprises or the principal sub- contracting or assigning the contract to the subsidiary.
11. Factually, in the case of the assessee company, there is no joint venture arrangement between the assessee company and GIA India Lab vis-à-vis gem grading services rendered by the assessee company to GIA India Lab since it is GIA India Lab who enters into agreement with the client and bears all the risks including credit risks, client facing risks, etc. Also, in terms of the agreement, GIA India Lab bears the risk of loss or damage to articles while in transit to and from the assessee company and also during the time when the articles are at or in the assessee company's facilities. Therefore, the economic risks of the gem grading services rendered by the assessee company vis-à-vis stones/diamonds of customers of GIA India Lab shipped to it are borne by GIA India Lab and hence, there is no joint venture arrangement whatsoever between the assessee company and GIA India Lab. In terms of Article 5(6) of the India USA DTAA, it is provided that the mere fact that a company has controlling interest in the other company does not by itself construe the other company to be its PE. Accordingly, the assessee company is not having a 'fixed place' PE in India.
In terms of Article 5 (1) of the India - USA DTAA, a service PE arises on the furnishing of services in India by the assessee company through employees or other personnel, but only if: activities of that nature continue in India for a period or periods aggregating to more than 90 days within any twelve-month period; or the services are performed within India for a related enterprise. Hence, a service PE is triggered if the services (other than included services as defined in Article 12 'Royalties and Fees for Included Services') are rendered by the assessee company through employees or other personnel and activities of that nature continue in India for a period or periods aggregating to more than 90 days within any twelve-month period; or the services are performed within India for a related enterprise. The assessee company renders 'grading services' and 'management services to GIA India Lab'. In fact, 2 graders who were earlier employed with the assessee company are now employed with GIA India Lab and are on the payrolls of GIA India Lab and are working under control and supervisions of GIA India Lab and therefore, no service PE is created in India in terms of India- US DTAA. The Supreme Court has affirmed the decision of the Delhi High Court in EFunds (supra) wherein it has been held that two employees deputed to e-Fund India fund India did not create a service PE as the entire salary cost was borne by e-fund India and they were working under control
Gemological Research (Thailand) Company Ltd. (Group cases) and supervision of e-fund India. In the facts of the instant case, since the said services are rendered outside India and none of the employees/ personnel of the assessee company has visited India and therefore, service PE is not triggered in the case of the assessee company.
In terms of Article 5(4) of the India – US/DTAA, an agency PE is created where a person-other than an agent of an independent status to whom paragraph 5 applies - is acting in India on behalf of an enterprise of the USA, that enterprise shall be deemed to have a permanent establishment in India, if: (a) he has and habitually exercises in India an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he 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 enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise ; or (c) he habitually secures orders in India wholly or almost wholly for the enterprise.
The definition excludes from the ambit of a PE any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status acts in the ordinary course of its business. The OECD Commentary deals with the concept of 'Independent Agent' in paragraphs 36 to 39. In terms of paragraph 37 of the OECD Commentary, a person will be regarded as an independent agent (i.e. it will not constitute a PE of the enterprise on whose behalf it acts) only if: -He is independent of the enterprise both legally and economically, and - He acts in the ordinary course of his business when acting on behalf of the enterprise. In other words, Article 5(5) of the India- USA DTAA stipulates the following conditions which are required to be satisfied in order that an agent may be said to be an independent agent, i.e., - That he should be an agent of independent status; that, he should be acting in the ordinary course of his business; and, that his activities should not be devoted wholly or almost wholly on behalf of the foreign enterprise for whom he is acting as agent.
15. GIA India Lab is an independent/separate legal entity in India which is engaged in rendering of grading services. Further, considering the functions and the risks assumed by GIA India Lab vis-à-vis its business activities in India (as has been recorded in the transfer pricing study report - which functional and risk analysis has Gemological Research (Thailand) Company Ltd. (Group cases)
been accepted by the Transfer Pricing Officer both in the case of GIA India Lab and in the case of the assessee company), GIA India Lab is an independent entity which is rendering grading services to its clients in India. GIA India Lab also bears service risk and all client facing risks vis-à-vis the stones sent to the assessee company for grading purposes (as has been recorded in the Transfer Pricing Study Report). Hence, GIA India Lab is not acting in India on behalf of the assessee company. Further, GIA India Lab is not having any authority to conclude contracts and has neither concluded any contracts on behalf of the assessee company nor has it secured any orders for the assessee company in India. Thus, GIA India Lab cannot be regarded as ‘agency PE’ of the assessee company in India.” [Emphasised by us]
We find that Article -5 of India-US DTAA and Article -5 of India -Thailand DTAA have almost similar clause. Both sides are unanimous in stating that the nature of transactions and terms and conditions of transactions between assessee and Indian AE in both the cases are similar. The Revenue has not brought on record any distinguishing factor in the present set of appeals before us. Therefore, the findings given by the Co-ordinate Bench of Tribunal while adjudicating the appeal in the case of assessee’s group concern GIA-US would mutatis mutandis apply to present appeal. Respectfully following the order of Co-ordinate Bench, we hold that GIA India Laboratories Pvt. Ltd. is not agency PE/PE of the assessee. Consequently, ground No.2 of the appeal is decided in favour of the assessee.
The assessee in ground no. 1 of the appeal has assailed validity of re- assessment proceedings. No submissions were made by the ld. Counsel for the assessee on this legal ground. Ergo, ground no. 1 of appeal is dismissed.
In ground of appeal No. 3, the assessee has assailed attribution to the alleged PE in India. Since, the assessee has succeeded on the primary issue, the alternate ground has become academic, therefore, not deliberated upon.
10. In ground of appeal No. 4, the assessee has assailed estimation of gross profits. Since, the assessee has succeeded on the primary issue, this ground has become academic, therefore, not deliberated upon.
Gemological Research (Thailand) Company Ltd. (Group cases)
In ground No.5 of appeal, the assessee has assailed non-granting of TDS credit of Rs.3,10,277/-. We deem it appropriate to restore this issue to the Assessing Officer for re-examination/reconciliation. The Assessing Officer is directed to allow benefit of TDS credit to the assessee after verification of records, in accordance with law. The ground No.5 of the appeal is allowed for statistical purpose.
12. In ground No.6 of appeal, the assessee has assailed levy of interest under section 234A of the Income Tax Act, 1961 (in short ‘the Act’). The contention of the assessee is that the assessee is a foreign company. The due date for filing return of income for the impugned assessment year was 31/10/2010. The assessee filed its original return of income on 05/10/2010 i.e. well before the due date. The revised return was filed on 30/03/2012. The Assessing Officer has wrongly levied interest under section 234A of the Act. Since, the assessee has filed original return of income within due date under the provisions of section 139(1) of the Act, interest under section 234A is not leviable. The provisions of section 234A of the Act are triggered where there is default in furnishing return of income i.e. the return of income is filed beyond due date as mandated under section 139(1) or (4) of the Act. The issue is restored to the file of Assessing Officer for verification of facts. If the return is filed by the assessee within the due date, the provisions of section 234A of the Act are no attracted, hence, no interest to be levied. The ground No.6 of the appeal is allowed for statistical purpose.
13. In ground No.7& 8 of the appeal, the assessee has assailed charging of interest under section 234B and 234C of the Act. Charging of interest under section 234B & 234C of the Act is consequential, hence, this issue requires no separate adjudication.
14. The ground 9 of appeal is general in nature, hence, require no adjudication.
In the result, appeal of the assessee is partly allowed in the terms aforesaid.
Gemological Research (Thailand) Company Ltd. (Group cases)
, 851/MUM/2016, 2295/MUM/2017, 7040/MUM/2017, 6380/MUM/2018, 7741/MUM/2019 A.Ys.2011-12 to 2016-17:
In these six appeals, the assessee has raised three alternate contentions assailing the assessment order passed under section 144C(1) r.w.s. 143(13) of the Act, viz.: - Challenge to the findings holding appellant/assessee is having PE in India; - Assailing attribution of 50% receipts to alleged assessee’s PE in India; and - Assailing estimation of gross profits. The grounds of appeals in all these six appeals are identical to ground no. 2 to 4 raised in the appeal for A.Y.2010-11 reproduced in para 2 above.
17. The fundamental issue that run common in all these appeals is, “Whether the assessee/appellant is having PE in India?” We have adjudicated this issue in the appeal of assessee for 2010-11. Since, facts germane to the issue in all these appeals are identical, the findings given by us while adjudicating the appeal for assessment year 2010-11 would mutatis mutandis apply to the appeals of assessee for AYs 2011- 12 to 2016-17. Consequently, the issue is decided in favour of the assessee for parity of reasons.
18. Since, the primary ground has been decided in favour of the assessee, the alternate grounds raised in the appeals have become academic, hence, are not deliberated upon.
In the result, appeals of the assessee for assessment year 2011-12 to 2016-17 are allowed.
Gemological Research (Thailand) Company Ltd. (Group cases)
To sum up, appeal of the assessee for assessment year 2010-11 is partly allowed and appeals for assessment years 2011-12 to2016-17 are allowed.
Order pronounced in the open court on Monday the 03rd day of May, 2021.