Income Tax Appellate Tribunal - Pune
Deputy Director Of Income-Tax,, vs Epcos Ag.,, Nashik on 14 December, 2016
आयकर अपील य अ धकरण, पुणे यायपीठ "बी" पुणे म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
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BEFORE SHRI R.K. PANDA, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.249/PN/2015
#नधा&रण वष& / Assessment Year : 2010-11
DDIT (International Taxation)-I, .......... अपीलाथ /
Pune
Appellant
बनाम v/s
EPCOS, AG,
C/o. Epcos India Pvt., .......... यथ /
Plot No.E,22-25, MIDC,
Respondent
Satpur, Nashik - 422 007
PAN : AAACE9787H
अपीलाथ क ओर से / Appellant by : Shri Avadesh Kumar
यथ क ओर से / Respondent by : Shri Paras S. Savla
सुनवाई क तार ख / घोषणा क तार ख /
Date of Hearing :13.12.2016 Date of Pronouncement: 14.12.2016
आदे श / ORDER
PER R.K.PANDA, AM :
This appeal filed by the Revenue is directed against the order dated 27-11-2014 passed by the DRP, Pune for the Assessment Year 2010-11.
2. Facts of the case, in brief, are that the assessee is a Foreign Company having its head office at Munich, St. Martin Street 53, Germany. It is a tax resident of Germany. It is engaged in the business of Development, Manufacture and marketing of Electronic Components 2 ITA No.249/PN/2015 and Modules. It is well known for its superior products in the segment of capacitors, Ceramic components, Capacitors and Inductors.
3. During the course of assessment proceedings the Assessing Officer noted that the assessee is in receipt of income of Rs.16,72,75,797/-, the breakup of which is as under :
Sr.No. Description of the Income Amount (Rs) 1 Receipt from Product Marketing Services 8,56,61,873/- 2 Income from Sales Support Services 77,83,023/- 3 Income from IT Support Services 4,87,48,738/- 4 Interest Received on ECB Loans 2,50,82,163/-
Total 16,72,75,797/-
4. The Assessing Officer noted that as per the TDS certificate the amount paid or credited by the Indian entity is Rs.16,74,64,089/-.
However, the assessee has offered an amount of Rs.16,72,75,800/- only as interest and royalty/FTS. He, therefore, asked the assessee to submit the reconciliation of amount shown as taxable income and the amount credited as per the TDS certificate and the reasons thereof along with documentary evidence. In absence of any reply from the side of the assessee, the Assessing Officer determined the taxable income of the assessee at Rs.16,74,64,089/- and passed the draft order u/s.144C(1) by holding that the assessee is in the receipt of the interest, royalty/FTS income amounting to Rs.16,74,64,089/- which is attributable to PE in India. Accordingly, he taxed the receipts u/s.115A (in case of interest) and u/s.115A r.w.s. 44D of the Act (in case of royalty/FTS) @20%, without allowing any deduction in respect of any expenditure or allowance under any of the sections from section 28 to 44C.
5. The assessee objected to the said addition made in the draft order and appealed to the DRP, Pune. The DRP, Pune relying on the 3 ITA No.249/PN/2015 decision of the Tribunal in assessee's own case for A.Y. 2007-08 directed the Assessing Officer to delete the demand.
6. Aggrieved with such direction of the DRP the revenue is in appeal before us with the following grounds :
"1. Whether on the facts and in the circumstances of the case, the DRP, Pune erred in holding that assessee does not have a PE in India dehors the finding of the AO that the functions of EPCOS, AG are performed through the Indian Subsidiaries by issuance of directions through emails etc. and the entire spectrum of activities of the Indian Subsidiaries are monitored by the assessee thus having control and management of Indian Subsidiaries and thereby constituting a PE in India.
2. Whether on the facts and in the circumstances of the case, the DRP, Pune erred in law by holding that even if a PE, exists but if the receipts sourced from India are not attributable to the PE, then the case of the assessee would still fall under Art.12(2) and exclusion clause provided in Art.12(5) would not be invoked thereby not triggering Art.7 of the treaty for the rate purposes.
3. The appellant craves leave to add, amend/alter or delete any ground other than the aforesaid ground herein if advised so."
7. The Ld. Counsel for the counsel at the outset submitted that identical issue had come up before the Tribunal in assessee's own case for A.Y. 2009-10. The Tribunal following the order of the Tribunal in assessee's own case for the preceding assessment years dismissed the appeal filed by the revenue on this very issue. Therefore, the issue is covered in favour of the assessee and against the revenue by the decision of the Tribunal in assessee's own case. He accordingly submitted that the grounds raised by the revenue should be dismissed.
8. The Ld. Departmental Representative on the other hand fairly conceded that the issue stands decided in favour of the assessee by the decision of the Tribunal. However, the revenue has filed appeal against the order of the Tribunal before the Hon'ble High Court. Therefore, to keep the matter alive, the revenue has filed this appeal. 4 ITA No.249/PN/2015
9. We have considered the rival arguments made by both the sides, perused the order of the Assessing Officer/DRP and the paper book filed on behalf of the assessee. We find the issue raised by the revenue in the grounds of appeal has already been decided by the Tribunal in assessee's own case for A.Y. 2009-10. The Tribunal after considering the order of the Tribunal in assessee's own case for A.Y. 2003-04 which has subsequently been followed in the other assessment years has decided the issue and the grounds raised by the revenue have been dismissed. The relevant observation of the order of the Tribunal from para 5 onwards read as under :
"5. Both sides heard. We have perused the orders of authorities below and have also considered the decision of the Tribunal in the case of the assessee in earlier assessment years. We find that the issue raised in the present appeal has been already adjudicated by the Coordinate Bench of the Tribunal in assessee's own case. The relevant extract of the order of Tribunal for the assessment year 2003-04 which has been subsequently followed in the other assessment years reads as under:
"Conclusion on the first issue i.e. on existence of PE:
41.1 In the light of these discussions, in our considered view, the assessee company did not have any PE in India, much less a PE to which subject 'royalties' and 'fees for technical services' can be attributed. In terms of the India-Germany DTAA, India does not have right to tax these receipts as business profits under art. 7. Of course, in the light of our finding that no revenues earned by the assessee company could be said to be attributable to the PE, even if one was to come to the conclusion that a PE existed, no taxability could arise under art. 7. The assessee has offered the royalties and fees for technical services for taxability in India under art. 12, and, to that extent, admitted tax liability exists. The overzealous approach of the AO has been rightly rejected by the CIT(A). We approve and confirm the stand of the CIT(A), and decline to interfere in the matter.
Observations on the second issue i.e. on taxability @ 20 per cent in terms of s. 44D r/w s. 115A in case PE is found to be in existence:
42. While dealing with the interplay between existence of a PE and taxability as 'royalties and fees for technical services', we had taken note of the proposition advanced by the Revenue authorities that once art. 12(5) is invoked, all the receipts as 'royalties and fees for technical services' are 5 ITA No.249/PN/2015 taxable in India on gross basis under s. 44D, though, as per the provisions of s. 115A, at a lower rate of 20 per cent.
43. This proposition proceeds on the fallacy that once the first conditions under art. 12(5) are satisfied, i.e. once the assessee company has a PE in India, the 'royalties and fees for technical services' are to be necessarily taxed in India under art. 7. That is clearly erroneous, because, as noted above, twin conditions of existence of the PE as also the effective nexus between the PE and the subject 'royalties' and 'fees for technical services' are to be satisfied. We are of the view that on account of existence of a PE in India, only such profits of the assessee company can be brought to tax in India as are "attributable to that PE". It is a typical chicken and egg situation of circular logic. On one hand, the wording of art. 12(5) is such that this exclusion clause is triggered only when 'royalties and fees for technical services' have a live economic nexus, reflected by effective connection with 'rights', 'properties' and "contracts', in respect of which such royalties and fees for technical services are paid, with PE, and, on the other hand, the scheme of taxability under art. 7, which is complementary to this approach, is also such that the taxability under art. 7 is attracted only in respect of such 'royalties' and 'fees for technical servicer' as are so attributable to the PE. Unless an amount is such that it is taxable under art. 7, even if it is in the nature of 'royalties' or 'fees for technical services', the exclusion clause under art. 12(5) will not come into play. At the same time, unless an amount representing 'royalties' or 'fees for technical services' is such that it triggers exclusion clause under art. 12(5), it would not be taxable under art. 7.
44. Art. 7(1) restricts the scope of taxability of business profits of an enterprise in the source country to only such profits as are attributable to the PE. Therefore, to bring any income to taxability under art. 7 in the source country, the first thing to be satisfied under art. 7(1) is that the income being sought to be taxed is only such as is attributable to the PE. In other words, unless the Revenue authorities can demonstrate that the 'royalties and fees for technical services' earned by the foreign company constitutes profit attributable to the PE, it cannot be brought to tax in India. Just because there is a PE in the source country, one cannot infer that entire income from the source country is attributable to the PE and liable to be taxed in the source country for that reason. There is no justification for the Revenue authorities to come to the concision that entire receipts of the assessee company are attributable to 'PE' and are, therefore, taxable under art. 7 for that reason. Unless the conditions of art. 7(1) are not satisfied, there is no occasion to invoke taxability as profits attributable to PE. It would perhaps need a force of attraction rule of widest amplitude to do so. As to how should this profit attribution exercise done, the guidance is available from art. 7(2).
45. Under art. 7(2), these profits are to be so attributed as PE "might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities 6 ITA No.249/PN/2015 under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE". The PE is to be considered as hypothetical independent but let us not forget that the services are rendered by the PE, i.e. Indian subsidiaries, and the services are also availed by same Indian subsidiaries. The fundamental question that would arise in such a case s whether someone can make profit out of dealings with oneself. The answer poses no difficulty. The proposition is well settled that nobody can make profit out of self or trade deal with self or earn from self. It is so held it a series of cases, including Sir Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC), Betts Hartley Huett & Co. Ltd. vs. CIT (1979) 116 ITR 425 (Cal) and ABN Amro Bank NV vs. Asstt. Director of IT (2005) 98 TTJ (Kol)(SB) 295 : (2005) 97 ITD 89 (Kol)(SB), It is thus clear that an income of the Indian subsidiaries, on account of having rendered services to themselves, cannot be taxed.
There cannot be any income in the hands of this PE, even if that be so, which can be brought to tax. 46. The limitation on deductions in accordance with the domestic law, as laid down by art. 7(3), can come to play when there is an income attributable to the PE in the first place. When there are no receipts which can be attributed, to the PE, there is no question of allowing deductions there from. That aspect of the matter is entirely infructuous. The limitation under s. 44D is, therefore, not relevant in the present case. The same is the position with regard to the lower rate prescribed under s. 115A of the Act. There is no warrant for application of s. 44D and s. 115A unless there is a positive income from 'royalties and fees for technical services' which can be brought to tax under art. 7.
Conclusion on the second issue i.e., taxability @ 20 per cent in terns s. 44D r/w S.115A in case PE is found to be in existence :
47. In our considered view, in terms of the indo German tax treaty provisions, it will have to be demonstrated that such royalties and fees for technical services have a live economic nexus with the PE and only then exclusion clause under art.
12(5) as also taxability under arts. 7(1) and 7(2), will come into play. It is only after these royalties and fees for technical services are so included in the business profits attributable to the PE that the provisions of ss. 44D and 115A can be invoked. Therefore, even if we are to hold that the taxpayer had a PE in India, unless there is a categorical finding that entire receipts were attributable to that PE, entire business receipts of the taxpayer sourced from India would not have been taxable in India under art. 7. The provisions of s. 44D and s. 115A do not, therefore, come into play only because there is a PE in India."
6. Since, there has been no change in the facts and circumstances of the case in the impugned assessment year, we, therefore, respectfully follow the order of Co-ordinate Bench and dismiss the appeal of the Revenue."
7ITA No.249/PN/2015
10. Since the facts of the present case are identical to the facts of the case in the preceding assessment years, therefore, in absence of any contrary material brought to our notice, we do not find any infirmity in the order of the DRP in holding that the assessee company has no PE in India and therefore invoking of section 115A r.w.s. 44DA was not necessary. We accordingly uphold the order of the DRP and the grounds raised by the revenue are dismissed.
11. In the result, the appeal filed by the revenue is dismissed.
Pronounced in the open court on 14-12-2016.
Sd/- Sd/-
(VIKAS AWASTHY) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
पण
ु े Pune; दनांक Dated : 14 December, 2016.
th
सतीश
आदे श क) *#त,ल!प अ-े!षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The DRP, Pune #वभागीय %त%न*ध, आयकर अपील य अ*धकरण, "B
4.
Bench" पुणे / DR, ITAT, "B Bench" Pune;
5. गाड2 फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, //स या#पत %त / True Copy // // True Copy // व&र'ठ %नजी स*चव / Sr. Private Secretary आयकर अपील य अ*धकरण, पुणे / ITAT, Pune