The Hon’ble Delhi Income-tax Appellate Tribunal (ITAT) has observed that employees of the foreign enterprise assigned to India for performing marketing and sales functions for the overseas group entities, used the liaison office of one of the group entities in India. Thus, the ITAT held that the assessee had both, a fixed place permanent establishment (PE) and agency PE, in India.
Income-tax Appellate Tribunal (‘ITAT’), Delhi
GE Energy Parts Inc. vs. Addl. DIT, Circle-1(2), International Taxation, New Delhi
[ITA No. 671/Del/2011]
Whether the liaison office would constitute fixed place PE, when business of overseas entities are partly carried on in India and the activities carried out from a fixed place are not of preparatory or auxiliary character?
Whether the nature of activities performed by expatriate employees of GEII located in India and employees of GEIIPL, i.e. GE India, which are of core nature and not merely preparatory or auxiliary, would mean that GE India has authority to conclude contracts on behalf of the GE Overseas entities and would constitute Agency PE in India?
Facts of the case:
- GE Energy Parts Inc. (‘the assessee’) is a company incorporated in the United States of America (‘USA’) and is also a tax resident of the USA. The assessee is a part of the GE Group, which makes equipments for the customers in India relating to oil and gas, energy, transportation and aviation business
- A survey u/s 133A of the Income-tax Act, 1961 (‘the Act’), was conducted at AIFACS premises, i.e. liaison office of General Electric International Operations Company Inc. (GEIOC). During the course of survey and post-survey enquiries, the revenue authorities obtained certain incriminating material / documents / information and also recorded statements of some persons
- On the basis of the material/ information gathered, the Assessing Officer (‘AO’) issued notices u/s 148 of the Act to 24 GE group entities (including the assessee) which were incorporated in various countries like UK, Japan, USA, Germany, Canada, Italy, Mauritius, Singapore, etc.
- The AO observed that many activities relating to marketing and sales were carried out in India. The AO also observed that the expatriates from GE International Inc., US (‘GEII’) along with the employees of GE India Industrial Private Limited, India (‘GEIIPL’) constituting the Indian team (‘GE India’) were always involved and participated in the negotiation of prices
- Thus, the AO passed an order and held that the GE group entities were selling goods in India with the involvement of its Permanent Establishment (PE) (i.e. a fixed place PE and a dependent agent PE) in India and, accordingly, the profits attributable to such PE were chargeable to tax in India. The Commission of Income-tax (Appeals) [‘CIT(A)’] also upheld the order of the AO.
- Aggrieved by the order of the AO / CIT(A), the GE group overseas entities filed a batch of 139 appeals. The GE group selected the assessee’s case as lead case and fairly admitted that there are four broad common issues to be dealt with. The following broad issues are as under:
- Whether there exits any Fixed Place PE or Agency PE in India;
- Attribution of profits to such PE;
- Whether re-assessment proceedings are valid and
- Levy of interest u/s. 234B
Key Observations and decision of the Delhi ITAT:
A. EXISTENCE OF PE
i. Fixed Place PE
- The ITAT considered the Double Tax Avoidance Agreement (‘DTAA’) between India and USA to examine the provisions in respect of 'Fixed Place PE’. Article 5 of the said DTAA deals with PE, and in particular paragraphs 1 to 3 deal with the fixed place PE, relevant extract of paras are reproduced below:
' 1. For the purposes of this Convention, the term ‘permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term ‘permanent establishment' includes especially:
(a) a place of management;
(c) an office;
(d) to (l)
3. Notwithstanding the preceding provisions of this Article, the term ‘permanent establishment' shall be deemed not to include any one or more of the following :
(a) to (d)
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise.’
- The ITAT observed that on a conjoint reading of the relevant parts of paras 1, 2 and 3 of Article 5, a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on and such fixed place is not maintained for activities of a preparatory or auxiliary character
- Thus, based on the facts, the ITAT found that expatriates from GEII, permanently using the liaison office premises of GEIOC at AIFACS building. It was also observed that these expats and employees of GEIIPL working under expats were working in AIFACS building, has never been denied by the assessee
- The ITAT also observed the primary, specific and original substantiated material in the form of survey documents, self-appraisals, manager assessment, etc., and held that GE overseas entities were selling its products in India and the core activities in regard to sale, namely, pre-sale, during-sale and post-sale were being carried out in India by GE India
- Thus, the ITAT held that all the conditions for constituting a fixed place PE in terms of paras 1, 2 and 3 of the Article 5 are fully satisfied, as AIFCAS building is a fixed place from which business of GE overseas entities is partly carried on in India and the activities carried out from such fixed place are not of preparatory or auxiliary character
ii. Agency PE
- The Agency PE is subject matter of paras 4 and 5 of Article 5 of the DTAA. Relevant extract of paras are reproduced below:
'4. Notwithstanding the provisions of paragraphs 1 and 2, where a person— other than an agent of an independent status to whom paragraph 5 applies— is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State if :
(a) he has and habitually exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercise through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;
(b) to (c)……
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.’
- The ITAT observed that para 4 of Article 5 states that where a person, other than an agent of independent status to whom para 5 applies, and fulfills the conditions as set out in the para 4, the said person will constitute a PE of the enterprise
The ITAT further observed that the first part of para 5 refers to an agent of independent status and the second part of para 5 refers to an agent of independent status who is not considered an agent of independent status because of the conditions set out in the said paragraph.
Thus, it is axiomatic, that the ‘person’ referred to in para 4 refers to an agent of dependent status and also an agent of an independent status who is covered in part 2 of para 5. Exception to the first part of para 5 created in part 2 is restricted only to 'an agent of independent status’. On the other hand, if there is an agent of dependent status per se whose activities are devoted to one or multiple related enterprises, he will be directly covered within the scope of para 4 of Article 5 of the DTAA
- Thus, the ITAT observed that the nature of activities done by GE India, which are of core nature, and they clearly indicate GE India’s authority to conclude contracts on behalf of GE overseas entities. Thus, the ITAT held that GE India constituted agency PE of all the GE overseas entities in India.
B. ATTRIBUTION OF PROFITS
- The ITAT observed that the AO was correct in its approach in estimating total income at 10% of sales made in India due to non-availability of year-wise, and entity-wise profits of GE overseas entities for the operations carried out in India.
- Further, the ITAT held that GE India conducted core activities and the extent of activities by GE Overseas in making sales in India is roughly one fourth of the total marketing effort. Thus, it was estimated that the 26% of total profit (i.e. 10% of sales) in India, as attributable to the operations carried out by the PE in India, instead of 35% estimated by the AO.
C. VALIDITY OF RE-ASSESSMENT PROCEEDINGS
- The ITAT on the basis of various facts/ information collected during and after the survey proceedings observed that various GE group entities are carrying out the business in India. The ITAT also observed that the assessee has taken several legal objections against the initiation of reassessment, but did not deny correctness of factual assertions in this regard in the reasons
- The ITAT relying on various judgments held that the initiation of reassessment proceedings requires the AO to form a prima facie view about the escapement of income and there is no need to conclusively establish at that stage that such income escaped assessment. Thus, the ITAT held that that the AO was justified in initiating reassessment proceedings based on the incriminating material found during the survey
D. LEVY OF INTEREST U/S. 234B
- The ITAT, relying on the decision of the Hon’ble Delhi High Court in assessee’s own group cases involving identical facts, has approved the cancellation of the levy of interest u/s 234B of the Act.
This decision is clearly based on the facts unearthed during the survey conducted by the revenue authorities. The facts as held by the ITAT do indicate the carrying on of core business functions of marketing and sales in India, by the foreign enterprises.
The important aspect of the decision is the attribution of income under the Act to the activities carried on by the PE in India. The key in such attribution, is the identification of the economic nature of the activities of the PE, and the contribution of such activities to the profits of the enterprise and its attribution to the income chargeable to tax in India to the PE.
 Representing expatriate employees of GEII located in India and employees of GEIIPL engaged in providing marketing support services for offshore sales into India
 All India Fine Arts and Crafts Society, Liaison Office of GEIOC