GEMOLOGICAL INSTITUTE OF AMERICA. INC, MUMBAI V. ADDL CIT (IT) RG 2(3), MUMBAI

ITA 1138/MUM/2015

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 2520 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 12-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 25-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V SREEKAR
• Assessee Lawyers: J D MISTRY
• Keywords: Business income; Transfer pricing; Double taxation relief; Permanent establishment
• Section: 143(3); 234B

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I, MUMBAI BEFORE HONBLE JUSTICE SHRI P.P. BHATT, PRESIDENT & SHRI G.S. PANNU, VICE-PRESIDENT ITA NO. 1138/MUM/2015 ASSESSMENT YEAR : 2010-11 GEMOLOGICAL INSTITUTE OF AMERICA, INC C/O. GIA INDIA LABORATORY PVT. LTD., 10 TH FLOOR, TRADE CENTRE, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI PAN: AADCG7962K VS. THE ADDL. COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION), RANGE-2(3), MUMBAI (APPELLANT) (RESPONDENT) APPLICANT BY : SHRI J.D. MISTRY, & SHRI NIRAJ SHETH, RESPONDENT BY : SHRI V. SREEKAR, CIT-DR DATE OF HEARING : 26.03.2019 DATE OF PRONOUNCEMEN T : 21.06.2019 O R D E R PER G.S. PANNU, VICE PRESIDENT: THE CAPTIONED APPEAL BY THE ASSESSEE IS DIRECTED AG AINST THE ORDER OF ASSESSING OFFICER DATED 22.01.2015 PASSED UNDER SECTION 144C(13) R.W.S. 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT), WHICH IS IN TERMS OF THE DIRECTIONS ISSUED B Y THE DISPUTES RESOLUTION PANEL-III, MUMBAI UNDER SECTION144C(5)OF THE ACT DATED 22.12.2014. 2 ITA NO. 1138/MUM/2015 2. IN THIS APPEAL, ASSESSEE HAS RAISED THE FO LLOWING GROUNDS OF APPEAL: 1:0 RE. HOLDING THAT THE APPELLANT HAS A 'PERMAN ENT ESTABLISHMENT' ('PE') IN INDIA:: 1:1 THE ASSESSING OFFICER/THE DISPUTE RESOLUTION PA NEL HAS ERRED IN HOLDING THAT THE APPELLANT HAS A 'PERMANENT ESTABLISHMENT' ('PE') IN INDIA. 1:2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACT S AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT, IT HAS NO PE IN INDIA AND THE STAND TAKEN BY THE ASSESSING OFFICER/THE DISPUTE RESOLUTI ON PANEL IN THIS REGARD IS ERRONEOUS, MISCONCEIVED AND NOT IN ACCORDANCE WITH LAW. 1:3 THE APPELLANT SUBMITS THAT THE ASSESSING OFFICE R HAS ERRED IN ARRIVING AT VARIOUS UNWARRANTED AND ERRONEOUS CONCLUSIONS UNSUP PORTED BY ANY RELEVANT MATERIAL TO HOLD THAT THE APPELLANT HAD A PE IN IND IA. FURTHER HE ALSO FAILED TO CONSIDER THE CONTRARY MATERIAL AND EVIDENCE ADDUCED BY THE APPELLANT. 1:4 THE APPELLANT SUBMITS THAT THE ASSESSING OFFICE R'S STAND THAT THE APPELLANT HAS A PE IN INDIA BE STRUCK DOWN AND HE B E DIRECTED TO RE-COMPUTE THE APPELLANT'S TOTAL INCOME ACCORDINGLY. WITHOUT PREJUDICE TO THE FOREGOING 2:0 RE.: ATTRIBUTION: 2:1 THE ASSESSING OFFICER/THE DISPUTE RESOLUTION PA NEL HAS ERRED IN HOLDING THAT 50% OF RECEIPTS ARE ATTRIBUTABLE TO THE ALLEGE D PE OF THE APPELLANT IN INDIA. 2:2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACT S AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT NO PART WHATSOEVER OF ITS RECEIPTS ARE ATTRIBUTABLE TO INDIA AND THE STAND TAKEN BY TH E ASSESSING OFFICER/THE DISPUTE RESOLUTION PANEL IN THIS REGARD IS, INCORRE CT, ILLEGAL, ARBITRARY, NOT IN ACCORDANCE WITH LAW AND HENCE OUGHT TO BE STRUCK DO WN. 2:3 THE APPELLANT SUBMITS THAT THE ARBITRARY ACTION OF THE ASSESSING OFFICER/THE DISPUTE RESOLUTION PANEL BE STRUCK DOWN AND THE ASS ESSING BE DIRECTED TO RE- COMPUTE ITS TOTAL INCOME ACCORDINGLY. WITHOUT PREJUDICE TO THE FOREGOING: 3 ITA NO. 1138/MUM/2015 3:0 RE.: ESTIMATION OF GROSS PROFIT: 3:1 THE ASSESSING OFFICER/THE DISPUTE RESOLUTION PA NEL HAS ERRED IN HOLDING THAT THE 20.31% OF THE RECEIPTS ATTRIBUTABLE TO THE ALLEGED INDIAN OPERATIONS OUGHT TO BE CONSIDERED AS PROFITS OF THE PE TAXABLE IN INDIA. 3:2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACT S AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT, EVEN IF IT IS HELD THAT THE APPELLANT HAS A PE IN INDIA NO FURTHER INCOME CAN BE TAXED IN INDIA AS THE ALLEGED PE HAS BEEN REMUNERATED AT AN ARM'S LENGTH AND HENCE T HE STAND TAKEN BY THE ASSESSING OFFICER/THE DISPUTE RESOLUTION PANEL IN R ESPECT THEREOF IS INCORRECT, ERRONEOUS, MISCONCEIVED AND ILLEGAL AND HENCE OUGHT TO BE STRUCK DOWN. 3:3 THE APPELLANT SUBMITS THAT THE ASSESSING OFFICE R BE DIRECTED TO RECOMPUTE ITS TOTAL INCOME ACCORDINGLY. 4:0 RE. : LEVY OF INTEREST U/S 234B OF THE INCOME-TAX ACT, 1961: 4:1 THE ASSESSING OFFICER HAS ERRED IN LEVYING INTE REST U/S. 234B OF THE INCOME-TAX ACT, 1961 ON THE APPELLANT. 4:2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACT S AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT NO INTER EST U/S. 234B IS LEVIABLE AND THE STAND TAKEN BY THE ASSESSING OFFICER IN THI S REGARD IS MISCONCEIVED, INCORRECT, ERRONEOUS AND ILLEGAL. 4:3 THE APPELLANT SUBMITS THAT THE ASSESSING OFFICE R BE DIRECTED TO DELETE THE INTEREST U/S. 234B SO LEVIED ON IT AND TO RE-COMPUT E ITS TAX LIABILITY ACCORDINGLY. 5:0 RE. : GENERAL: 5 : 1 THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AME ND AND/OR SUBSTITUTE ALL OR ANY OF THE FOREGOING GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. 3. ALTHOUGH THE ASSESSEE HAS RAISED MULTIPLE GROUNDS O F APPEAL, BUT THE SUBSTANTIVE DISPUTE REVOLVES AROUND AS TO W HETHER THE ASSESSEE HAS A PERMANENT ESTABLISHMENT (IN SHORT TH E PE) IN INDIA SO AS TO ATTRIBUTE CERTAIN INCOME WHICH IS TAXABLE IN INDIA. 4 ITA NO. 1138/MUM/2015 4. BRIEFLY PUT, THE RELEVANT FACTS ARE THAT THE APPELL ANT ASSESSEE IS A COMPANY INCORPORATED IN THE USA AND IS ALSO A TAX -RESIDENT OF USA. IT IS ENGAGED IN THE BUSINESS OF DIAMOND GRADING AN D PREPARATION OF DIAMOND DOSSIERS. ASSESSEE FILED ITS RETURN OF INCO ME FOR ASSESSMENT YEAR 2010-11 DECLARING A TOTAL INCOME AT RS. 3,96,8 28/- ON THE PLEA THAT IT WAS A TAX RESIDENT OF USA AND ENTITLED TO B E TAXED IN ACCORDANCE WITH THE PROVISIONS OF INDIA-USA DOUBLE TAXATION AV OIDANCE AGREEMENT ('DTAA') TO THE EXTENT THEY ARE MORE BENEFICIAL. TH E INCOME SO DECLARED WAS ON ACCOUNT OF INSTRUCTOR FEE EARNED FROM GIA INDIA LABORATORY PRIVATE LIMITED (IN SHORT GIA INDIA LAB ), WHICH IS A COMPANY INCORPORATED IN INDIA. HOWEVER, THE ASSESS ING OFFICER WAS NOT SATISFIED AS ACCORDING TO HIM, GIA INDIA LAB, T O WHOM THE DIAMOND GRADING SERVICES HAS BEEN RENDERED, CONSTITUTED A P ERMANENT ESTABLISHMENT (PE) OF THE ASSESSEE IN INDIA AND TO THAT EXTENT, THE ASSESSEES RECEIPTS FROM THE DIAMOND GRADING SERVIC ES WOULD BE TAXABLE IN INDIA. THE ASSESSING OFFICER ARRIVED AT THIS CONCLUSION ON THE GROUND THAT THE ASSESSEE AND GIA INDIA LAB T OGETHER ALONG WITH THE OTHER ENTITIES OF THE GROUP HAD, IN EFFECT, ESTABLISHED A JOINT VENTURE BUSINESS IN WHICH THESE TWO OPERATED AS PARTNERS. THE STAND OF THE ASSESSEE WAS THAT IN TERMS OF THE RELEVANT DTAA PROVISIONS, TO DRAW THE CONCLUSION TH AT THE ASSESSEE HAD A PE IN INDIA, THERE SHOULD EXIST A PL ACE OF BUSINESS IN INDIA OR A SERVICE PE OR AN AGENCY PE, WHEREAS A LL THE AFORESAID FEATURES WERE LACKING. THIS IS THE PRECIS E AREA OF DIFFERENCE BETWEEN THE ASSESSEE AND THE REVENUE, WH ICH IS MANIFESTED IN GROUND OF APPEAL NO. 1 ENUMERATED ABOVE. 5. IN THE ABOVE BACKGROUND, WE MAY NOW CULL OUT FROM T HE ORDERS OF THE AUTHORITIES BELOW AND THE MATERIAL ON RECORD , THE RELEVANT FACTS 5 ITA NO. 1138/MUM/2015 AND THE BASIS ADOPTED BY THE ASSESSING OFFICER TO H OLD THAT ASSESSEE HAS A PE IN INDIA. IN THIS CONTEXT, IT IS NOTABLE T HAT ASSESSEE IS AN ORGANIZATION DEDICATED TO ENSURE THAT THE PUBLIC TR UST IN GEMS AND JEWELLERY INCREASES BY UPHOLDING THE HIGHEST STANDA RDS IN INTEGRITY, SCIENCE, ACADEMICS AND PROFESSIONALISM. THE ASSESSE E CONTINUOUSLY RESEARCHES ALL ASPECTS OF ITS DIAMOND GRADING PROCE SSES, TO UNCOMPROMISINGLY MAINTAIN ITS STANDARDS FOR GRADING DIAMONDS. IT HAS BEEN EXPLAINED AT SOME LENGTH BEFORE US THAT THE AS SESSEE HAS NOT ONLY DEFINED THE STANDARDS IN THE FIELD, BUT HAS AL SO DEVELOPED ITS OWN UNIQUE APPROACH FOR GRADING GEMSTONES. IT HAS BEEN POINTED OUT THAT THE NAME AND MARK OF THE ASSESSEE IS RECOGNIZED AND WELL-REGARDED THROUGHOUT THE WORLD. IT HAS CREATED GLOBAL STANDAR DS TO ACCURATELY DETERMINE QUALITY OF DIAMONDS (4CS I.E., CUT, COLOU R, CLARITY AND CARAT WEIGHT), COLOURED STONES AND PEARLS. THE GRADING CE RTIFICATE ISSUED BY THE ASSESSEE IS RECOGNIZED AS THE STANDARD OF EXCEL LENCE ['GOLD STANDARD'] AND A BENCHMARK IN THE DIAMOND/GEMOLOGY INDUSTRY. EXPLAINING THE BACKGROUND, LD.REPRESENTATIVE STATED THAT GIVEN THE FACT THAT THE GEM INDUSTRY, PARTICULARLY THE CUTTIN G AND POLISHING OF DIAMONDS, AFTER WHICH THE CUT AND POLISHED STONES A RE GRADED IS CONCENTRATED IN PARTICULAR PARTS OF THE WORLD AND S PECIALLY IN INDIA, THE ASSESSEE SET UP VARIOUS ENTITIES IN PROXIMITY TO TH ESE LOCATIONS WHICH COULD INDEPENDENTLY, PROVIDE GRADING SERVICES OF TH E SAME HIGH QUALITY. THE ASSESSEE SET-UP A SUBSIDIARY COMPANY I N INDIA VIZ., GIA INDIA LAB ON 26 SEPTEMBER 2007. THIS SUBSIDIARY CO MPANY SET-UP A LABORATORY IN INDIA AND IS SINCE THEN ENGAGED IN TH E ACTIVITY OF GEM GRADING IN INDIA. 6 ITA NO. 1138/MUM/2015 6. PRIOR TO THE SETTING UP OF THE SUBSIDIARY, THE ASSE SSEE CONTRACTED WITH A THIRD PARTY 'CONSOLIDATOR' CALLED 'INTERNATIONAL DIAMOND LTD.' UNDER THE CONSOLIDATOR ARRANGEMENT, T HE CONSOLIDATOR COORDINATED THE COLLECTION OF DIAMONDS FROM INDIA, AND THE ASSESSEE GRADED THE DIAMONDS AND ISSUED GRADING REPORTS. IT WAS AGREED BETWEEN THE PARTIES TO THE CONSOLIDATOR ARRANGEMENT THAT THE COST TO THE CONSUMERS WOULD BE DIVIDED IN THE RATIO OF 90:1 0 (90 FOR THE ASSESSEE AND 10 FOR THE CONSOLIDATOR). IT WAS EXPLA INED THAT THIS ARRANGEMENT CONTINUES TO EXIST EVEN AFTER FORMATION OF GIA INDIA LAB. IT HAS BEEN EMPHASISED BEFORE US AND WHICH ALSO EME RGES FROM PERUSAL OF ASSESSEES STAND BEFORE THE LOWER AUTHOR ITIES THAT WHENEVER GIA INDIA LAB FACES CAPACITY AND / OR TECHNICAL CON STRAINTS, IT SENDS STONES FOR GRADING TO OTHER ENTITIES OF THE GIA GRO UP ACROSS THE GLOBE, INCLUDING THE ASSESSEE BEFORE US. THIS IS DONE IN T ERMS OF A 'GIA GEM GRADING SERVICES AGREEMENT' WHICH HAS BEEN ENTERED INTO BY THE VARIOUS ENTITIES OF THE GROUP INCLUDING THE ASSESSE E AND GIA INDIA LAB. FOR EXAMPLE, IF GIA INDIA LAB RECEIVES DIAMOND S FOR GRADING OF A QUANTITY IN EXCESS OF WHAT IT CAN HANDLE OR BEYOND THE TIME EXPECTED BY THE CUSTOMERS OR BEYOND THE CAPACITY OF THE MACH INES, COMPUTERS / STAFF AVAILABLE, IT SENDS SUCH EXCESS GRADING WOR K TO ANOTHER GIA GROUP ENTITY IN TERMS OF GEM GRADING SERVICES AGREE MENT. AT THIS STAGE, IT HAS BEEN EXPLAINED BY THE LD.REPRESENTATI VE THAT AT THE RELEVANT POINT OF TIME, GIA INDIA LAB ONLY HAD THE TECHNICAL CAPACITY TO GRADE THE DIAMONDS BELOW 2 CARATS ONLY AND HENCE LARGER DIAMONDS WERE BEING SENT TO OTHER GIA GROUP ENTITIES FOR GRA DING. SUBSEQUENTLY, WITH THE INCREASE IN TECHNICAL CAPACI TIES, GIA INDIA LAB ITSELF STARTED GRADING DIAMONDS UP TO 3.99 CARATS. IN TERMS OF THE AFORESAID AGREEMENT, THERE IS A UNIFORM PRICING MEC HANISM OF 90:10 7 ITA NO. 1138/MUM/2015 FOR GRADING SERVICES I.E. THE ENTITY OF THE GROUP W HICH IS REQUESTING FOR THE GRADING SERVICES RETAINS 10% OF THE FEES IT COL LECTS FROM ITS CUSTOMER AND 90% OF THE SAID FEES IS PAID TO THE EN TITY WHICH PROVIDES THE GRADING ACTIVITY. IN THE BACKGROUND OF SUCH AN ARRANGEMENT, THE ASSESSING OFFICER HELD THAT THE AS SESSEE HAS A PE IN INDIA VIZ., GIA INDIA LAB THROUGH WHICH IT CARRIES ON ITS BUSINESS IN INDIA. ACCORDINGLY, 50% OF THE GEM GRADING FEES REC EIVED BY THE ASSESSEE FROM GIA INDIA LAB HAS BEEN HELD TO BE ATT RIBUTABLE TO THE INDIAN PE, AND A PROFIT PERCENTAGE OF 20.31% HAS BE EN APPLIED THEREON TO DETERMINE THE TOTAL INCOME OF THE APPELL ANT, WHICH HAS BEEN HELD TO BE TAXABLE IN INDIA. 7. BEFORE US, LD.COUNSEL FOR THE ASSESSEE HAS EXPLAINE D THE KEY FEATURES OF THE AGREEMENT WITH GIA INDIA LAB, AGREE MENT BETWEEN ASSESSEE AND INTERNATIONAL DIAMOND LTD (I.E., THE C ONSOLIDATOR AND AN UNRELATED PARTY) AND AGREEMENT BETWEEN CUSTOMERS AN D GIA INDIA LAB. THE LD.COUNSEL ALSO SUBMITTED THAT THE ASSESSI NG OFFICER HAS MISUNDERSTOOD/MISCONCEIVED THE AFORESAID AGREEMENTS AND HAS MADE VARIOUS UNSUBSTANTIATED ALLEGATIONS AND ULTIM ATELY REACHED A CONCLUSION THAT GIA INDIA LAB IS A PE OF THE ASSE SSEE IN INDIA. IN SUPPORT OF THE CONTENTION THAT THE INDIAN SUBSIDIAR Y CANNOT BE TREATED AS A PE OF THE ASSESSEE EITHER ON FACTS OR IN LAW, THE LD.REPRESENTATIVE FOR THE ASSESSEE HAS MAJORLY RELIED ON FOLLOWING JU DGMENTS: I. DIT VS E-FUNDS IT SOLUTION (2014) 364 ITR 256 (DELHI) AFFIRMED BY SUPREME COURT IN (2017) 399 ITR 34 (SC) II. SWISS RE-INSURANCE CO LTD V. DDIT(IT) (2015) 68 SOT 121 8 ITA NO. 1138/MUM/2015 8. ON THE OTHER HAND, THE LD.DEPARTMENTAL REPRESENTATI VE FOR THE REVENUE HAS MERELY REITERATED THE STAND OF THE LOWE R AUTHORITIES WHICH IS TO THE EFFECT THAT THE ASSESSING OFFICER W AS CORRECT IN ARRIVING AT THE CONCLUSION THAT THE ASSESSEE COMPANY HAD A P E IN INDIA AND THEREFORE, BUSINESS INCOME ATTRIBUTABLE TO SUCH PE IS LIABLE TO BE TAXED IN INDIA. IN SUPPORT, HE HAS RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF FORMULA ONE WORLD CHAM PIONSHIP LTD (2017) 394 ITR 80 (SC). 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT MATERIAL, INCLUDING THE ORDERS OF THE LOWE R AUTHORITIES AS WELL AS THE CASE LAWS REFERRED AT THE TIME OF HEARING. N OTABLY, THE CONTROVERSY BEFORE US PRIMARILY REVOLVES AROUND AS TO WHETHER OR NOT THE SUBSIDIARY OF THE ASSESSEE COMPANY I.E., GIA IN DIA LAB CAN BE CONSTRUED AS ITS PE IN INDIA. THE INCOME-TAX AUTHOR ITIES HAVE INVOKED SECTION 9 OF THE ACT AND/OR ARTICLE 5 OF THE INDI A-US TREATY IN ORDER TO SAY THAT THE ASSESSEE COMPANY HAS A PE IN INDIA. ON THE CONTRARY, AS PER THE ASSESSEE, THE IMPUGNED RECEIPTS ARE IN THE NATURE OF BUSINESS PROFITS, AND IN THE ABSENCE OF ANY PE IN INDIA, THE SAME ARE NOT TAXABLE IN INDIA. FACTUALLY SPEAKING, IT IS EVIDENT THAT TH E ON PERUSAL OF THE AGREEMENTS, THE TRANSACTION OF GRADING SERVICES BET WEEN ASSESSEE COMPANY AND GIA INDIA LAB CANNOT BE CONSIDERED TO B E IN THE NATURE OF A JOINT VENTURE, SINCE GIA INDIA LAB HAS ITS OWN INDEPENDENT EXPERTISE BUT ONLY DUE TO ITS TECHNOLOGY/CAPACITY C ONSTRAINTS, IT FORWARDS THE STONES TO THE ASSESSEE COMPANY FOR GRA DING PURPOSES; IT IS NOT AN ARRANGEMENT BETWEEN TWO PARTIES WHERE EAC H PARTY CONTRIBUTES ITS SHARE IN ORDER TO UNDERTAKE AN ECON OMIC ACTIVITY WHICH IS SUBJECTED TO JOINT CONTROL; IN FACT, THE ARRANGE MENT IS AKIN TO AN 9 ITA NO. 1138/MUM/2015 ASSIGNMENT OR SUB-CONTRACTING OF GRADING SERVICES T O THE ASSESSEE COMPANY, WHEREVER GIA INDIA LAB DOES NOT HAVE THE R EQUISITE EXPERTISE OR TECHNOLOGY OR CAPACITY FOR CARRYING OU T THE GRADING SERVICES; FURTHER, THE AFORESAID ARRANGEMENT HAS AL SO BEEN ACCEPTED AS A MERE RENDERING OF GRADING SERVICES BY THE TRANSFE R PRICING OFFICER BOTH IN THE CASE OF GIA INDIA LAB AND THE ASSESSEE COMPANY. IN THIS BACKGROUND, WE MAY NOW PROCEED TO DECIDE AS TO WHET HER THE INDIAN SUBSIDIARY GIA INDIA LAB CAN BE CONSTRUED AS A PE U NDER ANY OF THE ASPECTS CONTAINED IN ARTICLE 5 OF INDIA-USA DTAA. 10. FIRSTLY, WE MAY EXAMINE WHETHER GIA INDIA LTD. CAN BE CONSTITUTED AS A FIXED PLACE PE OF THE ASSESSEE IN TERMS OF ARTICLE 5(1) OF THE INDIA- USA DTAA. AS PER ARTICLE 5(1) OF THE INDO-USA DTAA, A FIXED PLACE PE ARISES WHEN THE FOREIGN ENTITY HAS A FIXED PLACE IN INDIA THROUGH WHICH ITS BUSINESS IS WHOLLY OR PARTLY CARR IED ON. IN THIS CONTEXT, THE LEARNED COUNSEL POINTED OUT THAT A SIM ILAR SITUATION HAS BEEN CONSIDERED BY THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF E- FUNDS IT SOLUTIONS (SUPRA) , WHICH HAS BEEN UPHELD BY THE HON'BLE SUPREME COURT. IN THAT CASE, IT HAS BEEN HELD THAT A SUBSIDIARY CANNOT BE REGARDED AS A 'FIXED PLACE PE' OF THE PARENT COM PANY ON THE GROUND OF A CLOSE ASSOCIATION BETWEEN THE INDIAN SUBSIDIAR Y AND THE FOREIGN TAXPAYER. IN THAT CASE, IT WAS NOTED THAT BECAUSE V ARIOUS SERVICES WERE BEING PROVIDED BY E-FUND INDIA (INDIAN SUBSIDIARY) TO THE TAXPAYER OR THAT THE FOREIGN TAX PAYER WAS DEPENDENT UPON INDIA N SUBSIDIARY (E- FUND INDIA) FOR ITS EARNINGS OR ASSIGNMENT OR SUB-C ONTRACT OF CONTRACTS TO E-FUND INDIA OR E-FUND INDIA BEING REIMBURSED ON A CERTAIN COST- PLUS BASIS OR SAVING / REDUCTION IN COST BY TRANSFE RRING BUSINESS OR BACK OFFICE OPERATIONS TO THE INDIAN SUBSIDIARY OR THE M ANNER AND MODE OF 10 ITA NO. 1138/MUM/2015 THE PAYMENT OF ROYALTY TRANSACTIONS OR E-FUND INDIA PROVIDING SUPPORT FOR CARRYING ON CORE ACTIVITIES BEING PERFORMED BY THE TAXPAYER OR ASSOCIATED TRANSACTIONS, CANNOT BE THE BASIS TO CON STRUE THE INDIAN SUBSIDIARY AS PE OF THE FOREIGN TAX PAYER. FURTHER, BEFORE THE HON'BLE DELHI HIGH COURT, THE DEPARTMENT HAD CONTENDED THAT THE FOREIGN COMPANY HAD A JOINT VENTURE OR PARTNERSHIP WITH IND IAN SUBSIDIARY AS THE BUSINESSES OF THE ASSESSEE COMPANY AND THE INDI AN SUBSIDIARY WERE INTER-LINKED AND CLOSELY CONNECTED (WHICH IS A LSO CONTENDED IN THE CASE OF THE ASSESSEE BEFORE US) AND THEREFORE THE I NDIAN SUBSIDIARY WAS REGARDED AS PE OF FOREIGN COMPANY IN INDIA. TH E AFORESAID ARGUMENT OF THE REVENUE WAS REPELLED SINCE THE COND ITIONS UNDER ARTICLE 5 OF THE DTAA WERE NOT MET AND IT HAS BEEN HELD THAT PE CANNOT BE ESTABLISHED MERELY BECAUSE OF TRANSACTIONS BETWE EN ASSOCIATED ENTERPRISES OR THE PRINCIPAL SUB-CONTRACTING OR ASS IGNING THE CONTRACT TO THE SUBSIDIARY. 11. FACTUALLY, IN THE CASE OF THE ASSESSEE COMPANY, THERE IS NO JOINT VENTURE ARRANGEMENT BETWEEN THE ASSESSEE COMPANY AN D GIA INDIA LAB VIS--VIS GEM GRADING SERVICES RENDERED BY THE ASSESSEE COMPANY TO GIA INDIA LAB SINCE IT IS GIA INDIA LAB WHO ENTE RS INTO AGREEMENT WITH THE CLIENT AND BEARS ALL THE RISKS INCLUDING C REDIT RISKS, CLIENT FACING RISKS, ETC. ALSO, IN TERMS OF THE AGREEMENT, GIA IN DIA LAB BEARS THE RISK OF LOSS OR DAMAGE TO ARTICLES WHILE IN TRANSIT TO A ND FROM THE ASSESSEE COMPANY AND ALSO DURING THE TIME WHEN THE ARTICLES ARE AT OR IN THE ASSESSEE COMPANY'S FACILITIES. THEREFORE, THE ECONO MIC RISKS OF THE GEM GRADING SERVICES RENDERED BY THE ASSESSEE COMPANY V IS--VIS STONES/DIAMONDS OF CUSTOMERS OF GIA INDIA LAB SHIPP ED TO IT ARE BORNE BY GIA INDIA LAB AND HENCE, THERE IS NO JOINT VENTU RE ARRANGEMENT 11 ITA NO. 1138/MUM/2015 WHATSOEVER BETWEEN THE ASSESSEE COMPANY AND GIA IND IA LAB. IN TERMS OF ARTICLE 5(6) OF THE INDIA USA DTAA, IT IS PROVIDED THAT THE MERE FACT THAT A COMPANY HAS CONTROLLING INTEREST I N THE OTHER COMPANY DOES NOT BY ITSELF CONSTRUE THE OTHER COMPANY TO BE ITS PE. ACCORDINGLY, THE ASSESSEE COMPANY IS NOT HAVING A ' FIXED PLACE' PE IN INDIA. 12. IN TERMS OF ARTICLE 5 (1) OF THE INDIA - USA DT AA, A SERVICE PE ARISES ON THE FURNISHING OF SERVICES IN INDIA BY TH E ASSESSEE COMPANY THROUGH EMPLOYEES OR OTHER PERSONNEL, BUT ONLY IF: ACTIVITIES OF THAT NATURE CONTINUE IN INDIA FOR A PERIOD OR PERIODS AG GREGATING TO MORE THAN 90 DAYS WITHIN ANY TWELVE-MONTH PERIOD; OR THE SERVICES ARE PERFORMED WITHIN INDIA FOR A RELATED ENTERPRISE. HE NCE, A SERVICE PE IS TRIGGERED IF THE SERVICES (OTHER THAN INCLUDED SERV ICES AS DEFINED IN ARTICLE 12 'ROYALTIES AND FEES FOR INCLUDED SERVICE S') ARE RENDERED BY THE ASSESSEE COMPANY THROUGH EMPLOYEES OR OTHER PER SONNEL AND ACTIVITIES OF THAT NATURE CONTINUE IN INDIA FOR A P ERIOD OR PERIODS AGGREGATING TO MORE THAN 90 DAYS WITHIN ANY TWELVE- MONTH PERIOD; OR THE SERVICES ARE PERFORMED WITHIN INDIA FOR A RELAT ED ENTERPRISE. THE ASSESSEE COMPANY RENDERS 'GRADING SERVICES' AND 'MA NAGEMENT SERVICES TO GIA INDIA LAB'. IN FACT, 2 GRADERS WHO WERE EARLIER EMPLOYED WITH THE ASSESSEE COMPANY ARE NOW EMPLOYED WITH GIA INDIA LAB AND ARE ON THE PAYROLLS OF GIA INDIA LAB AND ARE WORKING UNDER CONTROL AND SUPERVISIONS OF GIA INDIA LAB AND THEREFORE, NO SERVICE PE IS CREATED IN INDIA IN TERMS OF INDIA- U S DTAA. THE SUPREME COURT HAS AFFIRMED THE DECISION OF THE DELH I HIGH COURT IN E- FUNDS (SUPRA) WHEREIN IT HAS BEEN HELD THAT TWO EMPLOYEES DEPUTE D TO E-FUND INDIA FUND INDIA DID NOT CREATE A SERVICE PE AS THE ENTIRE SALARY COST WAS BORNE BY E-FUND INDIA AND THEY WERE WORKING UNDER 12 ITA NO. 1138/MUM/2015 CONTROL AND SUPERVISION OF E-FUND INDIA. IN THE FAC TS OF THE INSTANT CASE, SINCE THE SAID SERVICES ARE RENDERED OUTSIDE INDIA AND NONE OF THE EMPLOYEES/ PERSONNEL OF THE ASSESSEE COMPANY HA S VISITED INDIA AND THEREFORE, SERVICE PE IS NOT TRIGGERED IN THE C ASE OF THE ASSESSEE COMPANY. 13. IN TERMS OF ARTICLE 5(4) OF THE INDIA US/DTAA , AN AGENCY PE IS CREATED WHERE A PERSON-OTHER THAN AN AGENT OF AN IN DEPENDENT STATUS TO WHOM PARAGRAPH 5 APPLIES - IS ACTING IN INDIA ON BEHALF OF AN ENTERPRISE OF THE USA, THAT ENTERPRISE SHALL BE DEE MED TO HAVE A PERMANENT ESTABLISHMENT IN INDIA, IF: (A) HE HAS AND HABITUALLY EXERCISES IN INDIA AN AUT HORITY TO CONCLUDE ON BEHALF OF THE ENTERPRISE, UNLESS HIS ACTIVITIES ARE LIMITED TO THOSE MENTIONED IN PARAGRAPH 3 WHICH, IF EXERCISED THROUG H A FIXED PLACE OF BUSINESS, WOULD NOT MAKE THAT FIXED PLACE OF BUSINE SS A PERMANENT ESTABLISHMENT UNDER THE PROVISIONS OF THAT PARAGRAP H; (B) HE HAS NO SUCH AUTHORITY BUT HABITUALLY MAINTAI NS IN INDIA A STOCK OF GOODS OR MERCHANDISE FROM WHICH HE REGULARLY DEL IVERS GOODS OR MERCHANDISE ON BEHALF OF THE ENTERPRISE, AND SOME A DDITIONAL ACTIVITIES CONDUCTED IN THE STATE ON BEHALF OF THE ENTERPRISE HAVE CONTRIBUTED TO THE SALE OF THE GOODS OR MERCHANDISE ; OR (C) HE HABITUALLY SECURES ORDERS IN INDIA WHOLLY OR ALMOST WHOLLY FOR THE ENTERPRISE. 14. THE DEFINITION EXCLUDES FROM THE AMBIT OF A PE ANY BUSINESS ACTIVITY CARRIED OUT THROUGH A BROKER, GENERAL COMM ISSION AGENT OR ANY OTHER AGENT HAVING AN INDEPENDENT STATUS, IF SUCH B ROKER, GENERAL 13 ITA NO. 1138/MUM/2015 COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEP ENDENT STATUS ACTS IN THE ORDINARY COURSE OF ITS BUSINESS. THE OE CD COMMENTARY DEALS WITH THE CONCEPT OF 'INDEPENDENT AGENT' IN PA RAGRAPHS 36 TO 39. IN TERMS OF PARAGRAPH 37 OF THE OECD COMMENTARY, A PERSON WILL BE REGARDED AS AN INDEPENDENT AGENT (I.E. IT WILL NOT CONSTITUTE A PE OF THE ENTERPRISE ON WHOSE BEHALF IT ACTS) ONLY IF: - HE IS INDEPENDENT OF THE ENTERPRISE BOTH LEGALLY AN D ECONOMICALLY, AND - HE ACTS IN THE ORDINARY COURSE OF HIS BUSINESS WHEN ACTING ON BEHALF OF THE ENTERPRISE. IN OTHER WORDS, ARTICLE 5(5) OF THE INDIA- USA DTAA STIPULATES THE FOLLOWING CONDITIONS WHICH ARE REQUIRED TO BE SATIS FIED IN ORDER THAT AN AGENT MAY BE SAID TO BE AN INDEPENDENT AGENT, I.E., - THAT HE SHOULD BE AN AGENT OF INDEPENDENT STATUS; T HAT, HE SHOULD BE ACTING IN THE ORDINARY COURSE OF HIS BUSI NESS; AND, THAT HIS ACTIVITIES SHOULD NOT BE DEVOTED WHOLLY OR ALMOST WHOLLY ON BEHALF OF THE FOREIGN ENTERPRISE FOR WHOM HE IS ACTING AS AGENT. 15. GIA INDIA LAB IS AN INDEPENDENT/SEPARATE LEGAL ENTITY IN INDIA WHICH IS ENGAGED IN RENDERING OF GRADING SERVICES. FURTHER, CONSIDERING THE FUNCTIONS AND THE RISKS ASSUMED BY GIA INDIA LAB VIS- -VIS ITS BUSINESS ACTIVITIES IN INDIA (AS HAS BEEN RECORDED IN THE TRANSFER PRICING STUDY REPORT - WHICH FUNCTIONAL AN D RISK ANALYSIS HAS BEEN ACCEPTED BY THE TRANSFER PRICING OFFICER BOTH IN THE CASE OF GIA INDIA LAB AND IN THE CASE OF THE ASSESSEE COMPANY), GIA INDIA LAB IS AN INDEPENDENT ENTITY WHICH IS RENDERING GRADING SE RVICES TO ITS CLIENTS 14 ITA NO. 1138/MUM/2015 IN INDIA. GIA INDIA LAB ALSO BEARS SERVICE RISK AND ALL CLIENT FACING RISKS VIS--VIS THE STONES SENT TO THE ASSESSEE COMPANY F OR GRADING PURPOSES (AS HAS BEEN RECORDED IN THE TRANSFER PRIC ING STUDY REPORT). HENCE, GIA INDIA LAB IS NOT ACTING IN INDIA ON BEHA LF OF THE ASSESSEE COMPANY. FURTHER, GIA INDIA LAB IS NOT HAVING ANY A UTHORITY TO CONCLUDE CONTRACTS AND HAS NEITHER CONCLUDED ANY CO NTRACTS ON BEHALF OF THE ASSESSEE COMPANY NOR HAS IT SECURED ANY ORDE RS FOR THE ASSESSEE COMPANY IN INDIA. THUS, GIA INDIA LAB CANN OT BE REGARDED AS AGENCY PE OF THE ASSESSEE COMPANY IN INDIA. 16. BEFORE PARTING, WE MAY ALSO NOTE THE REFERENCE MADE BY THE LD. REPRESENTATIVE TO THE ASSESSMENT CONCLUDED BY THE A SSESSING OFFICER FOR ASSESSMENT YEAR 2009-10. IT WAS EXPLAINED THAT DURING THE ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 2009-10, A SIMILAR QUERY I.E. WHY GIA INDIA LAB SHOULD NOT BE CONSTRUED AS P E OF THE ASSESSEE COMPANY IN INDIA WAS RAISED, BUT AFTER CONSIDERING THE DETAILED RESPONSE FURNISHED BY ASSESSEE VIDE REPLY LETTER DA TED 02 NOVEMBER 2012, NO ADDITION WHATSOEVER WAS MADE, WHICH IS EVI DENT FROM THE ASSESSMENT ORDER (AY 2009-10) DATED 26 MARCH 2013. THUS, IN THIS BACKGROUND IT WAS ALL THE MORE INCUMBENT UPON THE R EVENUE IN THIS YEAR TO DISCHARGE ITS ONUS AS TO WHY A DIFFERENT ST AND IS BEING ADOPTED, ESPECIALLY IN THE FACE OF THE FACT THAT TH E NATURE AND SOURCE OF INCOME IN QUESTION REMAINS THE SAME. THEREFORE, ON THIS ASPECT ALSO, WE ARE NOT INCLINED TO UPHOLD THE STAND OF TH E ASSESSING AUTHORITY. 17. BEFORE PARTING, WE MAY ALSO REFER TO THE RELIAN CE PLACED BY THE LD. DR ON THE JUDGMENT IN THE CASE OF FORMULA ONE W ORLD CHAMPIONSHIP LTD. (SUPRA). IN THAT CASE, THE ASSES SEE WAS A U.K TAX 15 ITA NO. 1138/MUM/2015 RESIDENT WHO OBTAINED LICENCE OVER ALL COMMERCIAL R IGHTS IN FIA FORMULA ONE WORLD CHAMPIONSHIP. FOR THIS PURPOSE, THE ASSESSEE (FOREIGN TAX PAYER) ENTERED INTO A CONTRACT WITH J. P. SPORTS (AN INDIAN CONCERN) BY WAY OF WHICH IT GRANTED TO J.P. SPORTS THE RIGHT TO HOST, STAGE AND PROMOTE FORMULA ONE GRAND PRIX OF INDIA E VENT AT MOTOR RACING CIRCUIT OWNED BY J.P. SPORTS. AFTER EXAMINI NG ALL THE RELEVANT AGREEMENTS, THE CASE OF THE REVENUE WAS THAT THE CI RCUIT LOCATED IN INDIA CONSTITUTED A PE OF ASSESSEE (I.E. THE FOREIG N TAX PAYER) IN INDIA. THE HONBLE HIGH COURT CONCLUDED THAT SINCE THE ASS ESSEE (FOREIGN TAX PAYER) HAD FULL ACCESS TO THE CIRCUIT AND COULD DIC TATE AS TO WHO WAS AUTHORISED TO ACCESS THE CIRCUIT AND ORGANISING ANY OTHER EVENT ON THE CIRCUIT WAS NOT PERMITTED, THE SAID CIRCUIT CONSTIT UTED A PE OF THE FOREIGN TAX PAYER, I.E. FORMULA ONE WORLD CHAMPIONS HIP LTD., IN INDIA. THE SAID DECISION OF THE HONBLE HIGH COURT WAS APP ROVED BY THE HONBLE SUPREME COURT. THE AFORESAID DECISION, IN OUR VIEW, STANDS ON AN ENTIRELY DIFFERENT FACT-SITUATION. IN THE PR ESENT CASE, THERE IS NO MATERIAL TO SHOW THAT THE ASSESSEE DICTATES TO THE INDIAN SUBSIDIARY AS TO WHAT ACTIVITIES IT IS AUTHORISED TO ENGAGE IN. WE HAVE ALSO NOTED EARLIER THAT THE INDIAN SUBSIDIARY IS OPERATING IN AN INDEPENDENT MANNER AND THERE IS NOTHING TO SHOW THAT FACTUALLY SPEAKING THE INDIAN SUBSIDIARY CONSTITUTES A PE OF THE ASSESSEE IN INDIA. THUS, ON ACCOUNT OF DIFFERENCE IN FACT-SITUATION, THE RELIAN CE PLACED BY THE LD. DR IN THE CASE OF FORMULA ONE WORLD CHAMPIONSHIP LT D. (SUPRA) IS MISPLACED. 18. IN VIEW OF THE AFORESAID DISCUSSION, IN OUR CON SIDERED VIEW, THE ASSESSING OFFICER HAS ERRED IN INVOKING SECTION 9 O F THE ACT AND/OR ARTICLE 5 OF THE INDIA-USA DTAA IN ORDER TO SAY THA T THE ASSESSEE 16 ITA NO. 1138/MUM/2015 COMPANY HAS A PE IN INDIA. THUS, ASSESSEE SUCCEEDS ON THIS ISSUE. 19. GROUND NO.2 AND 3 RELATES TO ALTERNATIVE PLEA O F ATTRIBUTION AND ESTIMATION OF GROSS PROFIT. SINCE WE HAVE ALLOWED G ROUND NO.1 OF THE APPEAL HOLDING THAT THE ASSESSEE DOES NOT HAVE A PE IN INDIA AND THUS, INCOME OF THE ASSESSEE IS NOT LIABLE TO BE TA XED IN INDIA, THE AFORESAID GROUNDS OF APPEAL ARE RENDERED ACADEMIC. 20. INSOFAR AS GROUND OF APPEAL NOS.4 IS CONCERNED, IT RELATES TO CHARGING OF INTEREST U/S 234B OF THE ACT, WHICH IS CONSEQUENTIAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATI ON. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JUNE, 2019 SD/- SD/- (JUSTICE P.P. BHATT) (G.S. PANNU) PRESIDENT VICE- PRESIDENT MUMBAI, DATE : 21-06-2019 *SSL* COPY TO : 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT(A) CONCERNED 4) THE CIT CONCERNED 5) THE D.R, BENCH, MUMBAI 6) GUARD FILE BY ORDER DY./ASSTT. REGISTRAR I.T.A.T, MUMBAI