Mere establishment of Subsidiary in India does not tantamount to Having Permanent Establishment in India

Held By Hon’ble Income Tax Appellate Tribunal

In the matter of Mosdorfer GMBH Vs. ACIT, International Tax (ITA: 286/Del/2023)

The Assessee is a company based out in Austria. The Assessee is having a Subsidiary Company in India. The Appellant has received software-related services income during the year. Apart, The Company also received reimbursement of expenses from Indian Subsidiary. However, the Company claimed the same as exempted Income as expenses are recovered on cost to cost basis without any markup. Further, the Company also supplied goods to Indian Entities on a principal to principal basis. The Ld. AO Charged Income tax on reimbursement of expense claiming that such income pertains to technical income provided to Indian subsidiary. Further, AO assumed that entire sales in India are made through Indian Subsidiaries. The Asseesee has a fixed place of business in India in the form of Indian Subsidiary. The ‘core business’ of the assessee is conducted through Mosdofer India Private Limited. Therefore, profit attributable to such PE is taxable in India.

The Hon’ble Tribunal held that The assessee has made sale directly to the Indian customer. Consignees were situated outside India and the payments were also received outside India.  The Tribunal concluded that the non-resident taxpayer did not have a PE in India; accordingly, profit attribution to the taxpayer on this account is liable to be deleted. Further, mere reimbursement of expenses, being lab-testing charges, cannot be considered as fees for technical services (FTS) in the hands of the taxpayer receiving such reimbursement from its Indian subsidiary.  

1. Brief Facts of the Cases

1. M/s Mosdorfer GMBH (“The Appellant) is a Company based out in Austria. The Company is engaged in development and the industrial production of overhead accessories and damping systems from steel and metal.
2. The Company is having an Indian Subsidiary named Mosdorfer India Private Limited.
3. During the year under Assessment, the Appellant disclosed various Incomes in Income Tax return such as software related services, Interest Received, Reimbursement of expenses received from Indian Subsidiary etc. The Appellant claimed reimbursement of expenses as exempted Income
4. The Appellant also received an amount on account of supply  of goods and other tangible assets.
5. The Assessing Officer levied tax on Reimbursement of expenses holding that the Appellant has failed to submit any documentary evidence to substantiate that such expenses are paid by Indian Subsidiary on pure cost to cost basis. Such reimbursement income pertains to the technical services provided by the Appellant during the year. Therefore, the nature of the receipts also comes under the ambit of FTS under the provisions of the Act as well as DTAA.
6. During the year, The Appellant executed the sale of exported goods and other tangible assets in India. 

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1. The Assessing Officer held that the Appellant is having a fixed place in India in the form of M/s Mosdofer India Private Limited. Further, the ‘core business’ of the assessee is conducted through M/s Mosdofer India Private Limited. 
2. Therefore, the assessee has a permanent establishment in India through Masdofer India Private Limited. Accordingly, a reasonable profit from the business income is liable to be attributed to the assessee’s PE in India.
3. The AO invoked Rule 10 of the Income Tax Rules by considering 10% profit on a presumptive basis and considering the activities of assessee, 35% of the such profit is liable to tax in India as business income. 
4. Accordingly, on account of sale of exported goods in India of INR 47,47,71.267/-, The Assessing officer determine dRs. 1,66,16,994/-(Rs. 47,47,71,267/- x 10% x 35%) as income attributable towards PE of assessee in India.
5. The Dispute Resolution Panel also upheld the decision of the Assessing officer and held that:
   1.  the Assessee is liable to pay tax on reimbursement of expense in India and
   2. The assessee has a fixed place permanent establishment in India and its business is being conducted through its subsidiary namely M/s. Mosdorfer India Pvt. Ltd. .

2. Contention of the Appellant

The Appellant contended that:

a. With respect to reimbursement of expenses:

• The Appellant contented that there is no formal agreement with the Indian entity. However, receipt during the year is back to back reimbursement crossed charged to India entities without any markup. Therefore, the same is not considered as taxable income.

b. With respect to export of goods to Indian Customers:

• the Appellant has exported goods and other tangible assets to various Indian customers on a principal-to-principal basis. 
• As per CBDT circular no. 23 [F. No. 7A/38/69-IT (A-II)] dated July 23,1969, the non resident selling good or tangible assets from abroad to Indian Importer on a principle-to-principal basis will not be considered as income/ receipt accrued or deemed to accrue or arise in India.
• As such sales are made directly on a principle-to-Principal basis and therefore, such receipts or income will not be considered as income for the year.
• Further, The Appellant does not have any fixed place of business in India through Branch office, Project offices, Liaison office, Godown, Warehouses and construction or other business sites. 
• Also, The Appellant had no employee working in India. 
• Therefore, The Appellant does not have any business connection or a permanent establishment in India.

3. Contention of the Respondent

The Income Tax Authority contended that:

a. With respect to reimbursement of expenses:

• the assessee has not provided any documentary evidence to support his claim that reimbursement is claimed on a purely cost to cost basis.
• Therefore, in absence of any documentary evidence, such an amount can’t be held as reimbursement of expenses.
• Further, the assessee has provided consultancy & professional services and supervision & repair to its Indian subsidiary. Therefore, it is clear that the income received by the assessee on account of reimbursement income pertains to the technical services provided by the assessee during the year.

b. With respect to export of goods to Indian customers:

• AO mentioned that The Appellant has not only supplied goods to its Indian subsidiary but also supervised it and provided repair service for it. Therefore, The Assessee has deputed its expatriate personnel to supervise and to provide repair services to Indian Subsidiary.
• Therefore, The Asseesee is a having fixed place of business in India in the form of Indian Subsidiary. The ‘core business’ of the assessee is conducted through Mosdofer India Private Limited. 
• Therefore, a reasonable profit from the business income is liable to be attributed to the assessee’s PE in India

4. Analysis by Hon’ble Income Tax Appellate Tribunal

The Hon’ble Income Tax Appellate Tribunal made following analysis:

a. Reimbursement of Expenses:

• The Tax Authorities have failed to take into consideration the relevant piece of evidence filed by the Appellant.
• The DRP has fallen in error in considering the same to be in consultancy and professional services to the Indian associates. 
• The assessee had not added any value to the laboratory report. Assessee had not played any role except for being a medium to procure a report from a laboratory having higher credibility. The same cannot at all be in the nature of FTS.

b. Export sales to Indian Customers:

• The tax authorities have found existence of fixed place PE on allegation that the assessee is procuring its Indian business through the use of an Indian subsidiary and also provides it with necessary services and supervision. 
• Such a conclusion is made without any documentary evidence.
• The assessee has made sale directly to the Indian customer and the Indian subsidiary does not perform any services with respect to the sale made to Indian entities. 
• As per documents, the consignee were situated outside India and the payments were also received outside India. 
• The Indian subsidiary had made payments on account of software and consultancy fees, interest on FCCD, Designing fees for Tools and consultancy charges, reimbursement of Testing expenses etc. and such income are considered as taxable in the return.
• the Tax Authorities have fallen in error to hold the existence of a PE on the basis of the mere assumption that as assessee company has a subsidiary in India and therefore whatever sales in the form of export is made by it to Indian entities, same is assumed to be with indulgence of Indian subsidiary without substantiating as to how Indian subsidiary was privy to the purchases by other entities. 
• The Tax officer has failed to appreciate the fact that export to Indian counterparts was made on a principal to principal basis. 
• The Assessee company is not alleged to have any fixed place of business in the form of branch office, project office, liaison office, or any other business site in India. 
• No employee of the assessee company was found working in India. 
• Thus, to hold a PE on the basis of existence of a subsidiary of assessee in India cannot be sustained. 

5. Decision

The Hon’ble Income Tax Appellate Tribunal held that:

1. Reimbursement of Expense is not in the nature of FTS. Therefore, this matter is decided in favor of the assessee.
2. The Appellant does not have any PE in India and consequential attribution of the profit had no basis.