Whether Entity Is 'Permanent Establishment' Is A Fact-Specific Issue, Must Be Examined Separately For Different Tax Periods: Delhi High Court

A division bench of Justices Yashwant Varma and Harish Vaidyanathan Shankar observed,

“The position of a PE being a facts-specific issue and thus liable to be examined against the backdrop of what obtained in a particular tax period…”

Reliance was placed on a Commentary of the Organization for Economic Cooperation and Development which states that the way in which business is carried on evolves over the years. Hence, the facts and arrangements applicable at one point in time may no longer be relevant after a change in the way that the business activities are carried on in a given State.

“Thus, whether or not a permanent establishment exists in a State during a given period must be determined on the basis of the circumstances applicable during that period and not those applicable during a past or future period,” the Commentary reads.

The bench also cited CIT v Gupta Abhushan (P) Ltd (2008) where the Supreme Court held that a survey report pertaining to a particular tax period cannot automatically be countenanced as being relevant and binding for independent assessment years.

In the case at hand, the Transmission and Distribution vertical of the GE Group was issued reassessment notices for AYs 2013-14 to 2017-18 on the grounds that it is a PE.

In doing so, the Department had relied on GE Energy Parts Inc. vs. CIT (International Taxation), Delhi -1 (2018) where the Delhi High Court had upheld the reassessment action against various constituents of the GE Group for AYs 2001-02 to 2008-09, based on a survey conducted under Section 133A(2A) of the Income Tax Act, 1961 in the year 2007.

The issue before the High Court was whether the 2007 survey could form the basis for impugned action.

Significant to note that the action was additionally based on a survey conducted in the year 2019.

It was the Department's case that the nature of activities undertaken by members of the GE Group engaged in T&D business would establish they constituted a PE; whereas, it was the consistent stand of the Petitioner that no PE had existed in the years in question (AYs 2013-14 to 2017-18).

Petitioner contended that the surveys as well as the material gathered by the Department in 2007 and 2019 cannot possibly be extrapolated to other years.

The Department however submitted that the facts discovered during the course of the survey undertaken in 2007 were common to those that came to light post the 2019 survey.

Findings

At the outset, the High Court remarked that the Department failed to show any facet or fact pertaining to the AYs' in question which could have been read as “demonstrative of an application of mind” to the facts that prevailed in the years 2007 and 2019.

“In fact, as we go through those reasons, it becomes more than apparent that the AO has merely proceeded to adopt and reiterate what was found in the course of the survey undertaken in 2007 and 2019 read alongside the judgment of this Court rendered in GE Energy,” it said.

The Court agreed that it is permissible for an AO to take cognizance of a “fundamental aspect pervading through different assessment years”. However, it added that the AO could not have proceeded on an “assumption” that facts had remained unchanged and that the business model had remained unaltered.

“The said precept could have been legitimately invoked provided the AO were satisfied or had come to record its prima facie opinion that the facts which prevailed and obtained in AY 2013-14 upto AY 2017-18 were identical to those which had been found in the course of the two surveys which had been undertaken in 2007 and 2019,” Court said and quashed the impugned notices.

Appearance: Mr. Ajay Vohra, Sr. Adv. with Mr. Aditya Vohra & Mr. Shashvat Dhamija, Advs. for Petitioner; Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, JSC for Respondent

Case title: Grid Solutions OY (Ltd) v. Assistant Commissioner Of Income Tax International Taxation & Anr.

Citation: 2025 LiveLaw (Del) 58

Case no.: W.P.(C) 1196/2022