Treaty attribution and arm's length agent remuneration can limit further profit attribution to a non-resident enterprise.

In a treaty-based attribution dispute involving a non-resident and its Indian dependent agent, the Bombay HC stated that taxation in India is confined to profits directly or indirectly attributable to the permanent establishment under Article 7, and that this attribution exercise is distinct from transfer pricing under Section 92. Where the Indian agent is remunerated at arm's length and the treaty conditions and CBDT circular are satisfied, no further profits remain to be attributed to the foreign enterprise. The analysis also notes that the circular applies where business is wholly channelled through the agent, contracts are concluded outside India, and sales are on a principal-to-principal basis.

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Issues: Whether any further profits of the non-resident assessee could be taxed in India where the Indian dependent agent was remunerated at arm's length, and whether the advertisement revenues were nevertheless attributable to the assessee's deemed permanent establishment under the treaty and the CBDT circular.

Analysis: The relevant treaty provisions limit taxation in the source State to profits directly or indirectly attributable to a permanent establishment, and the attribution exercise under Article 7 is distinct from the transfer-pricing exercise under Section 92 of the Income-tax Act, 1961. The assessee had remunerated the Indian agent at arm's length, and the binding circular applicable to non-resident sales through an Indian agent confined the Indian assessment to profits attributable to the agent's services where the business activities were wholly channelled through the agent, contracts were concluded outside India, and sales were on a principal-to-principal basis. The Court also applied the principle that, where the arm's length compensation fully represents the value of the profit attributable to the activities carried on in India, nothing further remains to be attributed to the foreign enterprise.

Conclusion: No further profits were taxable in the hands of the assessee in India once the dependent agent was remunerated at arm's length and the treaty and circular conditions were satisfied.

Ratio Decidendi: In a treaty case involving a dependent agent permanent establishment, arm's length remuneration to the Indian agent extinguishes further attribution only if it fully reflects the profits and risks of the India operations; otherwise, additional profits may still be attributed to the foreign enterprise.

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