Permanent establishment profit attribution follows arm's length cost-plus method; Rule 10 and advance-tax interest were not applicable.

A non-resident's Indian permanent establishment income was required to be attributed on a cost-plus 9% arm's length basis where the income was ascertainable from the record and the transfer pricing study showed no defect; Rule 10 could not be invoked without showing that the income could not be definitely determined. Interest under section 234B was also held inapplicable because the assessee's income was fully subject to tax deduction at source, so no advance tax default arose. The additions were deleted and the appeals were allowed.

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Issues: (i) Whether the income attributable to the assessee's permanent establishment in India was to be computed under Rule 10 of the Income-tax Rules, 1962 or on the basis of the transfer pricing method and cost plus basis adopted by the assessee; (ii) Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee.

Issue (i): Whether the income attributable to the assessee's permanent establishment in India was to be computed under Rule 10 of the Income-tax Rules, 1962 or on the basis of the transfer pricing method and cost plus basis adopted by the assessee.

Analysis: The assessee had a permanent establishment in India and had supported its return with a transfer pricing study showing that the project office income at cost plus 9% was at arm's length. The Assessing Officer invoked Rule 10 without demonstrating that the income from the Indian operations could not be definitely ascertained or pointing out any defect in the transfer pricing study. The treaty required attribution of profits to the permanent establishment as if it were a distinct and separate enterprise, and the method had to be consistent year to year unless good and sufficient reason existed to depart from it. The Department had also accepted the assessee's method in later years for the same contract.

Conclusion: The income attributable to the permanent establishment had to be computed at cost plus 9% as declared by the assessee, and not under Rule 10.

Issue (ii): Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee.

Analysis: The assessee was a non-resident whose income was subject to tax deduction at source. In such a situation, there was no default in payment of advance tax so as to attract interest under section 234B. The precedents relied upon supported the view that where the entire income is subject to withholding, liability to pay advance tax does not arise.

Conclusion: Interest under section 234B was not leviable.

Final Conclusion: The assessee succeeded on the principal attribution issue as well as on the levy of interest, and the additions were deleted with the result that the appeals were allowed.

Ratio Decidendi: For a non-resident's permanent establishment, profit attribution must follow the treaty and the prescribed arm's length method where the income is ascertainable from the record, and Rule 10 cannot be applied without first showing that such ascertainment is not possible; interest under section 234B is not chargeable where the income is fully subject to tax withholding.

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