Accrual of commission expense and dependent agent PE standards shaped deductibility and profit attribution in India.

Dealer's commission relating to earlier years was deductible only if the liability had accrued and crystallised in the relevant year; where the expenditure matched earlier sales and no contractual basis showed deferred accrual, the liability was not treated as crystallised. On permanent establishment, the Indian branch was described as an independent contractor performing liaison, marketing support and post-sale functions without authority to conclude contracts, stock holding or entrepreneurial risk, so dependent agent PE conditions were not met. In the absence of a PE, the force of attraction rule was inapplicable and additional profit attribution to India was unsustainable.

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Issues: (i) Whether dealer's commission relating to earlier years was deductible in the relevant assessment year on the basis of accrual and crystallisation of liability. (ii) Whether the Indian branch constituted a dependent agent permanent establishment of the foreign Varian group companies and whether the force of attraction rule could be invoked to attribute profits to India.

Issue (i): Whether dealer's commission relating to earlier years was deductible in the relevant assessment year on the basis of accrual and crystallisation of liability.

Analysis: The commission expenditure was found to relate to sales concluded in earlier years, and no agreement was produced to show that the liability arose only on completion of installation or other post-sale formalities. The sales and the related expenditure were required to be matched in the same year unless a specific contractual term deferred accrual. In the absence of such material, the liability was not treated as crystallised in the year under appeal.

Conclusion: The disallowance of the dealer's commission was upheld and the ground was decided against the assessee.

Issue (ii): Whether the Indian branch constituted a dependent agent permanent establishment of the foreign Varian group companies and whether the force of attraction rule could be invoked to attribute profits to India.

Analysis: The branch acted as an independent contractor under the distribution agreements, had no authority to conclude contracts, did not bind the foreign enterprises, and did not maintain stock for their products or bear the relevant entrepreneurial risks. Its activities were limited to liaisoning, marketing support, customer assistance, and post-sale services, while the direct sales of spare parts were on a principal-to-principal basis. The conditions for dependent agent permanent establishment under the applicable treaty articles were therefore not satisfied. As no permanent establishment existed, the force of attraction rule did not apply. The Tribunal also accepted that the income already offered represented the income attributable to Indian operations, and the estimation of further profits on the basis of the foreign group accounts was unsustainable.

Conclusion: The assessee was held not to have a permanent establishment in India for the foreign group companies, the attribution of profits was deleted, and this issue was decided in favour of the assessee.

Final Conclusion: The appeal was allowed in part for the first year on the commission issue and the PE attribution was deleted across all years, while the connected appeals were allowed following the same reasoning.

Ratio Decidendi: A dependent agent permanent establishment arises only where the agent has and habitually exercises authority to conclude contracts, or otherwise satisfies the treaty conditions for dependent agency; absent such authority, absence of stock-based delivery or relevant risk assumption, and where dealings are on arm's-length terms, no force of attraction taxation of the foreign enterprise's profits can be sustained.

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