The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has strongly held that Assessing Officer cannot rely on the Form 10-K filed before the US Securities & Exchange Commission (SEC) to allege that a foreign assessee has a fixed place PE in India, if the report reflects the worldwide assets of the entire group and not the standalone entity of the assessee. The ITAT explained that a subsidiary with its own manufacturing unit, independent customer base, and turnover running into hundreds of crores cannot be treated as economically or administratively dependent on its foreign parent, and therefore does not constitute a Dependent Agency PE under Article 5(4) of the India-US DTAA.
Further, the Tribunal emphasised that the Revenue cannot extract clauses from a License Agreement relating to royalty income already offered to tax and use the same to allege that the subsidiary is habitually promoting the business of the foreign assessee in a different segment such as sale of machinery and raw material. Hence, once it is established that the assessee does not have a fixed place PE or DAPE in India, the question of attribution of profits to the alleged PE does not arise.
The Division Bench comprising Vikas Awasthy (Judicial Member) and Naveen Chandra (Accountant Member) observed that the AO’s reliance on the Form 10-K report was misplaced, following the Supreme Court’s decision in ADIT vs. E-Funds IT Solution Inc. [86 taxmann.com 240], which clearly held that the Form 10-K speaks of the group of companies worldwide as a whole and shows assets of the group worldwide, and therefore cannot be the basis to allege that the assessee has a fixed place PE in India.
Applying the ‘at the disposal’ test laid down by the Supreme Court in Formula One World Championship Ltd. vs. CIT [80 taxmann.com 347], the Tribunal observed that the principal test to ascertain a fixed place of business is whether the premises are physically at the disposal of the foreign enterprise, and that merely because DIFS is a subsidiary of the assessee, the premises of DIFS cannot ipso facto be treated as being at the disposal of the assessee. The Tribunal further held that the AO had failed to bring on record any material to discharge its onus of proving that the alleged premises at Manesar, Gurgaon were at the disposal of the assessee, and that the mandatory conditions under Article 5(1) and 5(2)(a) to (k) of the India-US DTAA were not satisfied.
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On the question of DAPE, the Tribunal held that DIFS was not economically dependent on the assessee, given its turnover of Rs. 282 crores and the minuscule value of transactions with the assessee, and that DIFS operated as a full risk-bearing independent entity with its own manufacturing plant, customer base, and logistics arrangements.
The Tribunal further observed that the AO had not cited even a single instance where DIFS had concluded contracts or secured orders on behalf of the assessee, and that the reference to Clause 7 of the Patent, Trademark and Know-how License Agreement (relating to marketing, advertisement and promotion of licensed products) was flawed because the said agreement pertained to the royalty segment already offered to tax, and the sale of machinery and raw material was a different segment not covered by the License Agreement. Accordingly, the Tribunal held that the mandatory conditions of Article 5(4) and 5(5) of the India-US DTAA to constitute a DAPE were absent.
Briefly, Donaldson Company Inc., a company incorporated under the laws of the State of Delaware, United States of America, and a tax resident of the US, is engaged in the manufacture of filtration systems serving industrial and engine markets. During the assessment year 2020-21, the assessee sold machinery, raw material, and finished goods to its Indian subsidiary, M/s Donaldson India Filter Systems Pvt. Ltd. (DIFS).
The assessee also executed a Patent, Trademark and Know-how License Agreement and an Information Technology Service Agreement with DIFS, receiving Royalty and Fees for Technical Services (FTS), which were duly offered to tax in India. The Assessing Officer (AO), however, held that the assessee had a Permanent Establishment (PE) in India and attributed a profit of Rs. 2.41 crores on the sale of machinery, finished goods, and raw material to the alleged PE, treating the same as business income chargeable to tax in India.
