INCOME TAX ACT, 1961

Section 90 Article 5

Double taxation Avoidance Agreement - Business profit - Fixed place PE - Liaison office in India was involved in the discharge of vital responsibilities

GE Energy Parts Inc (GEP) was incorporated in and was a tax resident of the USA. It was engaged in the business of manufacture and offshore sale of highly sophisticated equipments such as gas turbine parts and sub-assemblies. GEIOC, another US incorporated company, set up a liaison office (LO) in 1991 in New Delhi with permission of the Reserve Bank of India ('RBI') only to act as a communication channel and not carry on any business activity. AO held that the appellant had a fixed place PE and DAPE in India. Further, the AO also deemed 10% of the value of supplies made to the clients in India as the profits arising from such supplies and attributed 35% of such profit to the appellant's PE in India. CIT(A) upheld order of the AO. ITAT held that all conditions for constituting a fixed place PE in terms of paras 1, 2 and 3 of the article 5 were met with, as the AIFCAS building was a 'fixed place' from which business of GE overseas entities was partly carried on in India and the activities carried out from such fixed place are not of preparatory or auxiliary character. It, therefore, 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.Held: It was clear that in the kind of activity that GE carries out, i.e., manufacture and supply of highly specialized and technically customized equipment, the 'core activity' of developing the customer (identifying a client), approaching that customer, communicating the available options, discussing technical and financial terms of the agreement, even price negotiations, needed a collaborative process in which the potential client along with GE's India employees and its experts, had to intensely negotiate the intricacies of the technical and commercial parameters of the articles. This also involved discussing the contractual terms and the associated consideration payable, the warranty and other commercial terms. No doubt, at later stages of contract negotiations, the India office could not take a final decision, but had to await the final word from headquarters. But that did not mean that the India office was just for mute data collection and information dissemination. The discharge of vital responsibilities relating to finalization of commercial terms, or at least a prominent involvement in the contract finalization process, in the present case, clearly revealed that the GE carried on business in India through its fixed place of business (i.e., the premises), through the premises. The complexities of price negotiation, etc., clearly show that the assessee carries out through the PE business in India. These activities also intersect and overlap with the content of the principle of dependent agent, inasmuch it is evident that these agencies work solely for the overseas companies, in their core activities. Having regard to the conspectus of facts in this case and the findings of the lower Revenue authorities -- including the AO and the CIT(A), both of whom have upheld the attributability of income to the extent of 10% and apportionment of 3.5% of the total values of supplies made to the customers in India as income, the court found no infirmity with the findings or the approach of the Tribunal in this regard.

Relied:U.A.E. Exchange Centre Ltd. v. UOI & Ors. (2009) 313 ITR 94 (Del) : 2009 TaxPub(DT) 1457 (Del-HC), Formula One World Championship v. Commissioner of Income Tax (2017) 390 ITR 199 (Del) : 2016 TaxPub(DT) 4891 (Del-HC) [affirmed in Formula One World Championship v. CIT (2017) 394 ITR 80 (SC) : 2017 TaxPub(DT) 0899 (SC)], National Petroleum Construction Company v. DIT (IT) (2016) 383 ITR 648 (Del) : 2016 TaxPub(DT) 0858 (Del-HC), Jebon Corporation India v. CIT (2012) 206 Taxman 7 (Kar) : 2011 TaxPub(DT) 1727 (Karn-HC), Browne & Sharpe Inc. v. Commissioner of Income Tax and another (2014) 369 ITR 704 (All) : 2015 TaxPub(DT) 0064 (All-HC), Varian India v. ADIT (2013) 142 ITD 692 (Mum-Trib) : 2013 TaxPub(DT0 1714 (Mum-Trib), Rolls Royce Plc v. DDIT 2007TII-32-ITAT-DEL-INTL : 2008 TaxPub(DT) 1173 (Del-Trib) and Hukum Chand v. UOI (1976) 103 ITR 548 (SC) : 1976 TaxPub(DT) 0723 (SC).

REFERRED : National Petroleum Construction Company v. DIT (International Taxation) (2016) 383 ITR 648 (Del) : 2016 TaxPub(DT) 0858 (Del-HC), Director of Income Tax v. E-Funds IT Solution (2014) 364 ITR 256 (Del) : 2014 TaxPub(DT) 1849 (Del-HC) [affirmed in Additional Director International Taxation v. E-Funds IT Solutions Inc. (2017) 399 ITR 34 (SC) : 2017 TaxPub(DT) 4562 (SC) and Director International Taxation v. Mitsui & Co. Ltd. (2017) 399 ITR 505 (Del) : 2017 TqaxPub(DT) 2038 (Del-HC), Honda Motor Company Ltd. v. CIT 2018 (6) SCC 70 : 2018 Tax Pub(DT) 2086 (SC), CIT v. Hyundari Heavy Industries Ltd. (2007) 291 ITR 482 (SC) : 2007 TaxPub(DT) 1249 (SC), Director of Income Tax v. Galileo International Inc. (2011) 336 ITR 264 (Del) : 2009 TaxPub(DT) 1488 (Del-HC); Anglo-French Textile Company Ltd. v. CIT (1954) 25 ITR 27 (SC) : 1954 TaxPub(DT) 0047 (SC), AI Nisr Publishing (1999) 239 ITR 879 (AAR) : 1999 TaxPub(DT) 0391 (AAR) and Chryscapital Investment Advisors India (P) Ltd. v. DCIT (2015) 376 ITR 183 (Del) : 2015 TaxPub(DT) 2181 (Del-HC).

FAVOUR : Against the assessee-appellant.

A.Y. : 2001-02

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