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Judgment
PER SANJAY AWASTHI, ACCOUNTANT MEMBER:
This appeal arises from order of ACIT, International Tax-1(1)(2), New Delhi, dated 14.01.2025, passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereafter as “the Act”). The assessee is part of the Baker Hughes Group and is engaged in the business of offshore supply of hardware, some software and also provides certain support services. The assessee is a tax resident of the USA and has claimed benefits under the India – USA Double Tax Avoidance Agreement (hereafter as “DTAA”). The main issue in dispute pertains to the taxability of two items of revenue as under: -
Supply of software amounting to Rs.106,45,92,859/-. The income from this offshore supply has been claimed as not taxable in the absence of a Permanent Establishment (PE) in India.
Supply of software and related support services amounting to Rs.446,34,145/-. Income from such offshore supply of software has been claimed as not taxable under Article 12 of the DTAA in the absence of a PE in India. In this case, the Ld. AO has alleged that one GE Oil & Gas India P. Limited (GEOGIPL) is a Dependent Agent Permanent Establishment (DAPE) of the assessee, as per Article 5(4)(a) and 5(4)(c) of the DTAA. The Ld. AO has attributed profit from the receipts @2.625% of the Revenue earned by the assessee. The Ld. AO has given some fact finding which purportedly distinguishes the facts of the present year from earlier years regarding the presence of a DAPE of the assessee.
This case has a peculiar set off facts which, as per the Ld.AO, establish the presence of a DAPE; the Ld. AO has given a finding that M/s GEOGIPL is an independent agent in India which has been providing marketing support services to the assessee. The Ld. AO purportedly collected information from assessee’s customers through action u/s 133(6) of the Act and came to the conclusion that GEOGIPL was acting with far greater involvement than the terms of the contractual agreement between the assessee and the GEOGIPL revealed. The Ld. AO collected e-mails from assessee’s clients like M/s Mangalore Refinery and Petro Chemicals Limited, M/s Narmada Valley Fertilizers and Chemicals Limited & M/s Iris Automations. The Ld. AO has scanned and pasted copies of several e-mails in the body of the impugned order and thereafter, he has come to the conclusion that M/s GEOGIPL is involved in making offers, securing orders and concluding contracts on behalf of the assessee. The Ld. AO came to the conclusion that the terms finalized by GEOGIPL where binding on the assessee and effectively the services regarding the goods sold by the assessee are provided by M/s GEOGIPL only. On the basis of this reasoning the Ld. AO came to the conclusion that M/s GEOGIPL was a DAPE of the assessee and thereby income from the receipts had to be taxed in the hands of the assessee.
The assessee has approached the ITAT with following grounds: -
“Tenability of the impugned Final Assessment Order
1.On the facts and the circumstances of the case & in law, the learned Assessing Officer (Ld. AO grossly erred in pasting the Assessment Order dated 14 January 2025 ('Final Assessment Order) under section 1433) read with section 144C(13) of the Income Tax Act. 1961 ('the Act) and computing the income of the Appellant for the relevant AY of INR 2,391,17,208/- as against "Nil" income returned by the Appellant
Impugned Final Assessment Order is barred by limitation
2.On the facts and circumstances of the case & in law, the Final Assessment Order passed by the Le AO is barred by limitation in view of the provisions of section 153 of the Act, rendering it illegal, void-ab initio and, thus liable to be quashed.
Offshore Supply of Goods and standard software
3.On the facts and in circumstances of the case & in law, the Ld. AO and Ld. Dispute Resolution Panel ('Ld DRP") erred in holding that the receipts of INR 1,06,92,27,004 from offshore supply of goods by the Appellant are taxable in India under the provisions of the Act and the provisions of the India USA Tax Treaty ("Tax Treaty).
4.On the facts and in circumstances of the case & in law, the Ld. AO/Ld. DRP grossly erred in taxing the income from standard software of INR 4,46,34,145 without appreciating that the income from software supply is not taxable under the provisions of the Tax Treaty in view of the settled law enunciated by the Hon'ble Supreme Court of India in case of Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax (2021] 125 taxmann.com 42 (SC)
Dependent Agent Permanent Establishment ("DAPE")
5.On the facts and circumstances of the case & in law, the Ld. AO/Ld. DRP grossly erred in holding that GE Oil & Gas India Private Limited ("GEOGIPL") constitutes DAPE of the Appellant under the provisions of Article 5(4) of the Tax Treaty without appreciating that:
5.1GEOGI neither habitually exercise any authority to conclude contracts in the name of the Appellant nor habitually secures orders in India.
5.2GEOGIPL is an independent Agent within the meaning of Article 5(5) Tax Treaty and GEOGIPL was providing limited marketing support in the capacity of an independent service provider to the Appellant, for which it has already remunerated on Arm's Length basis.
Attribution of receipts from offshore supply of needs and standard software
6.On the facts and circumstances of the case & in law, the Ld. AD/Ld. DRP erred in not appreciating that no further income is attributable to the Appellant on account of activities carried out by GEOGIPL for which it has been adequately remunerated as per the arm's length policy. In doing so.
6.1The Ld. AO/Ld. DRP grossly erred in arbitrarily allocating 26.25% percent of alleged profits of the Appellant from sales outside India and supply of standard software towards marketing activities assuming that the entire marketing activity were carried out in India.
6.2.Without prejudice to the above, the Ld. AO/Ld. DREP erred in attributing income to the alleged India PE, without giving any deduction for arm's length remuneration paid to GEOGIPL for providing local marketing support services.
7.On the facts and in the circumstances of the case & in law, the Ld. AO/ DRP erred in not following the Tribunal's orders from AY 2019-20 (ITA No. 1570/Del/2022) and AY 2020-21 (ITA No. 1858/De/2023) in which it was held that GEOGIPL is not the appellant's DAPE.
8.Without prejudice the above grounds, the Ld. AD erred in making attribution of receipts earned by the Appellant to the alleged PE in India in respect of offshore supply of equipment and standard software at an arbitrary rate of 2.025% instead of 2.0% as determined by the Hon'ble Tribunal in Appellant's own case for earlier years.
9.Without prejudice the above grounds, on the facts and circumstances of the case & in law, the Ld. AO/Ld. DRP grossly erred in not excluding the offshore supply of equipment amounting to INR 24,40,80,410 and supply of standard software amounting to INR 95,98,131 made to GEOGIPL as one cannot provide marketing support services to own.
Miscellaneous Grounds
10.On the facts and in law, the Ld. AO grossly erred in levying interest under section 2348 of the Act.
11.On the facts and in law, the Ld. AO grossly erred in initiating the penalty proceedings under section 274 read with section 270A of the Act for underreporting of income in consequence of misreporting of income.
That the above grounds of appeal are independent and without prejudice to each other.
The Appellant reserves its right to add, alter, amend or withdraw any ground of appeal as may be considered necessary either before or during the hearing of this appeal in the interest of natural justice.”
It needs to be mentioned that ground no.2, challenging the impugned order on grounds of limitation, has been withdrawn by the assessee and this fact has been recorded in the order-sheet dated 20.03.2026; this ground is accordingly dismissed as withdrawn. It may be mentioned that ground no.1 is general and is not being specifically adjudicated. Similarly, grounds 10 & 11 are consequential and are not proposed to be adjudicated.
Before us the Ld. AR narrated the background of the case in brief. It was stated that the assessee is a wholly owned subsidiary of the General Electric Company of USA. During the year under consideration, as in previous years, the assessee made offshore sale of goods & software, with related support services to its customers in India. It was stated that in the past the assessee was carrying out its business activities with the help of a Liaison Office (‘LO’) in India. Due to this LO in previous years it has been held that the assessee has a PE in India and certain profits had been attributed to this PE. It was stated that in the year 2012 the assessee closed down the LO and thereafter no employees of the assessee have been posted in India. According to the Ld. AR this changed the factual position all together and the assessee has since then held that in the absence of a PE in India, no business income could be attributed to the assessee from its Indian operations. It was stated that while disposing of the appeal for AY 2017-18 to 2020-21 the ITAT had called for a remand report from the AO on the specific queries regarding whether there was a place of business in India and whether expatriate employees were present in India thereon. It was mentioned that the Ld. AO gave a report that the LO’s premises were vacated on 01.05.2012 and no expatriate employees were present in India during the years under consideration by that Bench. It was averred that the issue of PE in India was conclusively settled by the ITAT in assessee’s own case for AYs 2017-18 to 2020-21 [ITA No. 1974/2020, ITA 1569/2022, ITA 1570/2022 & ITA 1858/2023]; order dated 29.10.2024. Through this consolidated order it was held that the assessee did not have a PE in India or even a DAPE and thus, it was directed that the assessee could not be subjected to tax on the basis that had been done by the Ld. AO. The Ld. AR then proceeded to address the detailed finding given by the Ld. AO that during the year under consideration certain enquiries had been conducted with some clients of the assessee and it was discovered that GEOGIPL was much more intensely involved with the negotiations and conclusion of the deal than was projected by the assessee. It was stated by the Ld. AR that even if some importance had to be attached to those e-mails which were obtained through notices u/s 133(6) of the Act, then it deserves to be appreciated that none of those e-mails pertained to the year under consideration. The Ld. AR took us through the e-mails pasted on several pages of the impugned order and pointed out that they all pertained to the FY 2020-21 and would not be relevant for AY 2023 (the year under consideration). It was also stated that M/s GEOGIPL cannot be a DAPE of the assessee since only about 22% of its total income could be attributed to the assessee and over 77% of the revenue was from sale of products and other services. The ld. AR stated that these figures would highlight the fact that M/s GEOGIPL would remain commercially viable even if the assessee ceased to do business with it. The Ld. AR concluded his arguments by relying on the cases of Rolls Royce Singapore (P) Ltd. vs. ADIT (347 ITR 192) where it was held that an agency PE would not exist if the assessee principal could show that it was not the sole client of the agent and that the activities of the agent were not devoted wholly or almost wholly on behalf of the assessee. The Mumbai Tribunal in the case of International Global Networks BV vs. ADIT (84 taxmann.com 188) has also held the agent to be an independent agent where it acts in its ordinary course of business and the activities of the agent are not wholly or exclusively devoted to the assessee. It was pointed out by the Ld. AR that his arguments would cover grounds 3 to 9 which are broadly divided under the themes of offshore supply of goods and standard software; DAPE; and attribution of receipts from offshore supply of goods and standard software.
Per contra, the Ld. DR argued with the help of written submissions. It was stated that the matter should be considered to be covered in favour of Revenue through the order of ITAT in the case of GE Energy Parts Inc. reported in 47 taxmann.com 284 (Delhi – Trib). It was mentioned that this order of ITAT was upheld by the Hon’ble Delhi High Court [101 taxmann.com 142 (Del)]. It was argued that for AYs 2016-17 to 2020-21 the ITAT relied on the case of Nuovo Pignone International [ITA 999/Del/2022, order dated 13.06.2023] to hold that there is no PE on which the Ld. DR stated that in the Nuovo Pignone case the findings were contrary to the facts and thus, the ITAT’s order in the assessee’s own case for AYs 2017-18 to 2020-21 (supra) deserves to be revisited on the ground that the Nuovo Pignone case itself was based on certain factual misunderstandings. The Ld. DR read out from the written submissions and stated that there the assessee had contended that it was no longer part of the GE Groups but of the Baker Hughes Group. The Ld. DR read out from his notes and stated that the documents available with the Ld. AO in the Nuovo Pignone case indicated that Baker Hughes was very much part of the GE Group as was evidenced by the financial statements filed for Baker Hughes. The Ld. DR stated that any finding based on the Nuovo Pignone case should not be relied on since it would lead to a factual error. It was averred by the Ld. DR that M/s GEOGIPL was clearly involved in price negotiations and the terms decided by them where binding on the assessee. Our attention was drawn to pages 139 to 141 of the Paper Book Volume 1, where the e-mails from the assessee’s clients have been mentioned. Thereafter, the Ld. DR relied on several cases in support of the argument that the conditions mentioned in the DTAA for establishing the existence of a DAPE was duly fulfilled in this case. The Ld. DR relied on the following cases: -
Daiken Industries Ltd. reported in 94 taxamnn.com 299 (Del. – Trib). This case was cited for distinguishing between the formal signing of contracts and the actual securing of orders. It was held that even if the Indian entity does not have the formal authority to sign the contract but even if they are negotiating and finalizing the terms then also a DAPE would be presumed to exist.
GE Energy Parts Inc. reported in 101 taxmann.com 142. In this case, the Hon’ble High Court affirmed that the authority to conclude contracts is not limited to the physical signing but even active participation in negotiation amounts to concluding contracts. The proposition here was that the “substance” over “form” would prevail.
GE Nuovo Pignone SPA case reported in 101 taxmann.com 402 (Del. – Trib). In this case, the existence of a sales team in India that secured orders was held to create the DAPE.
The Ld. DR concluded his arguments by relying on the Ld. DRP’s order where this issue has been discussed in detail in paras 8.3 to 8.7. The Ld. DR also relied on the order of Ld. AO where this issue has been discussed in great deal.
We have carefully considered the submissions of Ld. AR/DR and we have also carefully perused the ITAT’s order in assessee’s own case for AYs 2017-18 to 2020-21 (supra). What is not in doubt is that the LO was effectively shut down in 2012 and thereafter the assessee has been depending on M/s GEOGIPL for providing support services. In this regard the detailed copy of agreement between the assessee and M/s GEOGIPL has been perused. It is seen that pages 63 to 65 of the Paper Book, comprising of submissions made before Ld. AO (dated 22.01.2024), would reveal a host of deliverables by M/s GEOGIPL. Presumably M/s GEOGIPL would have performed functions with respect to this agreement. The Ld. AO has obtained information from assessee’s clients regarding the extent and “depth” of services rendered in light of this agreement. We are constrained by the fact that the e-mail trails collected by the Ld. AO pertained to an earlier financial year and hence would not have any relevance for deciding whether at all a DAPE existed during this year or not at all. We are aware of the fact that the existence or otherwise of a PE or even a DAPE has to be determined each year independently. Thus, on this fact alone the Ld. AO’s findings would be rendered meaningless and the finding rendered in earlier years 2017-18 to 2020-21 [169 taxmann.com 4 (Delhi – Trib)] would hold the ground even when the Ld. DR has taken pains to point out that this order rested on the finding given in the Nuovo Pignone International (supra). A close reading of the ITAT’s decision reveals that the main finding of fact on the basis of which the said decision has been rendered is contained in para 16 as under: -
“16.Once the relevant documents were placed before the AO by the assessee to substantiate its claim of having no LO in India, the onus shifts on the Revenue to prove otherwise. The AO has made no effort to examine claim of the assessee and to check the veracity of documents furnished during the assessment proceedings. The Tribunal sought remand report from the AO in September 2023. Six weeks time was given to the AO to furnish the report. The Assessing Officer furnished the report in December 2023, the said report is stated to be based on the information provided by the assessee. The AO had also expressed his helplessness in providing the said report without complete verification due to paucity of time. We do not agree with the Revenue/AO on the excuse of time limitation in furnishing the report. This appeal is taken up for hearing after almost 10 months from the date of furnishing report. If, the Assessing Officer had something more to add to the report dated 19.12.2023 or had any contrary material to rebut the contentions of the assessee, the AO could have very well furnished the same by way of supplementary report. The AO has not placed on record any material whatsoever to rebut contentions of the assessee with regard to closure of LO operations and no expatriate employees in India during the relevant period. The closure of LO operations in India result in paradigm shift in taxability and attribution of profits in India. With the closure of LO operations in India, the assessee will have no PE or DAPE in India. The Revenue has not placed on record any material to show that even after closure of LO operations, the assessee still has business connection that can be termed as PE or DAPE in India. In light of above, we find merit in the case of assessee. In the facts of the case and documents on record, we hold that since no business activity was carried out by the assessee during the relevant period through LO and no expat employee were engaged by the assessee at LO, the assessee ceases to have any PE or DAPE in India in the impugned assessment year.”
If we consider that the e-mails from the assessee’s clients available with the Ld. AO had to have some relevance then firstly, they should pertain to the year under consideration and not in any other year. Secondly, the contents of such e-mails should have been examined and tested in the light of the contractual obligations of M/s GEOGIPL vis-à-vis the assessee. We are aware that in the case of GE Energy Parts Inc. (supra) the Hon’ble Delhi High Court had affirmed the existence of a PE on the basis of the LO; certainly this fact is not applicable for the year under consideration but it is felt that for conclusively proving the existence of a DAPE the Ld. AO could have done well to refer to paras 66, 70 and 74 of this judgment so as to conclusively establish whether or not M/s GEOGIPL could be held to constitute a DAPE of the assessee in India. Also, the fact that more than 77% of the business of M/s GEOGIPL (a fact indicated by the Ld. AR) is from other entities would lead us to belief that the business structure of M/s GEOGIPL is not entirely dependent on the assessee. Thus, there is no hesitation in following the finding given in the assessee’s own case for AY 2017-18 to 2020-21 (supra) and holding that for the year under consideration no PE or DAPE has been found to exist. Accordingly, the additions made on account of the presumption of a DAPE in India cannot be supported and are directed to be deleted.
Thus, ground nos. 3 to 6 are decided in favour of the assessee. Ground no.2 is dismissed as withdrawn. Ground 1 is general and not specifically adjudicated, while grounds 10 & 11 are consequential.
In the result, the appeal is partly allowed.