Dependent-agent PE attribution requires full factual proof, while arm's-length commission needs proper transfer-pricing analysis and profit attribution was sustained.

For treaty attribution to a dependent-agent permanent establishment, the agent's effective dependence and degree of exclusivity must be established on a complete factual record. The Delhi HC found the material on ANR's business with other clients and related commission incomplete, so the dependent-agent PE question was remitted for fresh factual examination by the Assessing Officer. Arm's-length remuneration must be tested through a proper functions-assets-risks and transfer-pricing analysis; the fixed commission arrangement was not shown to be arm's length, so that finding was sustained. On profit attribution, the 10% allocation to the PE was upheld and the Revenue's claim for a higher attribution was rejected.

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Issues: (i) Whether ANR was a dependent agent and hence constituted a permanent establishment of the assessee in India under the applicable DTAA. (ii) Whether the lump sum commission of US$ 40,000 paid to ANR was at arm's length. (iii) Whether 10% of the profits on sales of spare parts in India was the proper attribution to the permanent establishment.

Issue (i): Whether ANR was a dependent agent and hence constituted a permanent establishment of the assessee in India under the applicable DTAA.

Analysis: The determinative question was whether ANR's activities were devoted wholly or almost wholly on behalf of the assessee and whether ANR functioned under the assessee's control rather than in the ordinary course of independent business. The Court found that the material relied upon by the Tribunal on this aspect was incomplete because the extent of ANR's business with other clients and the commission earned from them had not been properly examined. On the existing record, the issue whether ANR was wholly or almost wholly devoted to the assessee required fresh factual determination.

Conclusion: The finding that ANR was a dependent-agent permanent establishment was set aside to the limited extent of remand for fresh adjudication by the Assessing Officer.

Issue (ii): Whether the lump sum commission of US$ 40,000 paid to ANR was at arm's length.

Analysis: The arm's-length character of the remuneration had to be tested on the basis of functions performed, assets employed and risks assumed, and by reference to an appropriate transfer-pricing analysis. The Court held that no such exercise had been undertaken in the present case, and the reduction of commission from 5% of invoice value to a fixed annual sum did not, by itself, establish arm's-length pricing. In the absence of comparable material, the assessee failed to show that the remuneration was at arm's length.

Conclusion: The challenge to the finding that the commission was not at arm's length was rejected.

Issue (iii): Whether 10% of the profits on sales of spare parts in India was the proper attribution to the permanent establishment.

Analysis: Once the commission was held not to represent arm's-length remuneration, the Court found no reason to interfere with the percentage of profit attributed to the permanent establishment. The Court accepted the view that the activities performed in India justified attribution at 10% and declined to enhance the attribution to 25% as sought by the Revenue.

Conclusion: The attribution of profits at 10% was upheld and the Revenue's challenge for a higher attribution was rejected.

Final Conclusion: The assessee succeeded only to the limited extent that the dependent-agent issue was remitted for fresh examination, while the findings on arm's-length remuneration and 10% profit attribution were sustained.

Ratio Decidendi: For treaty attribution of profits to a dependent-agent permanent establishment, the agent's effective dependence and exclusivity must be established on a proper factual record, and arm's-length remuneration requires a functional and transfer-pricing analysis based on functions, assets and risks.

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