Once Issue Of Arm's Length Remuneration Settled By TPO, Question Of Ascertaining Existence Of PE Is Academic; Delhi High Court Quashes Reassessment Proceedings
The Delhi High Court, while quashing the reassessment proceedings initiated by the income tax department against the Caterpillar Group, held that once the issue of arm's length remuneration was settled by the Transfer Pricing Officer (TPO), the question of ascertaining the existence of a permanent establishment (PE) was academic.The bench of Justice Yashwant Varma and Justice Purushaindra...
The Delhi High Court, while quashing the reassessment proceedings initiated by the income tax department against the Caterpillar Group, held that once the issue of arm's length remuneration was settled by the Transfer Pricing Officer (TPO), the question of ascertaining the existence of a permanent establishment (PE) was academic.
The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that the reassessment proceeding was initiated on the ground that the production unit of the wholly owned subsidiary constitutes a fixed place permanent establishment, service PE, and dependent agent permanent establishment (DAPE).
The petitioner/assessee is stated to be a foreign company registered under the laws of Delaware, in the United States of America, and is a part of the Caterpillar Group. It is stated to be one of the largest integrated and diversified manufacturers of rolling stock and infrastructure solutions, engaged in providing solutions and technologies to rail customers across the globe. According to the writ petitioner, it is also engaged in supplying equipment directly to the Indian Railways, including to the Diesel Locomotive Works, Varanasi. The supplies are effected by way of imports, which are made directly to the Indian Railways against bills of entries that are duly filed. The petitioner describes itself as being one of the largest global suppliers of new and reconditioned components for Class-1 railroads, short lines, freight cars, freight car manufacturers, and private freight car owners.
The petitioner has a wholly owned Indian subsidiary, Progress Rail Innovations Private Limited, which was incorporated in 1996 and had a manufacturing unit at Noida and an office at Varanasi during Assessment Years', namely AYs' 2012–13 up to 2018–19.
On the basis of a survey conducted under Section 133A of the Income Tax Act, 1961, a survey report was prepared in which it was alleged that the petitioner has an office in Noida, which was liable to be viewed as a fixed place PE, service PE, or DAPE. On the basis of the report, action was proposed to be initiated under Sections 147 and 148.
Upon receipt of the Section 148 notice, the petitioner submitted a response asserting that it had not earned any income chargeable to tax and that consequently the notice was liable to be withdrawn. The department provided the reasons underlying the initiation of action under Sections 147 and 148 to the petitioner. The department principally relied upon the statements of Jeetendra Pratap Singh, Sales Executive of PRIPL's Varanasi branch; Shivanshu Narendra Kaushik, DGM, PRIPL, Noida; and Phaneendra Kumar Potnuru, Director-Finance, PRIPL, Noida. The department came to the opinion that the petitioner had a “virtual projection” and presence in India in the form of its subsidiary, PRIPL. It was consequently held that since a PE existed, income attributable to that entity was liable to be taxed.
The petitioner questioned the assumption of jurisdiction as well as the reasons so noted, as would be evident from its response. It also sought further documentation, including the statements taken from the employees of PRIPL, as well as a copy of all the documents and information collected by the petitioner during the course of those survey proceedings in terms of its letter.
The petitioner addressed a letter to the first respondent asserting that its duly allotted PAN was linked to the office of the department and consequently questioned the issuance of notices.
The petitioner contended that the department had wrongly assumed jurisdiction and that the notices were thus liable to be withdrawn on this ground alone. On June 26, 2019, and faced with the fact that the petitioner had failed to submit its return of income in compliance with the notices issued, the first respondent initiated penalty proceedings referable to Section 271F read with Section 274. In response to the notice, the petitioner reiterated its stance that its PAN fell within the jurisdiction of the fourth respondent and that consequently, both the Section 148 notice as well as the penalty notice issued by the department were without jurisdiction.
The petitioner contended that PRIPL, the wholly owned subsidiary of the petitioner, was incorporated way back in 1996 and had a manufacturing unit in Noida and an office in Varanasi during the AYs 2012–13 to 2018–19. The subsidiary had been regularly assessed for tax in Delhi by virtue of the location of its registered office, which was situated in that jurisdiction, and had also been subjected to transfer pricing assessments.
The petitioner contended 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 the 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. The petitioner highlighted the distinct line of products that were manufactured by the petitioner and its Indian subsidiary, as well as certain cost audit reports that were drawn in the course of oral submissions. The respondent department has incorrectly processed the claim on the basis that the Indian subsidiary constituted a PE.
The department relied upon emails obtained from the Noida office of PRIPL, which contained information regarding visits to India by foreign expatriates, minute-to-minute programs of the said expatriates during their visit to India, and other related information. Some of those emails, whose contents were, according to him, suggestive of foreign expatriates undertaking visits to India to overview PRIPL's operations, devise short- and long-term plans for India, diversify business, and engage in discussion aiding the formulation of future business strategies,.
Article 5(2)(l) of the India-USA DTAA enumerates 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.”.
The court noted that the conclusion was solely based on the visits of employees of the petitioner and their travel itineraries having been discovered. It cannot possibly be countenanced as being sufficient to render a finding with respect to Service PE.
The court stated that in order to fall within the ambit of Article 5(2)(l)(ii), it was incumbent upon the respondent-department to have established that the employees of the petitioner were in fact discharging functions in connection with the business of the Indian entity.
“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,” the court said while quashing the reassessment proceedings.
Counsel For Petitioner: Arvind Datar
Counsel For Respondent: Sunil Agarwal
Case Title: Progress Rail Locomotive Inc. (Formerly Electro Motive Diesel Inc.) Versus Deputy Commissioner Of Income-Tax
Citation: 2024 LiveLaw (Del) 671
Case No.: W.P.(C) 12405/2019