Delhi High Court: In a writ petition filed to challenge notice sent by the respondent 1 under Section of (‘the Act’), the Division Judge bench of Yashwant Varma*, Purushaindra Kumar Kaurav, JJ., while allowing the writ petition, quashed the impugned notices under Section 148 of the Act dated 28-03-2019, 29-04-2019, 31-05-2019. The order dated 05-11-2019 passed by the respondent 4 transferring the jurisdiction of the Permanent Account Number (‘PAN’) of the petitioner from the fourth to the respondent 1 was also quashed. The Court further directed respondent to revert the PAN to the jurisdictional Assessing Officer (‘AO’) of the petitioner. The Court Stated that, “This order, however, shall be without prejudice to the respondents to independently examining whether the office of the petitioner in the Delhi Circle constitutes a Permanent Establishment (‘PE’).”
Factual Matrix:
In an instant case, on 06-03-2019 a survey was conducted under Section 133A of the Act and for the same a report was prepared on 11-03-2019, which alleged the petitioner had an office in Noida and Varanasi which was liable to be viewed as a Fixed Place PE/Service PE/Dependant Agent Permanent Establishment (‘DAPE’) according to the Art. 5 of India-United Stated of America (‘USA’) Double Tax Avoidance Agreement (‘DTAA’). On the basis of aforesaid report, an action was proposed to be initiated under Section 147/148 of the Act, and the notice dated 28-03-2019, 29-04-2019, 31-05-2019 was served under Section 148 of the Act. On 26-04-2019, the petitioner submitted a response asserting that they had not earned any income chargeable to tax, so the notice was liable to be withdrawn. Respondent 1 after survey was of the opinion that the petitioner had a “virtual projection” and presence in India in the form of its subsidiary, Progress Rail Innovations Private Limited (‘PRIPL’).
On 24-06-2019, the petitioner sent a letter to the respondent 1 stating that its PAN was linked to the office of the respondent 4 and respondent 1 had no jurisdiction to issue notices. On 26-06-2019, since the petitioner had not submitted its Return of Income (‘ROI’) in response to the notices, the respondent 1 started penalty proceedings under Section 271F read with Section 274 of the Act. The petitioner repeated its claim about jurisdiction in response to the penalty notice and stated that it had not filed its returns because of the assumption that its request for a four-month extension to do so had been granted.
On 12-08-2019, the petitioner informed the respondent 1 that the Income Tax Business Application was not allowing the submission of the proposed ROIs. The petitioner then sent physical copies of these returns under protest. On 25-09-2019, the petitioner again questioned the respondent 1’s authority to reassess. It was also alleged that the respondent 4 had transferred the petitioner’s PAN jurisdiction to the respondent 1 on 05-11-2019, which was alleged to be approved by respondent 5 on 6-11-2019.
Analysis:
After perusal of facts and contentions raised, the Court in order to determine whether the office in Noida and Varanasi of Indian subsidiary could be termed as PE and be liable of a reassessment, found evaluation of Art. 5 of India-USA DTAA apposite.
Article 5(1)- Fixed Place PE:
The Court examined whether the Noida factory and Varanasi office constituted a Fixed Place PE under the India-USA DTAA.
A PE implies a substantial and enduring presence of a foreign enterprise in another country. Article 5(1) defines a PE as a fixed place of business through which an enterprise’s business is partly or wholly carried out. It includes three main factors, namely, a fixed place of business, conducting business from that place, and business activity being carried out wholly or partly from there. Examples of such establishments include a place of management, branch, office, factory, and workshop.
According to the Supreme Court in the Formula One World Championship v. CIT, a PE must have three key characteristics: stability, productivity, and dependence. The Court found that the respondent 1’s reasoning for initiating action under Sections 147/148 of the Act failed to show that any specific part of the Noida or Varanasi premises was under the control of the petitioner. There was no evidence that the space was used to carry out the core business activities of the petitioner.
Additionally, the court emphasized that the Noida factory and Varanasi office did not fit into any of the categories listed in Article 5(2) of the DTAA. The distinct and divergent activities of the petitioner and the Indian subsidiary, as well as the Noida outfit’s independent manufacturing activities, further dispelled any presumption of a PE. Therefore, the Court concluded that the assumption of a Fixed Place PE was misconceived and untenable.
Article 5(2)(1)- Service PE:
Article 5(2)(l) of the India-USA DTAA states that a Service PE is created when an entity from one Contracting State provides services through employees or personnel in another Contracting State, especially for a “related enterprise”. However, there was no evidence suggesting that the petitioner was providing services to its Indian subsidiary. The only basis for this claim is the visit of the petitioner’s employees, which was insufficient to prove a Service PE.
The mere oversight or visits by the petitioner’s employees to the Indian subsidiary do not constitute a Service PE. Such activities are part of normal managerial oversight and interaction, aimed at sharing best practices and problem-solving. These visits are an extension of the parent company’s right to oversee its Indian operations, not the provision of services. Therefore, the claim under Article 5(2)(l) of the DTAA is baseless and untenable.
Article 5(3)- Preparatory & Auxiliary Functions:
The sub-clauses (d) and (e) of Article 5(3) exclude PEs engaged solely in activities such as the purchase of goods, collecting information, market research, and support services. The Court emphasizes that these activities, if preparatory or auxiliary in nature, do not constitute a PE under the DTAA. The respondent 1 focused on the PRIPL acting as a communication channel between the petitioner and the Indian Railways and performing supportive functions such as information gathering. The Court noted these activities align with Article 5(3) as preparatory or auxiliary, thus excluding PRIPL from being considered a PE. In DIT (International Taxation) v. Morgan Stanley & Co. Inc., the Supreme Court held that activities like market research, data processing, and account reconciliation are back-office functions, which were preparatory or auxiliary, and do not establish a PE. The Court found that the activities conducted by the Indian subsidiary were preparatory or auxiliary in nature and did not form the core business activities necessary to establish a PE under Article 5(1) or 5(2) of the DTAA.
Article 5(4)- DAPE:
To determine if Article 5(4) applied or not, which includes establishments in one contracting state that habitually conclude contracts or maintain a stock of goods for supply on behalf of a foreign enterprise, or habitually secure orders almost exclusively for the foreign enterprise. the respondents needed to show that the Indian subsidiary both had the “authority to conclude contracts” and regularly exercised this authority. Since the subsidiary never had this authority, the issue of habitual exercise does not arise. Further, under Article 5(4)(c) of the India-USA DTAA, the respondents also needed to prove that the Indian subsidiary was created solely to secure orders for the petitioner. This was also required to show that the subsidiary worked primarily for the petitioner and did so habitually.
The Court after evaluation was of the view that the functions performed by the subsidiary were mainly supportive and auxiliary which fell under the ambit of Art 5(3)(d)(e) of the India-USA DTAA. Thus, activities like this does not constitute the core business activity. It was further noted by the Court that the subsidiary and petitioner had their independent transaction dealings with Diesel Locomotive Works and other entities.
The Court while allowing the present writ petition and quashing impugned notices under Section 148 of the Act stated that, “this order, however, shall be without prejudice to the respondents to independently examining whether the office of the petitioner in the Delhi Circle constitutes a PE”.
The Court further quashed the order dated 05-11-2019, where respondent 4 transferred the petitioner’s PAN to facilitate respondent 1 to conduct reassessment proceedings, which was later found to be unsustainable and directed parties to revert the PAN to the jurisdictional AO of the petitioner.
[Progress Rail Locomotive v. CIT, W.P. (C) 12405 of 2019, Decided on:28-05-2024]
*Judgement Authored by: Justice Yashwant Varma.
Advocates who appeared in this case :
For Petitioner: Arvind Datar, Sr. Advocate; Rubal Bansal Maini and Prakhar Pandey, Advocates.
For Respondents: Sunil Agarwal, Sr. SC, Shivansh B. Pandya, Jr. SC; Utkarsh Tiwari and Amaan Ahmed Khan, Advocates.
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