CASE LAWS

2017-TII-05-HC-DEL-INTL

DIT Vs KLM ROYAL DUTCH AIRLINES: DELHI HIGH COURT (Dated: January 25, 2017)

Income tax - Sections - India Netherland DTAA - Articles 7 & 8.

Keywords - technical facilities - air transport services - business income - traffic handling services - international pooling arrangement.

The assessees are international airlines with headquarters and controlling offices in Cologne, Germany and Amsterdam, Netherlands respectively and branch offices in India. They operate aircraft in the international traffic business, inasmuch as they operate aircraft in international traffic from, and to, various Indian airports. Both the Assessees are members of the International Airlines Technical Pool. As IATP members they extend minimal technical facilities to other International Air Transport Association member airlines at the New Delhi airport. The Assessees extend these facilities to various international airlines at Indian airports. However, monies are not paid on account of these services but notional credits and debits are routed through the Pool's accounting mechanism i.e. IATA clearing house.

The Assessees filed their returns and claimed that the amounts received from various IATP member airlines for the above services rendered in India were not taxable in India. However, the AO held that such amounts received by them in India were taxable, holding that these activities were not covered under the term "Air Transport Services"; the services were given to other airlines by the Assessees, the receipt from which was not recovered from their passengers and was not part of the face value of the ticket. The AO held that these services were incidental to the Assessees for their own flights, but when rendered to other airlines they were not air transport operation; the assessees' business would not be affected if they did not render them to other airlines. The AO also held that the Assessees' branch offices in India constituted PE and, therefore, the income relating to the engineering and traffic handling was taxable in India, as the same was not covered under Article 7 of DTAA. The AO's orders were challenged before the CIT(A) who ruled that the profit derived from exploitation of excess capacity by rendering services to other airlines was taxable in India and that deduction of expenditure which the AO allowed was quite reasonable and did not interfere with it. However, the order of the CIT(A) when challenged before the ITAT, was reversed.

On appeal, the HC held that,

Whether participation in an international pool arrangement means can be construed as activities performed by one airline on behalf of other airlines - NO: HC

Whether such pooling arrangement is ancilliary and incidental to the core airline operation business - YES: HC

+ a plain reading of the Articles 8(1) & (3) of the Indo Dutch DTAA reveals that income is exempt in respect of two activities, namely: (a) profits from operation of aircrafts in international traffic and, (b) profits from participation in a pool, joint business or an international operating agency. At the outset, it is necessary to notice that the Indo-UK DTAA is significantly different. Whilst Article 8(1) is similar in its language with the Indo-German and Indo-Dutch DTAAs, the phraseology used in the other provisions is a departure in the Indo-UK DTAA. Article 8(2) of DTAA between India and UK provides that Article 8 (1) shall likewise apply in respect of participation in pools of any kind. The words "pools of any kind" was interpreted by the ITAT by taking the dictionary meaning of the word "pools". Article 8(3) of DTAA between India and UK provided "....For the purposes of this article the term "operation of aircraft" shall include transportation by air of persons, live-stock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation....". Internationally, the only pool known to the aviation industry is IATP. The Revenue does not talk of or refer to any other internationally recognized pool in this regard. Its contention, rather is that a pool means not mere sharing of resources, but a structure or managing entity that administers the pool, which the participants are members of and that such centralized entity should facilitate the services. This Court is of the opinion that a "pool" cannot be stereotyped as the Revenue advocates. The international airlines business is a mammoth one; its size is assessed through operations of international airlines in several ways: fleet; cargo handled; passengers handled; countries served; scheduled freight tonne- kilometers (millions) served; profits; market capitalization and employees serving;

Whether a court of law can resort to the dictionary meaning or seek recourse to external aids such as DTAAs between one State and another, while interpreting a convention with third-party states - NO: HC

+ if one looks at the airlines industry which is cost intensive in terms of capital assets such as aircraft spares equipment etc., and one visualizes the compulsions of each airline to ensure compliance with air safety standards vis-à-vis both passenger and cargo traffic, the economic advantages for sharing resources become obvious. But for a pooling arrangement of the kind which IATP provides, every airline – irrespective of its size of operation or capital deployed, would be compelled to maintain ground handling services including the repairs, maintenance etc. in different continents, in several countries. This in turn would sap its capital and telephone its profitability. This adverse impact would mean that smaller airlines would be economically unfeasible. Thus the airline business requires not only huge capital deployment in acquisition of assets but also a continued maintenance and operations regime that is cost intensive. Like in any other industry, these costs are absorbed in the operation and are effectively factored in. That an airline carries on these activities as a part of its airline operation is not disputed by the Revenue. However, its argument essentially is that participation in a pool means that the activities that an airline performs on behalf of other airlines constitutes a business which is not an airline operation and is not ancillary or incidental to its business and consequently, has to be taxed where the income arises. In furthering this argument it states that the international pool or joint enterprise model conceived of in the pooling provision and in the relevant articles of the DTAA between India and Germany on the one hand, and between India and Netherlands on the other, envision a pool whereby there is a joint control in terms of deployment of capital resources as well as minimum management control by both airlines and a separate profit centre. This Court is of the opinion that the Revenue cannot ordain the manner by which industries set up or organize their business. The Court, too cannot resort to the dictionary meaning or seek recourse to other external aids such as DTAAs between one State and another in the interpretation of such convention with third-party states;

Whether profits derived by Indian airlines from participating in the International Airline Technical Pools, can be taxed in India in terms of the Indo-German & Indo-Netherland DTAAs - NO: HC

Whether 'operation of aircraft' shall include transportation by air of persons or goods, carried on by owners or lessees of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation - YES: HC

+ while interpreting tax treaties and conventions, the emphasis is upon the context- in the instrument itself, and "any subsequent agreement between the parties" as to the interpretation of the treaty or the application of its provisions. The expression "profit from the operation of ship or air-craft in international traffic" has not been defined in the Indo-Dutch DTAA, or in the Indo-German DTAA. In Article 8(3) of the DTAA between India and UK, it is explained. This is a significant distinction between these three sets of DTAA. The position in the Indo-German DTAA and Indo-Dutch DTAA on the one hand is similar, whereas, in the case of the Indo-UK DTAA, there is a difference. The ITAT while explaining the meaning of profit from the operation of ships or aircraft in international traffic in both Lufthansa and the KLM cases took into consideration the bye laws of IATP, because this organization authorized its members to share aircrafts, aircrafts pooling, ground handling equipment and manpower all over the world. The ITAT also considered the relevant clauses of the IATP manual and held that any receipt by the assessee due to participation in the IATP pool as provided in its manual and dealt with in Article 8(4) of Indo-German DTAA will not be taxable in India under Article 8(1); a similar finding was rendered in the case of KLM too. The Assessees participated in the IATP pool and earned certain revenues from such activities and also incurred expenditure. There is, in the opinion of the Court, clear reciprocity as to the extension of services; IATP membership is premised upon each participating member being able to provide facilities for which it was formed. As there was reciprocity in the rendering and availing of services, there was clearly participation in the pool; in terms of the two DTAAs (Indo-German and India-Netherlands) the profits from such participation were not taxable in India. Having regard to these facts, this Court is of opinion that the amplification of the term "operation of aircraft" in Article 8 (1) through Article 8 (3), i.e. "....For the purposes of this article the term "operation of aircraft" shall include transportation by air of persons, live-stock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation...." had the effect of limiting the nature of activities that could be comprehended in the pool envisioned in Article 8(2).

Revenue's appeal dismissed

2017-TII-07-HC-DEL-TP

SONY INDIA PVT LTD Vs CIT: DELHI HIGH COURT (Dated: January 24, 2017)

Income Tax - Sections 2(11), 2(42A), 32, 32(1)(c), 41(2), 43(6)(c), 50(1) & (2).

Keywords: block of assets - terminal depreciation - put to use - short term capital gains - deeming fiction & balancing charge

The assessee, a wholly owned subsidiary of Sony Corporation, Japan was engaged in the assembling and distribution of colour televisions, audio products and high-end electronic goods, including DVDs and handycams. It had imported goods from its associated enterprises and also rendered advisory services and software development services to such AEs. The assessee had filed TP reports which were subjected to examination by TPO after which the AO completed the assessment. In the period covered by AY 2005-06 (FY 2004-05), the assessee had sold its Daru Hera unit; it completely closed down its manufacturing activity in Daru Hera plant. Its assets were sold and transferred. The assets were part of a block of assets. Assessee claimed Rs. 4,42,22,475/- as depreciation. AO disallowed the claim, holding that the assessee was neither owner of the plant and machinery nor used it for the purpose of business. The assessee’s appeal to the CIT(A) was unsuccessful. On further appeal, ITAT affirmed the findings of CIT(A).

On appeal, the High Court held that,

Whether at the time of computing short term capital gains & interpreting Section 50, the effect of depreciation as per Section 32 has to be taken into consideration - NO: HC

++ in Ansal Properties, the facts indicated that the assessee had sold entire plant and machinery of its paper division and stopped and seized to carry on its business. Likewise, in Oswal too, the assessee claimed depreciation of its various assets, including a claim in respect of closed unit at Bhopal. It is thus clear that in both the judgments, the Court had occasion to deal with certain fact situations – in Ansal Properties, the facts were closely proximate to the circumstances of this case. After discussing the relevant provisions in Ansal Properties, the Court stated that Section 50 would apply where any block of assets ceases to exist. Rejecting the contention similar to the one advanced with respect to interpretation of Section 32, the Division Bench in Ansal Properties observed that counsel for the Revenue has relied u/s 32 and has submitted that the effect of the said Section should be examined while computing short term capital gains and interpreting Section 50. It is not possible to accept the said contention. Capital gains is chargeable to tax under Chapter IV-E. The provisions of the said Chapter are independent and separate. The provisions of the said chapter relating to capital gains have to be examined and interpreted. Only if there is a contradiction or conflict, we have to harmoniously interpret the two provisions. Section 50 incorporates a deeming fiction and has to be given and interpreted accordingly. Section 32 forms part of Chapter IV-D and relates to computation of income from profession and business. It is not the case of the Revenue that the gain on transfer of the block of assets is taxable as business income. The two sections operate in their own field and there is no conflict. In these circumstances, we do not think we should refer and rely u/s 32 and accordingly compute and decide whether short term capital gains is payable under Chapter IV-E. In Oswal and Ansal Properties, it was noticed that the Parliament had deleted the provision for terminal depreciation in respect of each asset that was previously allowed u/s 32(1)(c) and the taxation of balancing charge u/s 41(2) in the year when the sale was concluded. For the foregoing reasons, both the questions of law are answered in favor of the assessee and against the Revenue. The appeals are accordingly allowed.

Assessee's appeal allowed

2017-TII-19-ITAT-DEL-INTL

GE ENERGY PARTS INC Vs ADDL DIT: DELHI ITAT (Dated: January 27, 2017)

Income Tax – Sections 5(2), 9, 147, 148, 151, 44BB.

Keywords - reopening - escapement of income – failure to disclose particulars - fixed place PE - RBI's sanction - Sanction u/s 151 - liaison activities - agency PE - estimation of income - attribution of profits in India.

The assessee is a company incorporated in the United States of America and is also a tax resident of the USA. The assessee is a part of the GE Group, which makes equipments to the customers in India relating to oil and gas business, energy business, transportation business and aviation business. No return of income was filed by the assessee prior to the instant proceedings. A survey u/s 133A was conducted at AIFACS premises. Certain incriminating material/documents were found. On the basis of the material/information gathered during the survey and the post-survey enquiries, the AO issued notices u/s 148 to 24 entities of the GE Group incorporated in UK, Japan, USA, Germany, Canada, Italy, Mauritius, Singapore, etc. for different years, including the assessee. AO was of the opinion that assessee was making sales in India with the involvement of its Permanent Establishment (PE) in India and, accordingly, the profits attributable to such PE were chargeable to tax. He deemed 10% of the value of supplies made to the clients in India as the profits arising from such supplies and 3.5% of such profit was attributed to the PE in India. Assessee's Objections were dismissed by the AO. CIT(A) upheld the order of AO.

The A.O. examined the taxability of income of GE Overseas under the Act as well as the Double Taxation Avoidance Agreement. He held that a lot of activities relating to marketing and sales took place in India. Expatriates from GEII along with the employees of GEIIPL constituting the Indian team (GE India) were always involved and participated in the negotiation of prices. Such negotiations of prices took place in India. The Indian customers discussed MOU terms with the Indian team. These facts, in the opinion of the AO, were clear indicators of the GE India securing orders for GE Overseas. He further found that GE Overseas, by remotely sitting in foreign countries, could not make any sales, without the active involvement of GE India. This was held to be a business connection of GE Overseas in India in terms of section 9 of the Act. AO held that the business connection of GE Overseas was established in India and, consequently, income accrued or arose to them in India. Such income accruing or arising was held to be liable to tax as per the provisions of section 5(2) of the Act. AO finally held that all the GE overseas entities had PE in India in all the years under consideration in two forms, namely, AIFACS premises of GEIOC, constituting a 'fixed place PE'; 'GE India' comprising of expatriates of GEII and employees of GEIIPL constituting 'dependent agent PE'.

The AO also held that GE India constituted agency PE. He noticed that GE India was securing orders for GE overseas inasmuch as the documents found during the course of survey revealed that there were requests for proposals, copies of agreements, copies of MOUs and various other papers indicating that the expatriates along with the employees of GEIIPL participated in activities relating to the supply of products. Such were raw documents wherein many changes were made, which, in the opinion of the AO, established the participation of the persons for the business of overseas entities in deciding the prices, terms and conditions of the products sold in India. Here, not only one customer of GE, but, many customers in aviation, oil and gas, energy and transportation business were being looked after by these expats. CIT(A) upheld the order of AO.

The AO required the assessee to make available year-wise India specific accounts of GE Overseas. Financial statements of all the entities for all the years were not submitted. An inability was expressed on the ground that in some countries the accounts were not maintained and they were covered in the group schemes. In the absence of such information of entity level profits, the AO opined that working of actual entity-wise and year-wise profit was not possible. It was observed qua the three entities for which the assessee furnished information, that there was no regular trend in the profits and even GE Japan had closed its trading business from the year 2002-03. For the other two entities also, there were no reasons for the losses. Even notes to accounts, integral part to the financial statements, were also not submitted, that could have thrown some light on the losses/low profitability. The AO, therefore, took the view that the profitability statements of these entities for various years could not be used for attributing profits to Indian PE. AO estimated profit @ 10% of sales consideration to the customers in India. AO applied 35% of the total profitto work out the income chargeable to tax in India. CIT(A) upheld the order of AO.

On appeal, the ITAT held that,

Whether non-furnishing of return even when income earned in India during previous year was chargeable to income tax, is sufficient to form opinion regarding income escaping assessment – YES: ITAT

Whether initiation of reassessment proceedings requires the AO to form a conclusive view about the escapement of income – NO: ITAT

Whether reopening is bad in law, when sanction granted by Addl. DIT u/s 151 was not done in mechanical manner without application of mind – NO: ITAT

+ it is to be noted that the title of reasons contains the name of the assessee and the relevant year. Further, the seven expatriates from GEII were positioned in India to head the business operations of the GE overseas (referring to all the GE Overseas entities collectively, as described by the assessee itself before the AO).They were not deputed for the business of a specific GE group company, but, for the worldwide GE group companies in one of the three sectors, that is, Infrastructure (oil & gas, energy, rail, aircraft engines and aviation financial services); Industrial (equipment services); and Healthcare (Diagnostic imaging, information technology, services and bio sciences). All the business interests of GE overseas entities involved in the instant batch of 139 appeals were looked after by any of such seven expats and there was no business of GE overseas entities in India left out which was headed by some person other than the above seven. Though the AO categorically recorded the fact of expatriates working in India prior to seven expats, the assessee neither challenged the correctness of this fact recorded in its objections before the AO nor before the CIT(A). It is for the first time that the assessee raised this plea before the Tribunal by way of a short note dated 3.6.2014. This shows that the objection was taken for the first time after expiry of six years from the recording of reasons. Some documents found during the course of survey zeroed in the possibility of the GE overseas entities conducting full-fledged business in India, which got fortified from post-survey enquiries divulging more specific information on the business of the assessee carried out from India. Survey and post-survey enquiries transpired that the GE Group was engaged in various sales activities in India for which seven business heads mostly expats from GEII, were appointed to head Indian operations, with the support staff provided by GEIIPL and also third parties. AO, on the basis of such information gathered during the course of survey and post-survey enquiries, came to conclusion that various GE group entities, separately named in the Table, which covers all the GE overseas entities under consideration, were carrying on business and effecting sales in India. AO has clearly asserted in the reasons that GE India carried out full-fledged business activities and made sales in India for all the GE overseas entities;

+ the AO has conclusively recorded that the income of the assessee was chargeable to tax because of the Indian operations of the GE Overseas, which established a business connection under the Act and also PE under the DTAA and the absence of the assessee to file a return of income led to the escapement of income. Further it was stated that the non-resident GE group company, namely GE Energy Part Inc., USA has made a sale of USD 21,83,146/- during F.Y. 2000-01 in India. The assessee has business connection as well as the PE in India as per the provisions of Article 5 of the tax treaty between both the countries and the income attributable to the PE/ business connection is taxable in India. Since the assessee has not filed return of income in India to that extent the income chargeable to tax has escaped assessment. The survey and post-survey enquiries conducted by the AO before issue of notice u/s 148 gave sufficient material for the formation of a prima facie belief that the income of the assessee had escaped assessment. The assessee had not filed return of income prior to the issue of notice u/s 148. Explanation 2(a) to section 147 provides that where no return of income has been furnished by the assessee although his total income during the previous year exceeded the maximum amount, which is not chargeable to income-tax, it shall be deemed to be a case where income chargeable to tax has escaped assessment. Business carried on by the GE overseas entities in India was never disclosed to the Department. Business connection of the assessee in India, as set up by the AO, has not been denied. In that view of the matter and the further fact that the sales were made by GE Overseas in India through GE India, there was income of the assessee chargeable to tax in India for which the return of income ought to have filed and the benefit of DTAA, if any, could have been claimed as was done pursuant to the notice u/s 148. The fact that the assessee had a PE in India and no return was filed prior to the issuance of notice u/s 148 also brings the case within the fold of Explanation 2(a) to section 147. AO was justified in initiating reassessment proceedings. The nature of support services to be provided by GEIIPL as per this Agreement is inclusive of the services permitted by the Reserve Bank of India to GEIOC at the time of setting up of its LO in India. The permission was granted by the RBI for the purpose of undertaking purely liaison activities, viz., to act as a communication channel between head office and its customers in India. This permission was granted subject to the conditions that except the proposed liaison work, the LO will not undertake any other activity of a trading, commercial or industrial nature or it shall not enter into any business contracts in its own name without prior permission of the RBI;

+ it was further directed by the RBI that the Liaison Office will not charge any commission/fees for liaison activities and the entire expenses of the LO will be met exclusively out of the funds received from abroad through normal banking channels. It was also directed that the LO shall not borrow or lend any money from/to any person in India without prior permission and it shall not acquire, hold any immovable property, etc., except by way of a lease for a period not exceeding five years. It turned out only during the course of survey that the scope of actual services by GEIIPL far exceeded the market support services as provided in the Agreement. Actual activities carried out in India, far exceeded what was sanctioned by the RBI and such extra activities are of commercial and trading nature, which are exception to the rule of liaison office. In addition, the place of GEIOC was being used as fixed place of business of GE Overseas. Thus it is lucid that the actual functions performed by GEIIPL were much more than those prescribed in the Agreement. The ALP of payment made by GEIOC to GEIIPL was determined only w.r.t. the apparent services elaborated in the Agreement which are more or less of liaison nature, not leading to the doing of some income generating activity. But in reality, the actual services rendered by GEIIPL to the GE overseas entities under the leadership of expatriates from GEII is alien to the Agreement. Such activities performed by GEIIPL beyond the scope of the Service agreement have led to the creation of the PE of the assessee in India. Such services have not been remunerated at all. Since the transfer pricing analysis did not reflect these functions performed by GEIIPL, there is a need to attribute profits to the PE for those functions/risks that have not been considered. Further, it came to light during the course of the survey and the post-survey proceedings that the premises of the LO of GEIOC was being used as a fixed place PE by the GE overseas entities including the assessee, which fact was never disclosed to the Department. As this international transaction was not reported at all, there was no question of any transfer pricing analysis of the same. It is apparent from the recording of satisfaction by the Addl. DIT that the same was not granted in a mechanical manner without application of mind. The satisfaction was accorded 'for the reasons recorded by AO'. The Addl. DIT, who gave the sanction u/s 151 was already seized of the matter, prior to the issuance of notice u/s 148;

Whether non-revocation of the sanction given by RBI for carrying out liasoning activities, is sufficient to presume that only the designated activities sanctioned to the LO were carried on, when the evidences shows carrying on of activities at higher degree in qualitative terms than those sanctioned by RBI – NO: ITAT

Whether such non-action by the RBI would render factual findings recorded by I-T Authorities, as erroneous – NO: ITAT

Whether such liason office established in India, which is carrying on commercial activities and marketing support services to its fullest, would constitute fixed place PE of its principal foreign company – YES: ITAT

+ the DDIT, prior to issuing a notice u/s 148, required the GE group to furnish employment letters of all the employees of GE overseas group companies working in India along with their appraisal reports. The assessee furnished a list of employees of GE International Inc., US, who were working in India. These expats of GEII, who are highly qualified and some have even double qualifications, worked in India for different business interests of GE group and their activities were not confined to the business of a particular entity. Second is that they were heading the operations of GE overseas entities in India. From the Job descriptions and Appraisal reports with the Manager assessment, wherever given, it is crystal clear that the expats were India Country heads or working at the top positions, managing the business, securing orders and doing everything possible that could be done here qua the Indian operations of GE overseas entities in India. It has nowhere been denied, and rightly so, that the business model and role of the expats of GEII is similar qua all the businesses in India. The nature of jobs carried out by these employees of GEIIPL makes it amply clear that they were at the higher positions in the general administration and, more specifically, sales of GE Overseas, reporting directly to the expats, who, in turn, were India country heads or occupying the peak positions in GE Overseas in India. GE India was conducting business of GE Overseas in India and was directly and wholly involved in negotiating and finalizing the contracts. Though business of GE Overseas was partly carried out in India but the core of sales activity was done from the AIFACS building, being the fixed place of business. The second requisite also, therefore, stands satisfied. The third condition for constituting a fixed place PE is that the activities carried on from such fixed place should not be of preparatory or auxiliary character. If the activities done from such fixed place fall within the purview of ‘preparatory or auxiliary', the fixed place sheds its character of a permanent establishment. The activities to the extent of communication channel, as sanctioned by the RBI, being of preparatory or auxiliary character, would not constitute any PE in India. However, the actual activities carried on from the fixed place of AIFCAS building did not remain confined only to those of a communication channel as was allowed by the RBI to GEIOC at the time of setting up its LO in India;

+ the assessee admitted the role of GE India (expats of GEII and the employees of GEIIPL) in identifying business opportunities, collecting and furnishing information pertaining to market trends, key policy changes in the industry, etc. The major activities about sourcing of customers and finalizing the deals with them were done by GE India in consultation, wherever required, with GE Overseas. Most of the work concerning the first stage of Pre-qualification was admittedly done by GE India; for the second stage of Bid/no bid and Proposal development, albeit the assessee admitted that in some instances, the proposal development was jointly done by the GE Overseas and GE India teams. The core activities of finding the customers and finalizing the deals with them were done by GE India in consultation, wherever required, with GE Overseas; for the third stage of Bid approval and negotiations and the fourth stage of Final contract development and approval, again we have found that it was GE India who was finalizing and changing the terms and conditions of MOU with the Indian customers and GE Overseas was not even allowed to change any of the terms and conditions directly without consulting GE India. The mere fact that the contracts were formally signed outside India by GE Overseas does not in any manner undermine the doing of core activity of sales by GE India. It is so for the reason that GE India finds customers in India, understands their requirements, negotiates necessary terms and conditions with them, prepares or helps in preparing MOU and finalizes the deal with them. With the doing of all the above activities, when MOU is prepared in India and the Indian customer signs it first in India and then it is sent to GE overseas for signature, for all practical purposes, it will have to be concluded that core sales activity was undertaken by GE India alone. GE India was doing core marketing and sales activity and GE Overseas was doing only auxiliary activities, in aid and support of the activities of the marketing activities carried out by GE India. None of the instant assesses had any LO in India. Be that as it may, even the LO of GEIOC has been treated as its fixed place PE and the exclusion claimed on the ground of preparatory or auxiliary activities, has been denied up to the tribunal level. Therefore, AIFACS building constituted fixed place PE of the assessee and all the GE Overseas entities in this batch of appeals;

Whether the Liasion office would constitute agency PE of all its overseas group entities in India, when the nature of activities done by LO are of core nature and not merely preparatory or auxiliary and they clearly indicated authority to conclude contracts on behalf of Overseas entity – YES: ITAT

+ the expats were rendering services to multiple GE entities in India. The expats were looking after one of the three major lines of business, such as Infrastructure etc., catering to various GE overseas entities. Thus, there remains no doubt that GE India comprising of expats and other employees of GEIIPL etc., were not working for a particular enterprise, but, for multiple enterprises dealing in one of the three major businesses of GE group. The activities of agent should be ‘devoted wholly or almost wholly on behalf of that enterprise.' When the activities of such an agent are devoted wholly or almost wholly on behalf of an enterprise and the transactions between the agent and the enterprise are not at ALP, then, he shall not be considered an agent of independent status. Use of the word ‘and' between the two conditions makes it amply clear that the concurrent satisfaction of both of them is a prerequisite for not considering such a person an agent of independent status. If only one condition is satisfied and the other is not, the person is considered as an agent of independent status. Although the transactions were not at ALP, but, since GE India worked for multiple entities, it fails to fall within the exception carved out. The expats of GEII and employees of GEIIPL were appointed to act as agent of multiple GE overseas enterprises. It is nobody's case that they were otherwise acting as agents of independent status working for other third parties in India. This proves that expats and employees of GEEIPL acted as agents of dependent status in the first place itself. Although, the number of GE overseas entities looked after by each of them is more than one, but the fact that such entities were in one of the three broader lines of businesses of GE group, makes them agents of dependent status per se. GE India consisting of expatriates of GEII and employees of GEIIPL etc., are the persons covered in paragraph 4 acting in India on behalf GE Overseas entities. The agent will constitute PE if he habitually exercises ‘an authority to conclude contracts on behalf of the enterprise' and his activities are, inter alia, not limited to preparatory or auxiliary activities which if carried through a fixed place would not make that fixed place a PE. An agency PE is established if the person habitually exercises an authority to conclude contracts so long as his activities are not of preparatory or auxiliary nature. The activities of such a person should be of core nature and not merely subsidiary to the main activities, which obviously rules out negotiating all elements and details of a contract. Having discussed the nature of activities done by GE India, which are of core nature and not merely preparatory or auxiliary, they clearly indicate its authority to conclude contracts on behalf of GE Overseas. It is, consequently, held that GE India constituted agency PE of all the GE Overseas entities in India;

Whether estimation of income at 10% of sales made in India is justified, when the AO has specifically required the assessee to furnish year-wise & entity-wise profits of overseas entities for the operations carried out in India and either such information was not given or a part of the information given did not help in deducing the correct amount of profit – YES: ITAT

Whether attribution of profits in India has to be in line with the extent of activities of PE in India – YES: ITAT

+ the AO specifically required the assessee to furnish year-wise entity-wise profits of GE overseas entities for the operations carried out in India. Either such information was not given or a part of the information given did not help in deducing the correct amount of profit. In such circumstances, the AO was left with no alternative, but, to estimate income on some rational basis. He invoked the provisions of Rule 10(iii) and estimated profit at 10% of sales made in India. Rate of 10% was applied by drawing strength from sections 44BB and 44BBB, which, in turn, are special provisions for computing profits and gains in connection with the business of exploration, etc. of mineral oils/operation of aircraft in the case of non-residents. The approach of the AO in estimating income at 10% of sales made in India is perfectly in order and does not require any interference. As regards the second component of the share of marketing activities in the total profit, the AO applied 35% by taking assistance from the decision taken by the Delhi Bench of the Tribunal in the case of Rolls Royce. There can be no hard and fast rule of attribution of profit to marketing activities carried out in India at a particular level. In fact, attribution of profits to PE in India is fact based, depending upon the role played by the PE in the overall generation of income. Such activities carried out by a PE in India resulting in generation of income, may vary from case to case. Attribution of income has to be in line with the extent of activities of PE in India. The activities carried out by Rolls Royce and ZTE Corporation in India are not similar to those done by the PEs of GE overseas entities in India. Attribution of whole of 35% of the profits relating to sales and marketing to the PE in India cannot be approved. 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. 26% of total profit in India estimated as attributable to the operations carried out by the PE in India. Therefore, as against the AO applying 3.5% to the amount of sales made by the assessee in India, we direct to apply 2.6% on the total sales for working out the profits attributable to the PE in India.

Assessee's Appeal partly allowed