(2008) 113 TTJ 701 (Del.)
A.Y. : 1997-98. Dated : 31-10-2007
3. S. 9, Income-tax Act; Articles 5 & 7, India-Italy DTAA.
Issues :
(i) Whether business connection and income taxable in
India ?
(ii) Whether PE having taxable income in India ?
Facts :
The assessee company was a resident of Italy. It had a
wholly-owned subsidiary company in India. Managing Director of the WOS was
appointed by the assessee company, which also paid part of his salary outside
India. The assessee company had supplied machinery and raw materials to its WOS
and had not filed return of its income in India, on the ground that in terms of
India-Italy DTAA, its income was not taxable in India.
The AO issued notice u/s.163(1)(a) of the Act to the WOS
asking the assessee company to file return. After considering the
representations of the assessee company, the AO observed that the assessee
company had business connection in India and its income was deemed to have
accrued and arisen in India, since :
(i) It had supplied machinery on a continuous basis over a
long period;
(ii) By virtue of payment of salaries of Managing Director
and other expatriates, the assessee company had total control over management
and affairs of the WOS;
(iii) Orders for machinery were placed from India without
any written contract or negotiations, which showed business connection between
the assessee company and the WOS;
(iv) The machinery was overinvoiced; and
(v) The supply was made on CIF basis and hence the assessee
company was required to supply the goods in India.
Before CIT(A), the assessee company had contended that it did
not carry out any business activity in India as : the order for supply of
machinery and raw material was placed at Italy; the goods were also shipped at
airport in Italy; it did not retain any right in the disposal of goods; and it
sent technicians, food technologists and process specialists for developing
products and processes best suited for Indian environment and these personnel
were not connected with installation or running of machinery. The Customs
authorities had not raised any objection regarding the valuation of the goods,
which supported the assessee company’s contention that the supply was made on
principal-to-principal basis.
As regards control over management and affairs of the WOS,
the assessee company had submitted that the WOS acts as an independent legal
entity and takes its own decisions in day-to-day financial matters and that the
AO had not confronted it with the material brought on record. The CIT(A)
concluded that the contract was executed at Italy.
The Tribunal observed that having regard to the facts brought
on record, it appeared that findings of the AO were merely based upon
presumptions. He had not brought any evidence on record, either that the
employees of the assessee company installed machinery for the WOS, or that the
assessee company had used its dominant position to over-invoice the machinery.
The findings of the CIT(A) were also not disputed. Based on facts and
circumstances, since the contract was executed in Italy and the sale was made on
principal-to-principal basis at arm’s length, it was covered by CBDT’s Circular
No. 23, dated July 23, 1969. Mere existence of business relation does not give
any right to the AO to assess any income in India. The AO had also not brought
any evidence to prove the assessee company’s PE in India or as to what business
was conducted by it during the assessment year in question or what profit or
income was earned by it on supply of machinery and raw material. Thus, the
findings of the AO were presumptuous. The AO had not discharged the onus upon
him. The Tribunal further observed that under Article 5 of India-Italy DTAA, the
term PE includes several kinds of places. However, the AO had not proved
existence of any such place vis-à-vis the assessee company. Also, Article
5(6) of India-Italy DTAA clarifies that mere control of one enterprise over the
other does not constitute a PE. The AO merely presumed 20% as the profit on the
supplies, but did not bring any evidence to prove it.
Held :
(i) S. 9(1) of the Act was not attracted as the assessee
company had merely supplied machinery and raw material on
principal-to-principal basis on arm’s length price to the WOS.
(ii) In the absence of the PE of the assessee company in India, Articles 5
and 7 of India-Italy DTAA were not attracted and hence, no part of its income
taxable in India.
