11 March 2022 2:50 AM GMT
The Delhi Bench of ITAT, consisting of members N.K. Billaiya (Accountant Member) and Astha Chandra (Judicial Member), has held that access to a foreign enterprise for providing technical assistance to its Joint Venture Company in its premises in India does not amount to a Permanent Establishment under the Double Taxation Avoidance Agreement. The Assessee FCC Co. Ltd, a Japanese...
The Delhi Bench of ITAT, consisting of members N.K. Billaiya (Accountant Member) and Astha Chandra (Judicial Member), has held that access to a foreign enterprise for providing technical assistance to its Joint Venture Company in its premises in India does not amount to a Permanent Establishment under the Double Taxation Avoidance Agreement.
The Assessee FCC Co. Ltd, a Japanese company engaged in the business of manufacturing clutch systems for cars and utility vehicles, entered into a joint venture agreement with Rico Auto Industries Ltd. and formed a Joint Venture company in India, FCC Rico Ltd. The Assessing Officer (AO) held that during the relevant assessment years, FCC Rico Ltd.'s premises in India served as a branch and office of the Assessee and therefore the Assessee had a business connection in India under section 9(1)(i) of the Income Tax Act, 1961 and a Fixed Place (Permanent Establishment) in India under Article 5 of the India-Japan Double Taxation Avoidance Agreement (DTAA). The AO, therefore attributed 50% of the profits of the Assessee to its alleged Permanent Establishment in India for the purpose of tax. The Dispute Resolution Panel upheld the order of the AO. The Assessee filed an appeal before the ITAT.
The departmental representative before the ITAT contended that a Fixed Place (Permanent Establishment) was created in India on account of the presence of the employees of Assessee in India who performed supervisory functions in the form of technical guidance for the goods manufactured by FCC Rico Ltd . The Assessee FCC Co. Ltd averred that since the goods sold by the Assessee were manufactured and sold outside India and the sale consideration was also received outside India, the Assessee could not be said to have carried out any operation in India in relation to the raw materials and capital goods supplied by it to FCC Rico Ltd. The Assessee contended that it had the right to inspect the products manufactured by FCC Rico Ltd to ensure that the quality of goods and the manufacturing facility was as per the global standards of the Assessee, and that merely because access for inspection was provided to the Assessee it did not establish the premises of FCC Rico as its Permanent Establishment in India.
Article 7 of the India- Japan DTAA provides that the profits of a Japanese enterprise shall be taxable only in Japan unless the enterprise carries on business in India through a Permanent Establishment. Also, only the profits that are directly or indirectly attributable to the Permanent Establishment in India shall be taxable. Article 5(1) of the DTAA provides that a Permanent Establishment of a foreign enterprise may exist in India when a foreign enterprise has a Fixed Place in India through which the business of the foreign enterprise is wholly or partly carried out. Fixed Place or Permanent Establishment under Article 5(1) may exist if the foreign enterprise has a 'place of business' in India which is at the disposal of the enterprise and is 'fixed', i.e. it is established at a distinct place with a certain degree of permanence, and the business of the enterprise is carried through this fixed place. Also, under Article 5(4) of the DTAA, an enterprise shall be deemed to have a Permanent Establishment in a State and be said to carry business through that Permanent Establishment if it carries on supervisory activities in that State for more than six months in connection with a building site, construction or installation project in that State.
The ITAT held that in the present case the access to the factory premises in India to FCC Co. Ltd (Assessee) was only for a limited purpose of providing technical assistance to its Joint Venture Company, FCC Rico Ltd., with respect to its business. The Assessee had no control over the said premises as envisaged under Article 5(4) of the India-Japan DTAA.
"No doubt the assesee has access to the factory premises of FRL but it is for the limited purposes of rendering agreed services to FRL without any control over the said premises. Moreover, FRL is an independent legal entity carrying on its business with its own clients for which the assessee provides time to time technical assistance as required by it. The business of the assesee is not being carried out from the alleged Fixed Place PE."
The ITAT held that since the goods sold by the Assessee were manufactured and sold outside India and the sale consideration was also received outside India, the Assessee could not be said to have carried out any operation in India and therefore, it had no Fixed Place or Permanent Establishment in India.
"Since the goods were manufactured outside India, sale of goods took place outside India and consideration was also received by the assessee outside India, title passed outside India and hence the assessee has not carried out any operation in India in relation to supply of the raw material and capital goods. We therefore hold that the assessee does not have a Fixed Place PE in India"
The ITAT observed that the activities performed by the employees of the Assessee in the form of assistance in quality control with respect to the supplies made by FCC Rico Ltd to its customers were not in the nature of supervisory functions falling under the India-Japan DTAA. The ITAT also observed that the services rendered by the Assessee's employees were not in connection with a building site or construction installation under the DTAA.
The ITAT, therefore held that no Permanent Establishment of the Assessee existed in India and thus allowed the Assessee's appeal.
Case Title: FCC Co. Ltd. Versus ACIT, New Delhi
Representative For Assessee: K. M. Gupta, Advocate And Shruti Khimta, Advocate
Representative For The Department: Ms. Anupam Anand, CIT DR
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