Luthra And Luthra Law Offices India Secures Rs. 5,100 Cr Tax Relief For Caterpillar Group

Luthra And Luthra Law Offices India Secures Rs. 5,100 Cr Tax Relief For Caterpillar Group

In a significant victory, Luthra and Luthra Law Offices India have secured substantial income tax relief for the Caterpillar Group, totaling over Rs. 5,100 crores. This accomplishment came through the successful quashing of seven re-assessment notices and all subsequent proceedings quashed for seven assessment years by the Delhi High Court.

The court allowed all seven writ petitions and invalidated the notices issued under Section 148 of the Income Tax Act, 1961, along with other consequential notices issued by the Deputy Commissioner of Income Tax (DCIT), Noida.

The petitioner is a foreign company affiliated with the Caterpillar Group of the United States of America, registered under Delaware laws. It owns a wholly-owned Indian subsidiary named Progress Rail Innovations Private Limited (PRIPL), established in 1996. During the relevant assessment years (AYs) from 2012–13 to 2018–19, PRIPL operated a manufacturing facility in Noida and maintained an office in Varanasi.

The petitioner filed seven writ petitions before the Delhi High Court, challenging, among other things, seven reassessment notices issued under Section 148 of the Income Tax Act by the Deputy Commissioner of Income Tax (International Taxation), Circle, Noida (DCIT, Noida). The DCIT claimed authority to initiate reassessment proceedings based on findings that the production unit of the petitioner's wholly-owned subsidiary constituted a Fixed Place Permanent Establishment (PE), alternatively a Service PE, as well as a dependent agent PE. These conclusions were drawn from the provisions outlined in the India-United States Double Taxation Avoidance Agreement (DTAA).

The key issue before the Court revolved around determining whether a PE could be considered to have been established within the territorial jurisdiction under which the DCIT, Noida, held authority to exercise powers conferred by the Income Tax Act. Consequently, the Court assessed the justifiability of invoking Section 148 of the Act in this context.

The Court, among other observations, highlighted that the DCIT, Noida, could only acquire the authority to assess the petitioner or initiate proceedings under the Act if it had determined that the petitioner had a Permanent Establishment (PE) within the territorial jurisdiction specified in the notification issued by the Central Board of Direct Taxes (CBDT) dated November 3rd, 2014. This fundamental link connects the assumption of jurisdiction by the DCIT, Noida, with the issue of the petitioner's PE in the State of Uttar Pradesh. The decision of the DCIT, Noida, regarding the existence of a PE emerges as not only the central point of contention but also of significant importance, as the very foundation of the challenged re-assessment actions relies on the accuracy of the DCIT's determination in this regard.

The Court conducted a thorough analysis of the relevant provisions of Article 5 of the Double Taxation Avoidance Agreement (DTAA), particularly concerning Fixed Place PE, Service PE, and Dependent Agent PE. In doing so, the Court referenced various judgments, including Formula One World Championship v. Commissioner of Income Tax, Director of Income Tax (International Taxation) v. Morgan Stanley & Co. Inc., and Director of Income Tax-II (International Taxation) v. Samsung Heavy Industries Company Limited, delivered by the Supreme Court.

These judgments aided the Court in interpreting the terms 'disposal' and 'control' as used in the DTAA. The Court determined that 'disposal' refers to the right to utilize a place and exercise control over it, while 'control' denotes the extent to which an enterprise has use of a place of business at its disposal.

In light of the judgment in the case of Morgan Stanley (supra), the Court examined the meaning of the terms "preparatory" and "auxiliary" functions concerning Service PE. The Court relied on judgments including Assistant Director of Income Tax-1 v. E-Funds IT Solutions Inc., Union of India v. UAE Exchange Centre, and National Petroleum Construction Co. v. Director of Income (International Taxation).

The Court concluded that the services provided by PRIPL to the petitioner do not constitute a core activity of the petitioner.

The Court, among other considerations, determined that the concept of 'virtual projection' pertains to a functional integration between the two units, wherein an establishment is virtually utilized for all purposes to conduct the principal business activity of the petitioner. It was observed that none of these factors were referenced or seemed to have been taken into account before reaching the conclusion that the Indian establishment (i.e., PRIPL) constituted a fixed-place PE.

In this matter, the petitioner was represented by Rubal Bansal Maini, Partner at Luthra and Luthra Law Offices India, along with Prakhar Pandey, Associate.

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