2012 (10) TMI 55 - AT - Income Tax

Assessee wins appeal: Income computed at cost + 9%. No interest under section 234B.

The Tribunal allowed the appeals of the assessee, directing that the income should be computed at cost plus 9% as declared by the assessee and accepted in ... DTAA between India and Korea - computation of the income attributable to the Indian (PE) of the Korean company – applicability of provisions of Transfer Pricing or Rule 10 read with Rules 10A to 10E – Held that:- Supreme Court in the case of Hyundai Heavy Industries (2007 (5) TMI 196 - SUPREME COURT ) has observed that conjoint reading of sections 4 and 5 states that taxable unit is a foreign company and not its branch or PE in India. A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under sec. 5(2) is concerned, it is restricted to incomes which accrue or arise or which deemed to accrue or arise in India. Plain reading of Rule 10 suggests that it can be applied in the cases where income accruing or arising to any non-resident from any business connection is such which cannot be definitely ascertained. In the present case, assessee has submitted the transfer pricing report and buttressed its contention with the material that income shown at cost+9% is at arm’s length. Assessing Officer nowhere pointed out that income cannot be definitely ascertained on the basis of the material placed on record by the assessee and, therefore, he is computing the income under Rule 10. Further, department itself has accepted the method of assessee in a number of years and sub Article 5 of Article 7 of the DTAA between India and South Korea also provides that profits attributable to PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. Since no reasons are assigned by the AO for adopting different method from same source of income, in different years, it is held that income of the assessee be computed at cost+9% as declared by it, and accepted in subsequent year from the same contract – Decided in favor of assesse. Interest u/s 234B – Held that:- In case of a non-resident where entire income is subject to withholding tax u/s 195, then assessee could not be held to have committed default in payment of advance-tax and consequently it was not liable to pay interest u/s 234B. Issues Involved:1. Acceptance of cost-plus methodology for determining profits attributable to the project office (P.O) in India.2. Attribution of income from offshore supply to tax in India.3. Methodology for determining income attributable to the project office.4. Treatment of payments under the Double Taxation Avoidance Agreement (DTAA) between India and Korea.5. Levy of interest under section 234B of the Income-tax Act.Issue-wise Detailed Analysis:1. Acceptance of Cost-Plus Methodology:The assessee argued that the cost-plus methodology adopted for determining profits attributable to its project office in India was appropriate. The CIT(A) upheld the Assessing Officer's (A.O) decision to reject this methodology. The Tribunal noted that the assessee had submitted a transfer pricing study supporting the cost-plus method, which had been accepted in subsequent years. The Tribunal held that the A.O. had not provided sufficient reasons for rejecting the transfer pricing study and applying Rule 10 of the Income-tax Rules, 1962. Therefore, the income should be computed at cost plus 9% as declared by the assessee.2. Attribution of Income from Offshore Supply:The CIT(A) confirmed the A.O.'s attribution of 50% of the income from offshore supply to tax in India. The Tribunal found that the A.O. had not demonstrated that the income could not be definitely ascertained from the material available on record. The Tribunal emphasized that the methodology for determining the income should be consistent year by year unless there is a good and sufficient reason to the contrary. Since the Department had accepted the cost-plus methodology in subsequent years, the Tribunal ruled in favor of the assessee.3. Methodology for Determining Income Attributable to the Project Office:The A.O. applied Rule 10, adopting a global formulary apportionment approach to determine the income attributable to the project office. The Tribunal observed that Rule 10 should only be applied when the actual amount of income cannot be definitely ascertained. The Tribunal found that the A.O. had not pointed out any errors in the transfer pricing study submitted by the assessee. Therefore, the Tribunal held that the income should be determined using the transfer pricing methodology prescribed under sections 92 to 92F of the Income-tax Act, 1961, read with Rules 10A to 10E.4. Treatment of Payments under DTAA between India and Korea:The CIT(A) directed the A.O. to bring payments related to cost centers B-4 and B-5 to tax under Article 7 read with Article 13(5) of the DTAA between India and Korea as business income. The Tribunal noted that the A.O. had treated these receipts as royalty and taxed them on a gross basis. The Tribunal found that the A.O. had not provided sufficient reasons for this treatment and ruled in favor of the assessee, directing that the income be computed at cost plus 9%.5. Levy of Interest under Section 234B:The assessee challenged the levy of interest under section 234B of the Act. The Tribunal referred to various judicial decisions, including those of the Hon'ble Uttarakhand High Court and the ITAT, which held that in cases where the entire income is subject to withholding tax under section 195, the assessee could not be held liable for default in payment of advance tax. Consequently, the Tribunal ruled that the assessee was not liable to pay interest under section 234B of the Act.Conclusion:The Tribunal allowed the appeals of the assessee, holding that the income should be computed at cost plus 9% as declared by the assessee and accepted in subsequent years. The Tribunal also ruled that the assessee was not liable to pay interest under section 234B of the Act.