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 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asserting that it had not earned any income chargeable to tax and that consequently the notice was liable to be withdrawn.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 ...

Once Issue Of Arm's Length Remuneration Settled By TPO, Question Of Ascertaining Existence Of PE Is Academic; Delhi High Court Quashes Reassessment Proceedings

Mariya Paliwala

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