F.C.C. CO. LTD.,GURGAON, HARYANA V. ASSISTANT COMMISSIONER OF INCOME TAX (INTERNATIONAL TAX)-1(3)(1), NEW DELHI, CIVIC CENTER, NEW DELHI

ITITA 583/DEL/2025

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F.C.C. Co. Ltd., a Japanese company, appealed against the final assessment order passed by the Assistant Commissioner of Income Tax, which included additional income in the assessee's taxable income for the assessment year 2022-23. The primary contention was whether the assessee had a Permanent Establishment (PE) in India under the India-Japan DTAA, which would necessitate the taxation of certain income in India. The Tribunal examined previous rulings in similar cases involving the same parties and facts, where it was held that the assessee did not have a PE in India. The Tribunal decided in favor of the assessee, aligning with earlier decisions and dismissing the revenue's arguments based on the unchanged factual matrix.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 652769 (ITAT-DELHI)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 18-06-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2022-2023
• Other Referred Cases: ITA No. 766/Del./2023, ITA No. 1789/Del./2022, ITA Nos. 8960 & 54/Del/2019
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH ANAND
• Assessee Lawyers: K.M. GUPTA
• Keywords: Business income; Tax effect; Initiation of penalty proceedings; Double taxation relief; Permanent establishment
• Section: 143(3); 90; 234B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘D’ NEW DELHI BEFORE SHRI ANUBHAV SHARMA, JUDICIAL MEMBER AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER IT (IT)A No.583/Del/2025 (ASSESSMENT YEAR:2022-23) F.C.C. Co. Ltd., Plot No.5, Sector-3, IMT Manesar, Gurgaon, Haryana-122001 PAN:AABCF5381M Vs. Asst. CIT, (International Taxation), Circle-1(3)(1), New Delhi. (Appellant) (Respondent) O R D E R PER MANISH AGARWAL, AM: This is an appeal filed by the assessee against the final assessment order passed by the Assistant Commissioner of Income Tax, Circle INT. Tax- 1(3)(1) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (“the Act” in short) dated 11.12.2024 for A.Y. 2022-23. 2. The assessee has taken the following grounds of appeal:- “1. On the facts and circumstances of the case & in law, the final assessment order passed by the Learned Assistant Commissioner of Income-tax, International Taxation 1(3)(1), New Delhi (hereinafter referred to as 'Ld. AO') pursuant to the directions of the Dispute Resolution Panel-I ('DRP') dated 11 December 2024, under section 143(3) read with section 144C(13) is bad in law and barred by limitation. 2. On the facts and in the circumstances of the case & in law, the Ld. AO/ DRP has erred in assessing the income of the Applicant to INR 92,88,38,447 as against the returned income of INR 88,48,88,793 thereby making an addition of INR 4,39,49,654. 3. On the facts and in the circumstances of the case & in law, the Ld. AO/ DRP has erred in alleging the existence of a Permanent Establishment ('PE') in the nature of a fixed place PE and supervisory Assessee by Shri K.M. Gupta, Adv., Ms. Shruti Khimta, Adv. and Sh. Harmeet Singh, CA Department by Dr. Saurabh Anand, Sr. DR Date of hearing 07.05.2025 Date of pronouncement 18.06.2025 2 IT ( IT) A No.583/Del/2025 F.C.C.Co. Ltd. vs. ACIT (Int.Tax.) PE under the Article 5 of the Double Taxation Avoidance Agreement ('DTAA') between India and Japan. 3.1 The Ld. AO/DRP failed to appreciate the fact that only one employee of the Appellant has visited India for only 18 days, accordingly, basic conditions stipulated under DTAA India-Japan for establishing supervisory PE is not met. 4. On the facts and in the circumstances of the case & in law, the Ld. AO/ DRP has erred in alleging that the Appellant has business connection in India under section 9(1)(i) of the Act in-spite of the fact that the Appellant is governed by the provisions of DTAA which are more beneficial in view of the provisions of section 90 of the Act. 5. On the facts and in the circumstances of the case & in law, Ld. AO/ DRP erred in disregarding the addendum to sales contract entered into by the Appellant specifically providing that risk and title in the goods passes outside India and thereby erred in concluding that transfer of ownership takes place in India by applying the 'principle of Preponderance of Probability’. 6. On the facts and in the circumstances of the case & in law, the Ld. AO/ DRP exceeded his jurisdiction by overlooking and not following the favourable orders passed by the Hon'ble Tribunal in the Appellant's own case for earlier assessment years i.e., (AY 2014-15, AY 2015-16, AY 2017-18, and AY 2020-21) which were further affirmed by Delhi High Court, wherein there is no change in facts and circumstances of those years vis-à-vis year under consideration as admitted by the Ld. AO/DRP in their respective orders. 7. On the facts and in the circumstances of the case & in law, the Ld. AO/ DRP has erred in attributing income from offshore supply of raw materials & components and capital goods ignoring the facts that the same is not taxable in India under the provisions of the Act or DTAA between India and Japan. 8. On the facts and in the circumstances of the case & in law, the Ld. AO/ DRP has erred in attributing income from offshore supply of raw materials and components and capital goods to the alleged PE of the Appellant without establishing that the alleged PE of the Appellant had any role to play in such offshore supply 9. On the facts and in the circumstances of the case & in law, the Ld. AO/ DRP has erred in using the global financial statements of the Applicant for the purpose of attribution of 50% of profit on adhoc basis ignoring the functions performed, assets employed, and risk assumed in India. 10. Without prejudice to the above, the Ld. AO/DRP has erred in facts and in law in ignoring that even where the Applicant's PE is established in India alleging installation of equipment, only income from receipts arising from sale of equipment should be taxed and not income from sale of raw materials. 11. That the Ld. AO/DRP has erred on facts and in law in charging interest under section 234B of the Act. 3 IT ( IT) A No.583/Del/2025 F.C.C.Co. Ltd. vs. ACIT (Int.Tax.) 12. That the Ld.AO/DRP has erred on facts and in law in charging penalty under section 270A of the Act mechanically and without recording any adequate reasons for such initiation. The grounds of appeal raised by the Appellant herein are without prejudice to each other, except specifically mentioned. The Appellant reserves its right to add, alter, amend or withdraw any of the grounds of appeal or produce further documents either before or at the time of hearing of this Appeal.” 3. The main issue involved in the appeal is whether the assessee has permanent establishment (PE) either in the nature of a fixed place PE or supervisory PE under article 5 of India Japan Double Taxation Avoidance Agreement (DTAA). 4. Before us ld. Counsel of the assessee submits that grounds of appeal No. 1 & 2 are general in nature thus needs no adjudication. 5. Regarding Grounds of appeal No. 3 to 9, he vehemently submits that the issue involved in this appeal is squarely covered in the favour of assessee’s in its own cases for A.Y. 2014-15, 2015-16, 2017-18 & 2020-21 where the coordinate bench of Tribunal had allowed the appeal and such orders were stood confirmed by the hon’ble Jurisdictional Delhi High court. The ld. AR drew our attention to the findings given by the coordinate bench of the tribunal in preceding assessment years and requested that the present appeal of the assessee being identical and there is no change in the facts and circumstances, therefore, deserves to be allowed. 6. On the other hand, ld. CIT-DR though admitted that there was no change in circumstances as existed in previous years where the coordinated bench of the tribunal has allowed the appeal of the assessee however, relied upon the observations of the AO and Hon’ble DRP made in this regard as revenue has not accepted those orders. 7. Heard both the parties and perused the material available on record. The assessee is a non-resident corporate entity incorporated in Japan and is a tax resident of Japan. The assessee is engaged in the business of manufacturing of clutch system and facing of cars, motorcycles, and other 4 IT ( IT) A No.583/Del/2025 F.C.C.Co. Ltd. vs. ACIT (Int.Tax.) engines. Assessee undertakes molding and machining of plastics and manufacturing of various specialized tools and dies. In the year under appeal the return of income was filed u/s 139(1) declaring total income of Rs. 88,48,88,790/- and offered tax @ 10% after availing the benefit of India-Japan DTAA. The assessee has paid taxes on the royalty income of Rs. 52,08,34,623/-, fees for technical services of Rs. 4,15,54,170/- and interest of Rs. 32,25,00,000/-. However, the income from sale of raw materials, components and capital goods to its Indian group entities of Rs. 1,48,55,62,254/- and Rs. 93,23,947/- were not included in the taxable income. The assessee claimed that the supply had been made on principal- to-principal basis outside India and the title in goods was transferred outside India therefore the same is not taxable in India . However, the AO had not accepted the claim of the assessee and in the draft assessment order by observing that assessee has fixed place and supervisory PE in India in the form of Indian subsidiary and the raw material and capital goods sold were effectively connected with the activities of the PE. Therefore, 50% of the profits earned out of such sales (computed by applying global gross profit rate on 5.88%) i.e. Rs. 4,39,49,654/- is its business income chargeable to tax @ 40% plus applicable surcharge and education cess in India. 8. The assessee filed objections against the draft assessment order before the Hon’ble Dispute Resolution Panel (DRP) wherein it was contended that the issue has already been settled in favour of the assessee in terms of the decision of coordinate bench of tribunal in assessee’s own case for AY 2014- 15, 2015-16, 2017-18, 2018-19 & 2020-21. The assessee further contended that the order of the coordinate bench in these years stood confirmed by the Hon’ble Delhi High Court wherein the appeal of the revenue was dismissed vide order dated 23.07.2024. However, Hon’ble DRP in para 6(iii) at page 11 of its order, directed the AO to verify assessee’s claim in terms of acceptance or otherwise of the Hon’ble High Court impugned order and to complete the assessment keeping in view the departments stand on acceptance of Hon’ble High Court’s impugned order or preferring the litigation against the Hon’ble High Court’s impugned order. The Hon’ble DRP further observed that factual 5 IT ( IT) A No.583/Del/2025 F.C.C.Co. Ltd. vs. ACIT (Int.Tax.) matrix of the case continues to be almost same as existed in preceding few years. 9. It is also seen that while computing the final assessment order, the AO on the direction given by the Hon’ble DRP as stated above, had observed that the revenue has not accepted the order of Hon’ble High Court on merits and further appeal was not preferred only due to low tax effects. The AO, therefore, made the additions of the profits as stated above on the sale of raw material, components and capital goods and brought the same to tax @ 40% plus applicable Surcharge and Education Cess. 10. From the above discussion, it is clear that the factual position qua the disputed issue is identical to the earlier years where the coordinate bench in its latest order for AY 2020-21 in ITA No. 766/Del./2023 vide order dated 19.04.2023 has allowed the appeal by following the coordinate bench decision for AY 2017-18 in ITA No. 1789/Del./2022 dated 26.12.2022 wherein the tribunal by following its earlier has held as under: “6. Having considered rival submissions, we find, identical issue relating to existence of PE came up for consideration before the Tribunal in assessment years 2014-15 and 2015-16. While deciding the issue in order dated 09.03.2022 in ITA Nos. 8960 & 54/Del/2019, the Coordinate Bench accepted assessee’s pleading that it has no PE in India in any form. In this regard, the following observations of the Coordinate Bench would be relevant: “12. We have heard the Ld. Representatives of both the parties at length and perused the material on record. The primary issue before us is the determination whether FRL constitutes Fixed Place PE and / or if there is a Supervisory PE of the assessee in India in the AYs under consideration. Lets first analyze the provisions relating to the Fixed Place PE as provided under the India-Japan DTAA. 12.1 Article 5(1) of the India-Japan DTAA provides that a PE of a foreign enterprise may xist 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. 12.2 In order to constitute a Fixed Place PE under Article 5(1), the following conditions needs to be satisfied: (i) the existence of a ‘place of business’, i.e. a facility such as premises; (ii) the place of business must be at the disposal of the enterprise; (iii) this place of business must be ‘fixed’, i.e. it must be established at a distinct place with a certain degree of permanence; and (iv) the ‘carrying on of the business’ of the enterprise through this fixed place of business. 12.3 In the present case, FRL is alleged to be the place of business from which the business of the assessee is being carried out. It is well settled position that in order to constitute a Fixed Place PE it is a prerequisite that the alleged premise must be at the disposal of the enterprise. The Hon’ble Supreme 6 IT ( IT) A No.583/Del/2025 F.C.C.Co. Ltd. vs. ACIT (Int.Tax.) Court in the case of Formula One world Championship Vs. CIT [Civil Appeal No. 3849 of 2017] has held that merely giving access to the premise to the enterprise for the purposes of the project would not suffice. The place would be treated as at the disposal of the enterprise when the enterprise has right to use the said place and has control thereupon. 12.4 In light of the facts of the case and various judicial precedents wherein the constitution of Fixed Place PE has been considered and adjudicated upon, in our opinion the conditions laid down for creation of a Fixed Place PE is not satisfied in the assessee’s case. Merely providing access to the premises by FRL for the purpose of providing agreed services by the assessee would not amount to the place being at the disposal of the assessee. No doubt the assessee 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 Ld. DR in support of his contention that FRL constitutes Fixed Place PE of the assessee has placed reliance on certain clauses of the License Agreement and argued that title of goods supplied by the assessee to FRL passed in India and hence the assessee is carrying on business in India. In our opinion, reference to these clauses is irrelevant to conclude that the title of goods passed in India and thus Fixed Place PE of the assessee is created in India in view of the judgment of the Hon’ble Supreme Court in Mahabir Commercial Co. Ltd (supra). 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. 13. Now coming to the Supervisory PE, Article 5(4) of the India-Japan DTAA provides as under- “An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State.” 13.1 In the previous hearing held on 1.11.2021 this Bench had directed the assessee to file the description of services rendered by the employees of the assessee on their visit to India and the corresponding clause under the Agreement for Dispatch of Engineers under which such services would fall. In response, the assessee furnished Annexure 1 for AY 2014-15 and Annexure 2 for AY 2015-16 vide its written submission filed on 17.11.2021 providing the names of the employees who visited India along with the work performed by them giving reference of the relevant clause of the Agreement for Dispatch of Engineers along with Request for Technical Services (RFT) of the respective employee. The said Annexure 1 and Annexure 2 are on record. 13.2 Perusal of the above documents show that the employees of the assessee visited India to assist FRL in relation to supplies made by FRL/FCC Clutch to its customers; resolving problems relating to production, fixing of machines, maintenance of machines; checking safety status at the premises and suggesting ways for enhancing safety; support in quality control; IT 7 IT ( IT) A No.583/Del/2025 F.C.C.Co. Ltd. vs. ACIT (Int.Tax.) related services; support for launch of new segment line; etc. In our considered opinion, none of these activities performed by the employees are in the nature of supervisory functions, supervision being the act of overseeing or watching over someone or something which is not reflected in the work done by the engineers in India for FRL. 13.3 Moreover, no installation or assembly project was on going at FRL’s premises. FRL is in the existing business since many years and no new line of business has been launched by FRL. The employees were not rendering any services in connection with building site or a construction project or an installation project or an assembly project. From the nature of the services rendered by the employees, it is amply clear that these activities were not in connection with a building site or construction installation or assembly project. Hence the issue of computation of period of six months also becomes academic. The employees are visiting India on year to year basis under the contract. In AY 2014-15 and AY 2015-16, the employees visited India to render certain technical services under the License Agreement read with Dispatch of Engineers Agreement which have been duly offered to tax by the assessee as FTS as per the provisions of India- Japan DTAA. We therefore hold that the there is no Supervisory PE of the assessee for the AYs under consideration. 13.4 Since we have held that the assessee does not have a PE, the issue of attribution of profits to such PE does not arise for consideration.” 7. There cannot be any dispute that factually the impugned assessment year stands in identical footing to assessment years 2014-15 and 2015-16. This is further evident from the fact that, both, the Assessing Officer and learned DRP have acknowledged that the factual position in the present assessment year is identical to the preceding assessment years. Thus, respectfully following the decision of the Coordinate Bench, as discussed above, we hold that the assessee had no PE in India in any form whatsoever. Therefore, the addition made by attributing a part of the income of the assessee to the alleged PE has to be deleted. Accordingly, we do so. Grounds are allowed.” 11. As there is no change in the facts and the legal position in the matter, thus by respectfully following the Tribunal’s aforesaid orders in assessee’s own case that the assessee had no PE in India, either fixed place or supervisory, to which the profit from revenue earned from sale of raw-material and finished capital goods can be attributed. Accordingly, we delete the addition made by the Assessing Officer. Grounds of appeal No. 3 to 9 are allowed. 12. Ground of appeal No. 11 is with respect to charging of interest u/s 234B which is consequential in nature and do not require any adjudication. 8 IT ( IT) A No.583/Del/2025 F.C.C.Co. Ltd. vs. ACIT (Int.Tax.) 13. Ground No. 12 is with respect to initiation of penalty proceedings u/s 270A of the Act which is premature in this stage and thus dismissed. 14. In the result appeal of the assessee is allowed in terms of the discussion made herein above. Order pronounced on 18.06.2025. Sd/- Sd/- (ANUBHAV SHARMA) (MANISH AGARWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 18/06/2025. PK/Sr. Ps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi "