Mere Presumption About Foreign Parent's Deputed Employees Can't Establish Permanent Establishment: ITAT Delhi

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has recently held that a mere presumption that employees of a parent company deputed to an Indian group entity rendered services on behalf of a non-resident assessee, without any cogent material to support it, is insufficient to establish a Permanent Establishment (PE) in India.

A coram of Judicial Member Vimal Kumar and Accountant Member S. Rifaur Rahman observed that the Revenue had failed to establish that Honda Trading Asia Company Ltd. had a fixed place of business or any employees deputed by it in India.

The bench ruled, "In our view, mere presumption that the employees of parent company were deputed in the Indian entity would have provided services on behalf of the assessee without bringing on any material, without their being any cogent material, it cannot be established the existence of PE in India. Apart from that assessee is a group concern/AE of Honda Cars Japan. It cannot be held that assessee has PE in India merely on the above basis."

The bench partly allowed the appeals filed by Honda Trading Asia Company Ltd., Thailand. It held that the company did not have a Permanent Establishment in India under the India-Thailand Double Taxation Avoidance Agreement (DTAA).

Honda Trading Asia Company Ltd. is incorporated in Thailand and is engaged in the business of trading raw materials and spare parts. It supplied raw materials and capital goods to its Indian group entity, Honda Cars India Ltd. (HCIL).

For the assessment years 2016-17 to 2019-20, the Assessing Officer concluded that the company had a fixed place PE in India. The finding was based on survey findings and statements recorded during surveys conducted at HCIL. The officer attributed profits to the alleged PE and made transfer pricing adjustments.

The Dispute Resolution Panel upheld those findings, prompting the company to approach the tribunal.

Before the tribunal, the company argued that it only supplied raw materials and capital goods from Thailand. It maintained that it had no office, employees, or fixed place of business in India.

It also submitted that no employee of Honda Trading Asia had ever been deputed to HCIL. According to the company, the expatriates relied upon by the revenue were employees of Honda Motor Company, Japan. They worked exclusively under the control and supervision of HCIL and carried out HCIL's business.

The company further argued that the Revenue had relied on survey statements without any corroborative evidence. It contended that there was no material to show that the expatriates carried on its business in India. The company also relied on the Supreme Court's decisions in E-Funds IT Solution, Inc. and Honda Motor Company, Ltd., arguing that the requirements for a fixed place PE were not satisfied.

The Revenue argued that expatriate employees deputed from Honda Motor Company, Japan, carried out the business of Honda group entities, including the assessee, from HCIL's premises. It submitted that these expatriates retained their lien with the parent company and occupied key management positions in HCIL. According to the Revenue, HCIL's premises were at the disposal of the assessee through these expatriates, creating a fixed place of permanent establishment (PE) in India.

After considering the rival submissions, the tribunal found that the Revenue had failed to produce any evidence showing that employees of Honda Motor Company deputed to HCIL had rendered services on behalf of Honda Trading Asia. It observed that the Revenue had not produced any cogent material to demonstrate that the expatriates conducted the assessee's business in India.

The tribunal also noted that Honda Trading Asia carried on offshore supplies from Thailand as an independent entity. It found that none of the lower authorities had established the existence of a fixed place of business or shown that any employee had been deputed by the assessee to India.

The bench further observed that coordinate benches had consistently held in the assessee's own cases for earlier assessment years that no PE existed in India. As the facts for the years under appeal were identical, it followed those earlier decisions.

Once it concluded that no PE existed, the tribunal held that profit attribution to the alleged PE could not survive. It also held that the transfer pricing grounds had become infructuous. Accordingly, the appeals were partly allowed.

For Assessee: Senior Advocate Percy Pardiwala and Swapnil Takwani, Authorised Representative.

For Revenue: Dharm Veer Singh, CIT-DR.