BOMBARDIER TRANSPORTATION GmbH, NEW DELHI V. DCIT, CIRCLE- 1(1)(2), INTL. TAXATION, NEW DELHI

ITA 5638/DEL/2018

• Counselvise Citation: [2023] 101 COUNSELVISE.COM (IT) 9982 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 31-10-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 30-08-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Rectification of order; Double taxation relief; International transaction; Assessment record
• Section: 271(1)(c); 154; 143(3); 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH, ‘D’: NEW DELHI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ITA No.872/Del/2016 (Assessment Year: 2011-12) ITA No.5638/Del/2018 (Assessment Year: 2011-12) Bombardier Transportation GmbH, vs. DCIT, Circle 1(1)(2), C/o Shri Amit Gupta, Head of Taxation, International Taxation, Novotel – Pulman Commercial Tower, New Delhi. 3 rd Floor, Aerocity, New Delhi – 110 037. (PAN : AADCB4031C) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Anmol Anand, Advocate Ms. Priya Tandon, Advocate REVENUE BY : Shri Vizay B. Vasanta, CIT DR Date of Hearing : 01.11.2023 Date of Order : 15.11.2023 ORDER PER SHAMIM YAHYA, ACCOUNTANT MEMBER : ITA No.872/Del./2016 This appeal by the assessee is directed against the order of the Assessing Officer pursuant to the directions issued by the Disputes Resolution Panel (DRP) pertaining to the Assessment Year 2011-12. 2 ITA No.872/Del/2016 ITA No.5638/Del/2018 2. Ground of appeal taken by the assessee in ITA No.872/Del/2016 read as under :- “The following grounds of appeal are mutually exclusive of and without prejudice to each another. 1. That Learned Assessing Officer ('Ld. AO') erred in assessing the income of the Appellant at INR 27,86,03,199/- as against the returned income declared by the Appellant at INR 25,19,77,876/-. 2. That on the facts and in the circumstances of the case and in law, the impugned order passed by the Ld. AO is bad in law and void ab-initio. Re: Project Office at Vadodara does not constitute Fixed Place Permanent Establishment ("PE") of the Appellant Company under Article 5(1) of the India-Germany DTAA. 3. That on the facts and in the circumstances of the case and in law, the Ld. AO and the Hon'ble DRP erred in alleging that "Project Office at Vadodara" constitutes fixed place PE of the Appellant under Article 5(1) of the Indo-Germany Double Taxation Avoidance Agreement ("DTAA") without independently examining the same in the light of Appellant's factual background. 3.1 Without prejudice to above, Ld. AO and the Hon'ble DRP failed to appreciate that mere existence of a PE in the host country, i.e., India, would not automatically lead to the conclusion that any portion of income arising from sale of equipment outside India was liable to be taxed in India. 3.2 That on the facts and in the circumstances of the case, Ld. AO and Hon'ble DRP erred in alleging that "Project Office at Vadodara" constitutes fixed place PE of the Appellant under Article 5(1) of the Indo- Germany Double Taxation Avoidance Agreement ("DTAA") merely by relying upon their order for the immediately preceding assessment year. Re: Bombardier Transportation India Limited does not constitute Fixed Place PE of the Appellant Company under Article 5(1) of the India- Germany DT AA - Disallowance of INR 2,66,25,323/- 4. That on the facts and in the circumstances of the case and in law, the Ld. AO and the Hon'ble DRP grossly erred in alleging that core business of the Appellant was being carried out from the premises of BTIL and hence, BTIL constitutes fixed place PE of the Appellant in India under Article 5(1) of the Indo - Germany DTAA. 4.1 That on the facts and in the circumstances of the case and in law, the Ld. AO and the Hon'ble DRP grossly erred in enhancing the income of 3 ITA No.872/Del/2016 ITA No.5638/Del/2018 the Appellant by INR 2,66,25,323/-, while alleging that BTIL is a PE of the Appellant in India. 4.2 That the Ld. AO and the Hon'ble DRP failed to appreciate that supply of trains manufactured by BTIL was routed through the Project Office of the Appellant company merely because the Appellant was the Leader of the Consortium and DMRC had specifically directed/ requested for the supply of the trains to be carried out by the Appellant. 4.3 Without prejudice to the above, the Ld. AO and the Hon'ble DRP erred in holding that profits arising from sale of sub-assemblies and intermediary services should be attributed to the PE at an ad-hoc rate of 35% by applying the applying the decision of Delhi High Court in the case of M/ s Rolls Royce PLC, 339 ITR 147, which was rendered on different set of facts. 4.4 That the Ld. AO and the Hon'ble DRP failed to appreciate that when the transaction of purchase of goods and services between BTIL and BTG is benchmarked in the hands of BTIL, no further attribution can be made in the hands of BTG for the same transaction. 4.5 That the Ld. AO and the Hon'ble DRP failed to appreciate that the activities carried out by BTIL are independent, separately identifiable, separately compensated and hence there is no question of alleging it to be the PE of BTG. 4.6 That the Ld. AO erred in not allowing the travel expenses of INR 55,947,355 (Euro 888,053), (being 75% of the expenses incurred by the Appellant during the relevant previous year) despite holding that last year's order should be followed w.r.t the treatment/ allowability of travel expenses incurred during captioned assessment year. 4.7 That the Ld. AO and Hon'ble DRP erred in disallowing travel related expenses by also alleging that 25% of the same relates to contracts other than RS-2 contract without any basis to support the same. 4.8 That the Ld. AO / Hon'ble DRP erred in adopting contradictory stands inasmuch as one hand they allege large number of expat employees visited India during the relevant previous year solely for purposes to assist BTIL in execution of “RS-2" contract and on the other hand, they disallow 25% of travel expenses while holding that the appellant has been unable to demonstrate that the entire amount of travel expenses were incurred only in respect of “RS-2" contract. 5. That the Ld. AO and Hon'ble DRP erred in not allowing INR 2,60,00,000/-, being 25% of the travel expenses disallowed in AY 2010-11 on the ground that these expenses pertain to contracts awarded in AY 2011-12, while holding that contracts awarded in AY 2011-12 did not fetch any income. 4 ITA No.872/Del/2016 ITA No.5638/Del/2018 Re: Taxation of sale of sub-assemblies and intermediary services corresponding to onshore sales of INR 27,93,70,105/- already taxed in AY 2010-11 - Disallowance of INR 12,80,51,100/- 6. That on the facts and circumstances of the case and in law, Ld. AO and the Hon'ble DRP erred in Attributing revenue of INR 12,80,51,100/- from sale of sub-assemblies and intermediary services corresponding to differential sales of INR 27,93,70,105/ - in complete ignorance of the fact that the said revenue had already been taxed in assessment for the immediately preceding year, i.e., AY 2010-11. 7. That on the facts and circumstances of the case and in law, Ld. AO and the Hon'ble DRP erred in adopting gross profit ratio instead of the net profit ratio for the purposes of attributing income to "BTIL PE". 8. That on the facts and circumstances of the case and in law the Ld. AO grossly erred in initiating the penalty under section 271(1)(c) of the Act.” 3. Brief facts of the case are that the assessee filed its return of income for the Assessment Year 2011-12 declaring an income of Rs.25,19,77,876/- on 30.11.2011. The case was selected for scrutiny assessment and notice u/s 143(2) of the Income Tax Act, 1961, (the "Act") was issued and served upon the assessee. In response to the notices issued, assessee furnished requisite details from time to time. The assessee company is registered and incorporated under the laws of Germany. The assessee, a non-resident under the provisions of the Act, is a tax resident of Germany in terms of Article 4 of the India - Germany tax treaty. The assessee operates in the Rail transportation industry. Reference in this case was also made to the Transfer Pricing Officer. The Transfer Pricing Officer in his order dated 25.11.2014 passed u/s 92CA(3) of the Act has drawn no adverse inference in respect of the international transaction undertaken by the assessee during the year. The assessee company entered into a contract dated 19 th July 2007 with DMRC 5 ITA No.872/Del/2016 ITA No.5638/Del/2018 for design, manufacture, supply, testing, commissioning, training and transfer of technology in respect of passenger rolling stock ('Contract RS2'). During the AY 2010-11, the assessee company has made onshore supplies of passenger rolling stock to DMRC. Further, the assessee company has also rendered intermediary services to Bombardier Transportation India Limited ("BTIL") for marketing, project management and engineering etc. during the AY 2010-11. As the facts and circumstances of the current year are the same as the preceding assessment year 2010-11, vide order sheet entry dated 16.03.2015 the assessee was asked to show cause as to why the assessment for AY 2011-12 should not be completed on the same lines as the previous A.Y. 2010-11. The assessee vide letter dated 25.03.2015 filed its written submissions. 3.1 AO made enquiry from the assessee in this regard but he was not satisfied. He has held that the assessee has two fixed base PEs, first in the form of BTIL and the other in the form of Project Office (PO). AO further held that facts and circumstances remaining the same as in the previous AY 2010-11, the same rate has been accepted for the purpose of attributing profits of the PE by the assessee during the current AY 2011-12. AO went on to compute the net profit attributable to the assessee’s PE in India as under :- 6 ITA No.872/Del/2016 ITA No.5638/Del/2018 “ In view of above Net profit attributable to the assessee’s PE in India is computed as under :- Particulars Amount in (Rs.) Sale consideration for sub-assemblies 98,61,59,616 Gross profit @ 8.12% 8,00,76,161 Gross profits attributable to the PE in India @ 35% of the above 2,80,26,656 Net profit of PE 2,80,26,656 Less : Overheads as per Section 44C (14,01,333) Net taxable profit 2,66,25,323 46. Therefore, in view of the above discussions, the income is proposed to be assessed as under :- Particulars Amount (in Rs.) Returned Income 25,19,77,876 Add : Net taxable profit to be taxed @ 40% plus surcharge and cess (as computed above) 2,66,25,323 Total 27,86,03,199 5. Assessee objected the same before the DRP. DRP also found the facts similar to the previous year. Some of the observations that facts are similar can be noted from the observations of the DRP as under :- “The Panel has carefully examined the matter. In the preceding year as discussed above, the Panel has held that the assessee company has two fixed base PEs, first in the form of BTIL and the other in the form of the project office (PO). For the relevant year under consideration, the facts are quite similar and have been elaborately discussed by the assessing officer. Relying upon the specific facts for the year under consideration and the issues highlighted by the Panel in the preceding year, the AO has held that the assessee company in this year also has two fixed base PEs, first in the form of BTIL and the other in the form of the project office (PO). The assessee company has not brought anything new on record on the basis of which a finding other than that reached by the AO could be arrived at.” The DRP confirmed the proceedings. 6. Against this order, assessee is in appeal before us. 7 ITA No.872/Del/2016 ITA No.5638/Del/2018 7. As regards the facts of the case, ld. Counsel of the assessee submitted that the same are similar to AY 2010-11 and submitted that the ratio of the order dated 14.07.2023 of ITAT in ITA No.1390/Del/2015 for AY 2010-11 will also apply in this year i.e. AY 2011-12. Further, he submitted that no profit was earned by the AO. He referred to the aforesaid ITAT order in this regard. He also submitted that the ld. CIT (A) for AY 2012-13 has held that the PO could not be treated as PE of the assessee and the Department has not filed any appeal, hence this issue has attained finality. 8. Per contra, ld. DR for the Revenue could not dispute this proposition that the facts are similar to AY 2010-11. 9. We have heard both the parties and perused the records. We find that ITAT in the aforesaid order for AY 2010-11 has noted that DRP had held that project Office has not made any profit. In this regard, observation of the ITAT for AY 2010-11 in para 6 is as under :- “ While dealing with assessee’s objection, learned DRP granted substantial relief to the assessee qua the attribution of profit in relation to onshore supply and services. However, insofar as, income from offshore supply of 8 train sets, learned DRP, though, agreed with the assessee that the project office had no involvement with offshore supply, hence, no profit attribution can be made to the PE. However, learned DRP held that the assessee had a fixed place PE in the form of BTIL. Accordingly, learned DRP directed the Assessing Officer to attribute profit to the PE in respect of income earned from offshore supply at 35%.” 10. As regards the issue of PE is concerned, the facts are similar to AY 2010-11. This has been mentioned by both AO and DRP. We note that 8 ITA No.872/Del/2016 ITA No.5638/Del/2018 ITAT in the order of AY 2010-11 (supra) had held that BTIL cannot be considered as PE of assessee in India. The order of ITAT may be gainfully referred to as under :- “20. At this stage, it is relevant to observe, learned DRP, while coming to conclusion that BTIL constitutes fixed place PE in India, has relied upon the decision of the Tribunal in case of Nortel Networks India International Inc. However, the decision of the Tribunal stands reversed by the Hon’ble Jurisdiction High Court in Nortel Networks International Inc. Vs. DIT [2016] 386 ITR 253 (Delhi). Thus, analyzing the facts and materials on record in the touchstone of the ratio laid down in the judicial precedents cited before us, we are of the view that none of the conditions of fixed place PE as enshrined under Article 5(1) of India – Germany tax treaty stand satisfied to construe BTIL as the PE of the assessee in India. Thus, in view of our aforesaid conclusion, we hold that the attribution of profit qua the receipts from offshore supplies to the alleged fixed place PE in the form of BTIL is unsustainable as, in our view, BTIL cannot be construed as PE of the assessee in India.” 11. Respectfully following the aforesaid precedent, we hold that assessee’s grounds of appeal in this regard i.e. Project Office at Vadodara does not constitute Fixed Place Permanent Establishment of the assessee company and BTIL does not constitute fixed place PE of the assessee company, is upheld and issue decided in favour of the assessee. 12. In view of our decision above, the other issues/grounds raised by the assessee, having become either academic or consequential, do not require adjudication. ITA No.5638/Del/2018 9 ITA No.872/Del/2016 ITA No.5638/Del/2018 13. This appeal by the assessee is directed against the order of the Assessing Officer passed under section 154/143(3)/144C(3) of the Income Tax Act, 1961 for the AY 2011-12. 14. Ground of appeal taken by the assessee in ITA No.5638/Del/2018 read as under :- “These grounds are without prejudice and in addition to the grounds raised in ITA No. 872/De1/2016 [Appellant's Appeal for AY 2011-12 against final assessment order dated 27.01.2016 passed under Section 143(3) read with 144C (13) of the Income-tax Act, 1961 ("Act")] . 1. That the AO grossly erred in taxing the interest paid by Bombardier Transportation India Limited ("BTIN") on the external commercial borrowing ("ECB") advanced by the Appellant at the rate of 40% on the basis of its finding that the Appellant had a fixed place permanent establishment ("PE") in India in the form of its project office ("PO") in India. 2. That the rectification order passed by the Ld. AO is patently illegal as the interest income received from BTIN pursuant to the loan agreement has not been discussed in the Assessment Order dated 27.01.2016 and same is not a mistake apparent from the records under Section 154 of the Act. 3. That the AO completely erred in law and on facts in ignoring that the ECB advanced by the Appellant to BTIN, was not effectively connected with the activities of the PO, basis which such PO was determined to be the PE of the Appellant for the subject year. 4. That the AO completely failed to appreciate that BTIN and PO were completely independent of each other and therefore, interest income received from BTIN could not have been charged as income in the hands of the Appellant under Article 7 of the India-Germany DT AA, earned through activities carried out by the PO. 5. Without prejudice, the observation of the AO vis-a-vis BTIN being the PE of the Appellant in India, which formed the basis for the AO to rectify its final assessment order dated 27.01.2016 in order to tax the interest received by the Appellant from BTIN at a higher rate, is also erroneous since BTIN had not been determined to be a PE qua the transaction of ECB and as such the ECB advanced were not effectively connected with the activities of BTIN either. 10 ITA No.872/Del/2016 ITA No.5638/Del/2018 6. That the AO failed to appreciate that the ECB loan agreement executed between the Appellant and BTIN was not in connection with the RS-02 contract entered between the consortium of Appellant and BTIN with Delhi Metro Rail Corporation. 7. That the AO failed to appreciate that the Appellant had advanced the ECB to BTIN for the purposes of fulfilling its capital expenditure requirements, viz., setting up of plant at Savli, Vadodra. 8. That the AO erred in levying interest under section 234D of the Act. The above 'Grounds of Appeals' are all independent and without prejudice to one and another.” 15. AO on this issue passed an order under section 154 of the Act. He observed that on perusal of the assessment record, it is found that the income of the assessee comprised of interest income of Rs.3,50,01,831/- on external commercial borrowing from Bombardier Transportation India Ltd. This income has been taxed @10%. As the interest income has been received from PE, as per Article 11(5) of India-Germany DTAA, it should have been taxed under Article of the Treaty as business profit i.e. at the rate of 40% (plus surcharge and cess). 16. Considering the assessee’s response, the AO was not satisfied since he had already held that assessee has PE in India as under :- “ The submission of the assessee has been considered and examined, and not found to be acceptable as the assessee has a PE in India in the form of a Project Office. Sales were made to DMRC by the assessee through this PO during the current F. Y. 2010-11 also. Thus the PO would undisputedly constitute a fixed place PE of the assessee since its business was being carried out though the PO. Accordingly, the above mistake being apparent from record is hereby rectified. Income of Rs.21,69,76,045/- is taxed @10% and income of Rs.3,50,01,831/- is taxed @ 40% (plus surcharge and education cess). Tax Detailed computation in this regard is given in ITNS-150 which is made part of this order. Credit 11 ITA No.872/Del/2016 ITA No.5638/Del/2018 of prepaid taxes and tax paid after regular assessment, if any, is allowed. Notice of demand and necessary forms issued.” 17. Against the above order, assessee has filed appeal before us. We have head both the parties and perused the records. 18. Ld. Counsel of the assessee submitted that given the fact that there is no PE of assessee in India in terms of ITAT order in assessee’s own case in AY 2010-11 (supra), there is no question of attributing interest income to PE of India and taxing the same at 40%. Accordingly, ld. Counsel of the assessee submitted that these grounds being consequential to the finding on PE and deserves to be allowed as well and the interest income requires to be taxed at 10% as declared by the assessee in the return of income. 19. Per contra, ld. DR for the Revenue did not dispute the aforesaid proposition made by the ld. Counsel of the assessee. 20. We find that we have already held that assessee does not have PE in India in ITA No.872/Del/2016, hence this ground is consequential. We allow the ground raised by the assessee in this regard. 21. In the result, both the appeals filed by the assessee are allowed. Order pronounced in the open court on this 15 th day of November, 2023. Sd/- sd/- (KUL BHARAT) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated the 15 th day of November, 2023 TS 12 ITA No.872/Del/2016 ITA No.5638/Del/2018 Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.DRP. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.