The Delhi High Court quashed re-assessment proceedings and held that the question of ascertaining existence of PE academic when arm length remuneration issue settled by the Transfer Pricing Officer (TPO).
As per the petitioner, it has no income which can be said to accrue or arise in India under the provisions of the Act and although it has a registered office in Delhi, and has been allotted a Permanent Account Number falling under the jurisdiction of the Commissioner of Income Tax, International Taxation-1, Delhi – the fifth respondent herein, it has not filed any Income Tax Returns since no income accrued or arose and nor could that income be said to have deemed to have accrued or arisen in India.
The petitioner asserted that neither the said Transfer Pricing Order nor any other order made by the authorities under the Act have ever found the Indian subsidiary to constitute a PE of the petitioner despite the said entity having been duly assessed for the past 25 years.
It is also the case of the petitioner that the products manufactured by the Indian subsidiary are clearly distinct from those manufactured and supplied by it, and consequently it would be found that the core business activities of the petitioner and the Indian subsidiary are completely different.
The senior counsel for Progress Rail Locomotive submitted that the Transfer Pricing Officer had examined the activities of the Indian subsidiary in minute detail and ultimately proposed various adjustments. However, it was highlighted, that neither this order nor for that matter any other adjudication that may have been undertaken under the Income Tax Act had come to hold or recognize the Indian subsidiary to be a PE of the petitioner.
Article 5(2)(l) of the India-USA DTAA notes the conditions that, if found to exist, would lead to the creation of a service PE. In terms of that Article, where it is found that the entity of a contracting state is engaged in providing services through employees or other personnel in another contracting state, and where those services are rendered for a “related enterprise,” it would result in a service PE coming into existence. Article 5(3) constitutes the negative list, in terms of which activities of the nature specified therein would result in a presumption of a PE being dispelled. Even a single visit by employees of the petitioner to oversee PRIPL’s India operations would constitute a service PE, especially when there is no requirement of a specific time period for the furnishing of service by the parent enterprise for its “related enterprise.”.
A Division Bench of Justices Yashwant Varma and Puruhaindra Kumar Kaurav observed that “A finding on Service PE could not have been rendered unless the respondents had found that the petitioner had deployed personnel who were posted in the Indian establishment and were concerned with performing services for the Indian subsidiary. In fact, and as would be evident from a reading of the reasons set out for initiating action under Sections 147 and 148, the same were principally concerned with the Indian subsidiary performing functions and services for the petitioner”.
“Insofar as the tests laid down in Article 5(4)(a), (b) and (c) are concerned, the same are clearly not met since the respondents have failed to refer to any authority that may have been conferred upon the Indian entity ―to conclude contracts‖ on behalf of the petitioner. The mere discovery of the seal of the petitioner is also not liable to be viewed as resulting in clause (a) and stipulations contained therein being satisfied. This, since it is not the case of the respondents that the Indian entity had been authorized to affix that seal on any document or contract” the Court noted.
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