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The Tax Publishers Deletion of disallowance of non-deduction of TDS under Section 40(a)(i) consequential to non-existence of DAPE - Dependant Agent Permanent Establishment *Facts:* It was alleged by revenue initially that the assessee constituted a DAPE for its Japanese parent and income was attributed @ 50% of the Gross profits. Parallelly a disallowance of such expenditure to its foreign Japanese parent was also made due to non-deduction of TDS under Section 40(a)(i) alleging that the existence of a PE warranted TDS to be done and in absence of the same the disallowance was warranted in the hands of the Indian assessee. The existence of the DAPE case itself was lost by the revenue subsequently with no PE being read in the case of the assessee's parent. Based on this the CIT(A) went against the departmental addition under Section 40(a)(i) and deleted the same. Aggrieved revenue went in higher appeal - Held against the revenue in the non-existence of DAPE there was no disallowance which was warranted. Assessee's own cases were cited. i. CIT (International Taxation)-2 v. M/s Mitsui and Co. (ITA No. 38/2023) (Del.-HC) ii. CIT (International Taxation)-2 v. M/s Mitsui and Co. (ITA No. 321/2018) (Del.-HC) iii. DCIT v. M/s Mitsui & Company India Pvt. Ltd. (ITA No. 1608 & 1672/Del/2016) iv. M/s Mitsui & Company Ltd. v. ADIT (ITA No. 2335/Del/2011) v. DDIT v. Mitsui & Co. Ltd. (ITA Nos. 2801, 4329 & 4367/Del/2011, ITA No. 794 & 795/Del/2012) vi. DCIT (International Taxation) v. M/s. Mitsui & Co. (5106 & 5108/Del/2015 and CO Nos. 296 & 297/Del/2016) vii. Mitsui & Co. Ltd. v. DDIT (ITA No. 4377/Del/2016) viii. ACIT (International Taxation) v. Mitsui & Co. Ltd. (ITA No.4764/Del/2016 & CO No. 363/Del/2016) ix. ACIT (International Taxation) v. Mitsui & Co. Ltd. (ITA No. 5901/Del/2016 & CO No. 28/Del/2017) *Ed. Note:* (1) - What happens if the agent acts exclusively for a foreign principal? Can it be read that the agent is forcibly carrying/concluding contracts, has a place of business and also stocks merchandise/services on regular basis thus creating a unwarranted DAPE. The decision carries a para worth noting on this point - "4.3. The second contention of the learned DR was that MIL is economically dependent on assessee company as major revenue of MIPL is from assessee company. We are of the view that this per se cannot be ground to hold that MIPL is a Dependent Agent. For invoking this clause, first one of the three conditions needs to be fulfilled. As we have held hereinabove that MIL does not get covered Agent. The learned DR also made a reference to Conventions on Double Taxation by Klaus Vogel to support its contention that where a person works only for one principle such person is economically dependent on the principal. In these circumstances the agent though not legally but will be bound to obey his principal's instructions and be regarded as being Dependent Agent. This contention of the learned CIT-DR again ignores the basic requirement, i.e. fulfilling one of the three conditions. It is also important to note that the DTAA provide for treating a person as Dependent Agent. The DTAA has to be strictly interpreted. The DTAA having prescribed the conditions, no further conditions can be read. What learned CIT-DR is canvassing will mean adding new condition in the DTAA. Further, it may be relevant to note that as per Para 9 of this Article 5 in DTAA, it has been specifically provided that if a company in the contracting state is controlled by a company in the other contracting state that itself shall not itself constitute either of company a permanent establishment of the other. Thus, the fact that MIPL is controlled by the assessee company shall not mean that MIPL is a PE of the assessee company. 4.4 Our view gets supported by the judgment of Hon'ble Delhi High Court in the case of Director of Income Tax & Ors. v. M/s. E Funds IT Solutions and others 364 ITR 256 (Delhi)." *Ed. Note:* (2) Remunerating agent at arm's length price exonerates any further income attribution in the hands of the PE, but manifesting this thru documentation is always the challenge. "4.2. Further, in this case the TP study of MIPL was subject matter of examination by the TPO. The FAR (Function performed, Assets deployed and Risk assumed) analysis has been accepted by the TPO. These agreement on the basis of which Assessing Officer has levied the allegation were also before the TPO. Thus, there cannot be any allegation that MIPL has performed any function beyond what has been stated. Functional and economic analysis of the transactions entered into having been examined nothing further can be imputed. The services of MIL to assessee company were support services similar to the activities of a Liaison offices. This fact gets also supported from the finding recorded by the Assessing Officer himself in the assessment order on page 26 whereby it has been stated by the Assessing Officer that MIL is functioning in the same manner as the LOs of the assessee are functioning in India. It has already been held that Is do not constitutes PE in India. Thus, the functioning of MIL though a subsidiary and a company incorporated in India but its activities vis-a-vis assessee company were akin to liaison office. It does not have authority to conclude contract, it was not maintaining any stocks of goods and merchandise nor it was securing order for the assessee company. In view of the above facts we reject the contention of the learned CIT-DR that MIPL habitually secures order for the assessee company. And accordingly, none of the condition prescribed in Article 5(7) are fulfilled". *Case:* ACIT v. Mitsui & Co. India (P) Ltd.2023 TaxPub(DT) 1563 (Del-Trib)

The Tax Publishers

Deletion of disallowance of non-deduction of TDS under Section 40(a)(i) consequential to non-existence of DAPE - Dependant Agent Permanent Establishment

Facts:

It was alleged by revenue initially that the assessee constituted a DAPE for its Japanese parent and income was attributed @ 50% of the Gross profits. Parallelly a disallowance of such expenditure to its foreign Japanese parent was also made due to non-deduction of TDS under Section 40(a)(i) alleging that the existence of a PE warranted TDS to be done and in absence of the same the disallowance was warranted in the hands of the Indian assessee. The existence of the DAPE case itself was lost by the revenue subsequently with no PE being read in the case of the assessee's parent. Based on this the CIT(A) went against the departmental addition under Section 40(a)(i) and deleted the same. Aggrieved revenue went in higher appeal -

Held against the revenue in the non-existence of DAPE there was no disallowance which was warranted. Assessee's own cases were cited.

i. CIT (International Taxation)-2 v. M/s Mitsui and Co. (ITA No. 38/2023) (Del.-HC)

ii. CIT (International Taxation)-2 v. M/s Mitsui and Co. (ITA No. 321/2018) (Del.-HC)

iii. DCIT v. M/s Mitsui & Company India Pvt. Ltd. (ITA No. 1608 & 1672/Del/2016)

iv. M/s Mitsui & Company Ltd. v. ADIT (ITA No. 2335/Del/2011)

v. DDIT v. Mitsui & Co. Ltd. (ITA Nos. 2801, 4329 & 4367/Del/2011, ITA No. 794 & 795/Del/2012)

vi. DCIT (International Taxation) v. M/s. Mitsui & Co. (5106 & 5108/Del/2015 and CO Nos. 296 & 297/Del/2016)

vii. Mitsui & Co. Ltd. v. DDIT (ITA No. 4377/Del/2016)

viii. ACIT (International Taxation) v. Mitsui & Co. Ltd. (ITA No.4764/Del/2016 & CO No. 363/Del/2016)

ix. ACIT (International Taxation) v. Mitsui & Co. Ltd. (ITA No. 5901/Del/2016 & CO No. 28/Del/2017)

Ed. Note: (1) - What happens if the agent acts exclusively for a foreign principal? Can it be read that the agent is forcibly carrying/concluding contracts, has a place of business and also stocks merchandise/services on regular basis thus creating a unwarranted DAPE. The decision carries a para worth noting on this point -

"4.3. The second contention of the learned DR was that MIL is economically dependent on assessee company as major revenue of MIPL is from assessee company. We are of the view that this per se cannot be ground to hold that MIPL is a Dependent Agent. For
invoking this clause, first one of the three conditions needs to be fulfilled. As we have held hereinabove that MIL does not get covered Agent. The learned DR also made a reference to Conventions on Double Taxation by Klaus Vogel to support its contention that where a person works only for one principle such person is economically dependent on the principal. In these circumstances the agent though not legally but will be bound to obey his principal's instructions and be regarded as being Dependent Agent. This contention of the learned CIT-DR again ignores the basic requirement, i.e. fulfilling one of the three conditions. It is also important to note that the DTAA provide for treating a person as Dependent Agent. The DTAA has to be strictly interpreted. The DTAA having prescribed the conditions, no further conditions can be read. What learned CIT-DR is canvassing will mean adding new condition in the DTAA. Further, it may be relevant to note that as per Para 9 of this Article 5 in DTAA, it has been specifically provided that if a company in the contracting state is controlled by a company in the other contracting state that itself shall not itself constitute either of company a permanent establishment of the other. Thus, the fact that MIPL is controlled by the assessee company shall not mean that MIPL is a PE of the assessee company.

4.4 Our view gets supported by the judgment of Hon'ble Delhi High Court in the case of Director of Income Tax & Ors. v. M/s. E Funds IT Solutions and others 364 ITR 256 (Delhi)."

Ed. Note: (2) Remunerating agent at arm's length price exonerates any further income attribution in the hands of the PE, but manifesting this thru documentation is always the challenge.

"4.2. Further, in this case the TP study of MIPL was subject matter of examination by the TPO. The FAR (Function performed, Assets deployed and Risk assumed) analysis has been accepted by the TPO. These agreement on the basis of which Assessing Officer has levied the allegation were also before the TPO. Thus, there cannot be any allegation that MIPL has performed any function beyond what has been stated. Functional and economic analysis of the transactions entered into having been examined nothing further can be imputed. The services of MIL to assessee company were support services similar to the activities of a Liaison offices. This fact gets also supported from the finding recorded by the Assessing Officer himself in the assessment order on page 26 whereby it has been stated by the Assessing Officer that MIL is functioning in the same manner as the LOs of the assessee are functioning in India. It has already been held that Is do not constitutes PE in India. Thus, the functioning of MIL though a subsidiary and a company incorporated in India but its activities vis-a-vis assessee company were akin to liaison office. It does not have authority to conclude contract, it was not maintaining any stocks of goods and merchandise nor it was securing order for the assessee company.

In view of the above facts we reject the contention of the learned CIT-DR that MIPL habitually secures order for the assessee company. And accordingly, none of the condition prescribed in Article 5(7) are fulfilled".

Case: ACIT v. Mitsui & Co. India (P) Ltd.2023 TaxPub(DT) 1563 (Del-Trib)