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Facts
The assessee filed its return of income declaring total income of Rs. 40,10,23,678/-, with a significant portion declared as FTS and Royalty. The case was selected for scrutiny due to significant economic presence in a non-treaty jurisdiction. A draft assessment order proposed to enhance income by attributing profits from offshore sales to an alleged Permanent Establishment (PE) in India.
Held
The Tribunal held that the addition made by the AO was contrary to factual aspects and based on surmises and conjectures. The Tribunal found that the two individuals whose travel expenses were reimbursed were employees of the assessee's AE and not the assessee, and their presence in India was irrelevant to the PE computation. Therefore, the additions were deleted.
Key Issues
Whether the assessee had a Permanent Establishment (PE) in India and if profits from offshore sales could be attributed to it, considering the travel of personnel and their employment status.
Sections Cited
143(3), 144C(13), 153(1), Article 5(3), 194LC(1), 115A(1)(a)(iia), 143(2), 142(1), 234A, 234B, 234C, 270A
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Income Tax Appellate Tribunal, DELHI
This appeal is filed by the assessee pertaining to Assessment Year 2022-23 challenging the Final Assessment Order passed by Deputy Commissioner of Income Tax DDIT/ADIT, International Taxation, Nodia dated 20/01/2025 u/s143(3) r.w. Section 144C(13) of the Income Tax Act, 1961 ('Act' for short).
“1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in passing the assessment order dated January 20, 2025, beyond the prescribed limitation period under Section 153(1) of the Income-tax Act, 1961, rendering the order void ab initio.
That on the facts and circumstances of the case and in law, the Ld. AO erred in attributing 1.05% of the offshore sales, leading to an addition of Rs.2, 14,94,417/-, to the alleged Permanent Establishment ("PE") of the Appellant in India without properly appreciating that there is no PE of the Appellant in India.
On the existence of supervisory/installation PE
3. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that there is a PE in India under Article 5(3) of the India-Korea Double Taxation Avoidance Agreement ("DTAA") on pure surmises and conjectures.
4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in alleging that personnel (Mr. Park Shinkyu and Mr. Kim Khitwan) for whom travel reimbursement has been made to the Appellant are employees of the Appellant, ignoring the copious evidence submitted by the Appellant to show that these are employees of Elentec Power India Private Limited.
5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assuming the existence of a PE in India under Article 5(3) of the India-Korea DTAA based on the travel of two employees (Mr. Park Shinkyu and Mr. Kim Khitwan) without appreciating that they are employees of Elentec Power India Private Limited and not the Appellant, thereby making the assumption of PE purely on surmises and conjectures.
Without prejudice to the ground that there is no supervisory/installation PE in India, no attribution can be made in respect of offshore supply
Without prejudice to the primary contention of the Appellant that there is no supervisory/installation PE in India, no profit attribution can be made with respect to the offshore supplies as the same is made before the constitution of PE in India. Further, no attribution can be made as the risk and title in respect of the offshore supply has passed outside the territory of India.
On the issue of secondment
7. That on the facts and circumstances of the case and law, the Ld. AO has erred in holding that employees have been seconded to India, whereas no employees have been seconded to India during the subject year.
On the inter-connection of offshore sales with technical know-how
8. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that 'Purchase and Sale Agreement' and 'Royalty and Technical agreement' with Elentec India Private Limited are composite in nature whereas both are separate and distinct agreements. The Ld. AO has failed to appreciate that there is no nexus between the offshore supply and provision of technical know- how by the Appellant.
9. That on the facts and circumstances of the case and in law, the Ld. AO erred in attributing the profits in respect of the offshore supply to the alleged supervisory/installation PE in India on the assumption that the profits from the offshore sale made by the Appellant were dependent on the provision of technical know-how by the Appellant to its Indian subsidiary.
Other grounds
10. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the Indian AEs of the Appellant are under full control of the Appellant and are economically and technically dependent on the Appellant.
11. The Ld. AO failed to appreciate that mere presence of expatriate employees from Korea, who are under the control and on the payroll of the Indian AEs, or procurement of certain components from the Appellant does not establish absolute control or economic dependence. The conclusion that Indian AEs cannot function without the Appellant's support is speculative.
That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that the Indian AEs are fully dependent on the Appellant for designing, engineering, manufacturing to supervising the installation of the equipment, ignoring the fact that there is no designing, engineering,
That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that supply of equipment cannot be segregated from the supply of technology and marketing of products whereas there has been no supply of equipment or marketing of any product. Grounds against levy of interest and initiation of penalty proceedings
That on the facts and circumstances of the case and in law, the AO has erred in charging interest under Section 234A, 234B and 234C of the Act.
That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under Section 270A of the Act.
Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before, or at, the time of hearing of the appeal.”
Brief facts of the case are that, the Assessee filed return of income declaring total income of Rs. 40,10,23,678/- out of which income of Rs. 38,51,99,392/- has been declared as FTS and Royalty. Rs. 1,58,24,286/- as interest as per Section 194LC(1) in 115A(1)(a)(iia) of the Act) under the head ‘income from other sources’. The case of the Assessee was selected for scrutiny through CASS for the reason ‘Entity resident in a non treaty partner jurisdiction having significant economic presence but no or less incomedeclared as taxable in India’. Notice u/s 143(2) of the Act and also u/s 142(1) of the Act were issued to the Assessee, in response to which Assessee filed its reply from time to time. of the Act proposing to enhance the Assessee’s total income by Rs. 2,14,94,417/- by proposing to attribute the profits arising out of the offshore sale of raw material to the alleged PE in India. The Ld. AO rounded off the global profit margin of 2.80% to 3% and applied an ad- hoc attribution rate of 35%, thereby attributing 1.05% of the total offshore sales to the PE.
Aggrieved by the draft assessment order dated 31/03/2024, the Assessee filed its objection before the DRP and the Ld. DRP vide order dated 20/12/2024, upheld the findings of the A.O. made in the draft assessment order. Consequent to the order of the DRP, a final Assessment Order came to be passed on 20/01/2025u/s 143(3) r.w.
Section 144C(13) of the Act, wherein the A.O. confirmed the addition of Rs. 2,14,94,417/- to the returned income of the Assessee. Aggrieved by the Final Assessment Order dated 20/01/2025, the Assessee preferredthe present Appeal an appeal on the grounds mentioned above.
The Ld. Counsel for the Assessee has not pressed Ground No. 1, accordingly Ground No. 1 is hereby dismissed.
6. The Ld. Counsel for the Assessee addressing on the Ground No. 2 to 5 of the Appeal submitted thatthe offshore sale of raw material has no Royalty and Technical Services Agreement. The Assessee has given all the details to the Lower Authorities to prove that the total duration of stay of the Assessee’s employees in India was only 137 days, which is less than the threshold of 183 days prescribed under Article 5(3)(b) of the India-Korea DTAA. The detailed list of employees and their respective periods of stay was duly submitted before the Ld. AO. Additionally, the Ld. AO had sought details of travel reimbursements related to the employees, which were also furnished by the Assessee. The fact that the employees of the Assessee have stayed in India only for 137 days has not been disputed by the Ld. AO. However, the A.O. made the addition only on the ground that the Assessee has reimbursed the travelling expenses of two persons i.e. Mr. Park Shinkyu and Mr. Kim Kihwan, in addition to the employees declared by the Assessee whose total account of stay is more than 183 days in India. The Ld. Assessee's Representative further submitted that those two employees are not the employees of the Assessee and they were employees of Assessee’s AE - EPI, therefore, their presence in India had no relevance to the computation of the Appellant's stay period under Article 5(3)(b) of the DTAA. The Assessee has also produced employment agreements and Form 16 of these two individuals with EPI, confirming that they were employees of EPI. Thus, Ld. committed error in making the impugned addition.
Per contra, the Ld. Departmental Representative relying on the orders of the Lower Authorities submitted that the Assessee Company is deemed to have PE in India as per Article 5(3) of India-Korea DTAA, therefore, relying on the findings of the Lower Authorities, sought for dismissal of the Appeal of the Assessee.
We have heard both the parties and perused the material available on record.
The only basis for making the impugned addition that the debit notes for reimbursement of travelling expenses submitted by the Assessee included details for Mr. Park Shinkyu and Mr. Kim Kihwan, in addition to the employees listed by the Assessee finding that those two persons have stayed more than 183 days in India. It is the specific case of the Assessee that those two persons i.e. Mr. Park Shinkyu and Mr. Kim Kihwan were employees of its AE - EPI and not the employees of the Appellant. In order to substantiate the said claim the Assessee submitted the employment agreements and Form 16 of these two individuals.
(Employment agreement of Mr. Park Shinkyu is at page 250-251 of the paper book; Form 16 of Mr. Park Shinkyu is at page 252-256 of the 232 of the paper book; Form 16 of Mr. Kim Kihwan is at page 233-237 of the paper book). On perusal of those documents, it is clear that both Mr. Park Shinkyu and Mr. Kim Kihwan were employees of its AE - EPI and not the employees of the Appellant. Therefore, their presence in India had no relevance for computation of the stay period in India under Article 5(3)(b) of the DTAA. Therefore, we are of the opinion that, the Department has made the addition contrary to the above factual aspects brought on record by the Assessee and committed error in negating the contention of the Assessee based on surmises and conjectures.
Considering the above facts and circumstances, we delete the additions made by the A.O. which has been confirmed by the Ld. CIT(A). Finding merits in the Grounds No. 2 to 5 of the Assessee, the Grounds No. 2 to 5 of the Assessee are allowed.
Since we have allowed Ground Nos. 2 to 5 of the Assessee and deleted the addition, Ground Nos. 6 to 15 require no adjudication.
In the result, Appeal of the Assessee is partly allowed.