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Facts
Bticino S.P.A., an Italian company, made offshore sales of goods to its Indian group entity, Novateur India. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) treated Novateur India as a fixed place Permanent Establishment (PE) of Bticino S.P.A., contending that the income from these sales was taxable in India. They cited common shareholding (30%) and common directors, despite the appellant arguing that title and risk passed outside India and Novateur India acted independently.
Held
The Tribunal held that the offshore sale of goods concluded outside India, with title and risk transferred and payment received outside India. Novateur India independently imported and sold the goods, offering income to tax in its own hands. Citing Article 5(1) and 5(6) of the India-Italy Tax Treaty, the Tribunal concluded that a PE was not constituted merely by shareholding or common directors, as Bticino S.P.A. had no presence or business activity in India, and thus, offshore sales could not be taxed in India.
Key Issues
Whether the assessment order was valid concerning jurisdiction and limitation, and primarily, whether Novateur Electrical and Digital Systems Private Limited constituted a Permanent Establishment (PE) of Bticino S.P.A. in India, making income from offshore sales taxable in India.
Sections Cited
Section 143(3), Section 144C(13), Section 153, Section 270A, Section 234A, Section 234B, Section 9(1)(v), Section 9(1)(vi), Section 9(1)(vii), Article 5(1) of India-Italy Tax Treaty, Article 5(6) of India-Italy Tax Treaty, Article 7(1) of Tax Treaty
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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: Sh. Saktijit DeyDr. B. R. R. Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI Before Sh. Saktijit Dey, Vice President Dr. B. R. R. Kumar, Accountant Member ITA No. 2294/Del/2023 : Asstt. Year : 2020-21 Bticino S.P.A, Vs. ACIT, 231, Viale Borri, Varese, International Taxation Italy-999999 Circle-1(1)(2), New Delhi (APPELLANT) (RESPONDENT) PAN No. AAICB5197J Assessee by : Sh. S. K. Aggarwal, CA Revenue by : Sh. Vizay B. Vasanta, CIT-DR Date of Hearing: 08.05.2024 Date of Pronouncement: 24.07.2024 ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the assessee against the order dated 19.06.2023 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
Following grounds have been raised by the assessee:
“1. On the facts and in the circumstances of the case and in law, the assessment order is bad in law as well as on facts. The Learned AO has grossly erred in assessing the income at INR 139,41,63,287 as against income of INR 130,14,98,740 as per return of income filed by the Appellant. 2. Grounds relating to Jurisdiction. 2.1 On the facts and in circumstances of the case and in law, the Learned AO has erred in passing assessment order without taking into consideration/ without disposing the application filed by the Appellant for transfer of jurisdiction of the Appellant from New Delhi to Mumbai.
ITA No. 2294/Del/2023 2 Bticino S.P.A. 2.2 On the facts and in circumstances of the case and in law, the Learned AO has erred in passing the assessment order without jurisdiction and therefore, the assessment order is bad in law, void-ab-initio and liable to be quashed 2.3 Without prejudice to the above, on the facts and circumstances of the case and in law, the order passed by the Learned AO under Section 143(3) read with Section 144C(13) of the Act dated is barred by limitation under the provisions of Section 153 of the Act and therefore, bad in law and be struck down and annulled. 3. Grounds relating to Permanent Establishment 3.1. On the facts and in circumstances of the case and in law, the Learned AO/ DRP has erred in treating the Novateur Electrical and Digital Systems Private Limited (i.e., the Indian group entity to whom the Appellant has made offshore supply of goods) ('Novateur India) as fixed place permanent establishment ('PE') of the Appellant in India. 3.2. On the facts and in circumstances of the case and in law, the Learned AO/ DRP has erred in concluding income earned by Appellant from offshore sale of goods (raw materials, finished goods, samples and fixed assets) amounting to INR 92,66,45,478 is taxable in India and consequently erred in determining 10% of such gross receipts amounting to INR 9,26,64,547 as net profit attributable to alleged fixed place PE of the Appellant in India. 3.3. On the facts and in circumstances of the case and in law, the Learned AO/ DRP has erred in deciding income from offshore sale of goods of INR 92,66,45,478 is taxable in India despite concluding that the title in goods sold by the Appellant to Novateur India was transferred outside India and the payments have been received outside India. 4. Ground in relating to Penalty under section 270A The Learned AD/ DRP has erred on the facts and in law in initiating the penalty proceedings under section 270A of the Act against the Appellant. 5. Ground in relating to Interest under section 234A and 2348 of the Act. The Learned AO/ DRP has erred in levying interest under section 234A and 2348 The above grounds of appeal are independent and without prejudice to each other.”
ITA No. 2294/Del/2023 3 Bticino S.P.A. 3. Bticino SPA is a company incorporated in Italy and is engaged in manufacturing electrical products and production of electrical equipments including switches, plaques, intercoms, video-intercom, domotics and residual current device. The assessee holds 30% of share holding in the group entity Novateur Electrical and Digital Systems Private Limited (‘Novateur India’). During the year under consideration, the Appellant has made offshore sale of goods to its group company Novateur India and received income from Novateur India. The title and the risk in the goods pass outside India and the payment is received by the Appellant outside India.
“Novateur India” purchases goods in its own name and these goods forms part of inventory of Novateur India. Novateur India uses these goods in its manufacturing/further selling to its own customers in India and corresponding income from such sale is offered to tax for Novateur India as its business income.
The Assessing Officer has held that “Novateur India” as a fixed place PE of the Appellant in India based on the following contentions:
There is no contract / agreement between the Appellant and “Novateur India” for sale of goods. The Appellant holds 30 percent shareholding in Novateur India. There are two common directors between the Appellant and Novateur India and the Appellant has failed to provide proof that these directors have not visited India.
ITA No. 2294/Del/2023 4 Bticino S.P.A. The AO held that it is difficult to believe that common directorship in both during the year under consideration would not have any significant influence in key decisions.
In Para 18 of the draft Assessment Order, the AO has held as under:
“18. ...in case of the assessee, offshore supply were made to its Indian counterpart and all the risks and rewards were assumed by the Indian counterpart at the port of Italy itself. Hence, the title was transferred to the Indian counterpart at the port of Italy. Consequently, profits arising from the activities in India need to be attributed to the PE of the assessee...”
Aggrieved, the assessee filed appeal before the ld. DRP. 8. The Ld. DRP upheld the draft assessment order. The Ld. DRP in Para 5.9 of the Directions held as under:
“5.9 The assessee has been most relying on the case laws on the Honorable Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd vs. Director of Income Tax [2007]. However, the Honorable Supreme Court decision on the above case has been considerably overturned with the amendment of Finance Act 2010 where substantial emphasis is given to business connection of the non-residents rather than the situs of business activity of the non-residents regarding taxability of income arising or accruing from India. The Panel, therefore, confirms the stand taken by the Assessing Officer and rejects the objection filed by the assessee on this count.”
Aggrieved, the assessee filed appeal before the Tribunal. 10. Before us, the ld. AR argued that it is a fact that the assessee holds 30% shareholding in a group entity Novateur Electrical and Digital Systems Private Limited (‘Novateur
ITA No. 2294/Del/2023 5 Bticino S.P.A. India’). During the year under consideration, the assessee has made offshore sale of goods viz., raw materials, finished goods, fixed assets etc.) to its group company “Novateur India” and received income from that company. The title and the risk in the goods passed outside India and the payment is received by the assessee outside India. It was submitted that “Novateur India” purchases goods in its own name and these goods forms part of inventory of Novateur India. Novateur India uses these goods in its manufacturing/further selling to its own customers in India and corresponding income from such sale is offered to tax for Novateur India as its business income. It was argued that the assessee does not have any presence in India and does not undertake any business activity in India. It was submitted that the assessee is a tax resident of Italy, holds a valid TRC and is eligible to claim benefit under India - Italy Tax Treaty. The assessee submitted that a fixed place PE does not get constituted merely by having shareholding in Indian Company or by having common directors. It is a settled law that the fixed place PE can be constituted only if tests of a fixed place PE as provided under Article 5(1) of the Tax Treaty are met.
The ld. DR relied on the orders of the authorities below.
Heard the arguments of both the parties and perused the material available on record.
Article 7(1) of Tax Treaty states that if the enterprise carries on business in other contracting state, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to permanent establishment (‘PE’) of Appellant in India. As per Article 5(1) of the India-Italy
ITA No. 2294/Del/2023 6 Bticino S.P.A. Tax Treaty, the Appellant does not constitute fixed place PE in India in the form of “Novateur India” since none of the tests of a fixed place PE are satisfied in case of Appellant:
Place of business - Disposal test - The assessee does not have any place of business in India. Novateur India is an independent entity. Novateur India’s premises are not the disposal of the assessee. Novateur India undertakes its own business in India and does not undertake any business activity on behalf of the assessee. Fixed place of business - Permanence test - Given that there is no place of business in India, this condition suo moto becomes infructuous. Carrying business - Business activity test - The assessee does not carry any activity / business in India. The assessee sells goods to Novateur India from outside the territorial jurisdiction of India.
Further, Para 6 to Article 5 of the Tax Treaty specifically states as under:
“the fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.”
On reading of above, it can be held that a PE cannot be constituted merely because the assessee holds 30% in Novateur India and has two common directors.
ITA No. 2294/Del/2023 7 Bticino S.P.A. 16. The assessee submitted the documents before the AO and Ld. DRP which shows that the export of goods by the Appellant to Novateur India was offshore sale as the title and risk in the goods was passed outside India and the Appellant had no presence or activity in India.
i. Copy of invoices and bill of entry for offshore sale of goods ii. Sample copies of bill of lading iii. Passport copy of two directors
From the invoices, it is seen that offshore sale of goods were made on CFR (Cost and Freight), CPT - (Carriage paid to), EXW - (Ex-works Muscoline) Incoterms. From the bill of loading it can be seen that port of loading is Italy and from bill of entry it is seen that the importer is Novateur Electrical and Digital Systems Private Limited.
Further, from the copies of passport of two directors, it can be seen that there is no visit of Directors in India and there was no presence of the assessee in India.
From the above, it can be established that the offshore sale of goods got concluded outside India as the title and the risk in the goods was transferred outside India and the assessee and its Directors does not have any presence or activity in India. “Novateur India” imported the goods in their own name which formed part of their inventory and sale of the same constitutes business income in their hands, and hence, “Novateur India” cannot be held as constituting a PE of the assessee.
ITA No. 2294/Del/2023 8 Bticino S.P.A.
Reliance is placed on following judicial precedents in support of its above contentions:-
Ishikawajima-Harima Heavy Industries Ltd vs. Director of Income Tax [2007] 158 TAXMAN 259 (SC)
“79. We, therefore, hold as under: Re: Offshore Supply: (1)…………….. (2) Since all parts of the transaction in question, i.e., the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India....”
Mahabir Commercial Co. Ltd. (1972) 86 ITR 417 (SC) DIT vs. Nokia Networks OY (2012) 25 Taxmann.com 225 (Delhi High Court) POSCO Engineering & Construction Co. Ltd. vs. ADIT [2014] 31 ITR (T) 255 (Delhi - Tribunal)
The contention of the AO that the assessee has 30% shareholding in Novateur India thereby it constitutes PE is against the express provisions of Article 5(6) to India - Italy Tax Treaty which specifically provides that, the fact that the company which is resident of the contracting state controls a resident of other contracting state shall not of itself constitute PE.
In the present case, the assessee has no presence in India, it has no business activity in India and the offshore sale of goods cannot constitute PE merely on the allegation that it holds 30% shares in Novateur India. The action of the AO is
ITA No. 2294/Del/2023 9 Bticino S.P.A. contrary to the provisions of Article 5(6) of relevant Treaty and not sustainable in law.
The Ld. DRP’s comment in DRP with respect to amendment in Finance Act, 2010 and overturning of the Hon’ble Supreme Court decision in the case of Ishikawajima Harima is also examined with reference to sub-clause (v), (vii) and (vii) to Section 9(1) which deals with Interest, Royalty and FTS income only and not with respect to offshore sale of goods. The same is as under:
“Income deemed to accrue or arise in India to a non- resident
Section 9 provides for situations where income is deemed to accrue or arise in India.
Vide Finance Act, 1976, a source rule was provided in section 9 through insertion of clauses (v), (vi) and (vii) in sub-section (1) for income by way of interest, royalty or fees for technical services respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein.
The intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India.
ITA No. 2294/Del/2023 10 Bticino S.P.A.
This was the settled position of law till 2007. However, the Hon’ble Supreme Court, in the case of Ishikawajima- Harima Heavy Industries Ltd., Vs. DIT (2007) [288 ITR 408], held that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India.
This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India. Therefore, to remove doubts regarding the source rule, an Explanation was inserted below sub-section (2) of section 9 with retrospective effect from 1st June, 1976 vide Finance Act, 2007. The Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of section 9, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India.
However, the Karnataka High Court, in a recent judgement in the case of Jindal Thermal Power Company Ltd. vs. DCIT (TDS), has held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India for any income to be deemed to accrue or arise to a non-resident under section 9. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India and the utilization of the service in India laid down by the Supreme Court in its judgment in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) remains untouched and unaffected by the Explanation.
ITA No. 2294/Del/2023 11 Bticino S.P.A. In order to remove any doubt about the legislative intent of the aforesaid source rule, it is proposed to substitute the existing Explanation with a new Explanation to specifically state that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not,
(a) the non-resident has a residence or place of business or business connection in India; or
(b) the non-resident has rendered services in India.
This amendment is proposed to take effect retrospectively from 1st June, 1976 and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. Computation of exempted profits in the case of units in Special Economic Zones (SEZs) [Clause 4]
In this case, the assessee has exported goods from Italy, the Indian entity imported the goods and after importing the Indian entity sold the goods and offered to tax in India. The goods were sold offshore by the assessee and the risk in goods passed outside India and the payment was also received by the assessee outside India.
In view of the above factual and legal position and the provisions of the treaty, it is hereby held that the assessee does not have PE in India and hence, the offshore sale of goods cannot be taxed in India.
ITA No. 2294/Del/2023 12 Bticino S.P.A. 26. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 24/07/2024.
Sd/- Sd/- (Saktijit Dey) (Dr. B. R. R. Kumar) Vice President Accountant Member Dated: 24/07/2024 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR