2017 (2) TMI 848 - AT - Income Tax

Tax Appeal: Tribunal Adjusts Assessee's Income, Applies 10% Profit Rate

The appeal was partly allowed with the Tribunal determining the total income of the assessee at Rs. 51,63,440, differing from the amounts determined by ... Attribution of income - determination of the quantum of income chargeable to tax in India - at a mark-up of 15% on costs incurred by CIT-A as against AO's profit attribution to sales activity in India at 40% of the profit from sales made in India - nature of activities carried out by the PE in India - Held that:- Attribution of profits to PE in India is fact based, depending upon the role played by the PE in the overall generation of income. Such activities carried out by a PE in India resulting in generation of income, may vary from case to case. Attribution of income has to be in line with the extent of activities of PE in India. Taking all the relevant facts into consideration and on a holistic approach, we direct to apply 30% of the profits, namely, 3% (30% of 10%) on the amount of sales made by the assessee in India either directly or through its branch office amounting to ₹ 17,21,14,673/- (USD 36,15,095 x ₹ 47.61), as the amount of profit attributable to the PE in India. No further deduction on any account is to be allowed. This will result into determination of total income at ₹ 51,63,440/- as against ₹ 80.95 lac determined by the AO and ₹ 16.75 lac computed by the ld. CIT(A). We direct to take ₹ 51,63,440 as the total income of the assessee. Issues Involved:1. Attribution of income to the Indian branch office.2. Rejection of the transfer pricing study report.3. Application of Rule 10 of Income-tax Rules, 1962.4. Determination of the quantum of income chargeable to tax in India.5. Attribution of profits to marketing activities carried out by the Indian branch office.Issue-wise Detailed Analysis:1. Attribution of Income to the Indian Branch Office:The primary issue in this appeal is the attribution of income to the Indian branch office of the assessee, a company incorporated under the laws of Singapore. The Assessing Officer (AO) attributed 40% of the profit from sales activities in India to the permanent establishment (PE), resulting in a profit rate of 11.44% of the turnover. The CIT(A) reduced this attribution to a mark-up of 15% on the costs incurred by the branch office.2. Rejection of the Transfer Pricing Study Report:The AO rejected the transfer pricing study report submitted by the assessee, citing the absence of comparable cases and the lack of a reliable allocation of costs. The CIT(A) upheld this rejection, noting that the report did not provide a clear indication of how costs were allocated or how segments were created. The Tribunal agreed with this finding, as the deficiencies in the report were acknowledged by the assessee.3. Application of Rule 10 of Income-tax Rules, 1962:Given the absence of a reliable transfer pricing study report, the AO invoked Rule 10 of the Income-tax Rules, 1962, to determine the income of the assessee. This rule allows the AO to calculate income based on a reasonable percentage of turnover or in any other suitable manner when the actual amount of income cannot be definitely ascertained. The AO used the gross profit margin of Nipro Corporation and its consolidated subsidiaries to determine the profit attributable to the Indian operations.4. Determination of the Quantum of Income Chargeable to Tax in India:The AO computed the gross profit margin at 28.60% and attributed 40% of this profit to the sales activities in India, resulting in a profit rate of 11.44%. The CIT(A) reduced this to a mark-up of 15% on the costs incurred by the branch office, based on the transfer pricing study report for the assessment year 2006-07. However, the Tribunal found issues with both the AO's and CIT(A)'s calculations. The Tribunal ultimately decided to apply a profit rate of 10% on the sales consideration to customers in India, either directly by the head office or through the branch office.5. Attribution of Profits to Marketing Activities Carried Out by the Indian Branch Office:The Tribunal considered previous decisions, including those in Rolls Royce PLC vs. DDIT and ZTE Corporation vs. Addl. DIT, which attributed 35% of the profits to marketing activities in India. However, the Tribunal noted that the attribution of profits should be fact-based and vary depending on the role played by the PE in generating income. The Tribunal directed to apply 30% of the profits (3% of the sales made in India) as the amount of profit attributable to the PE in India, resulting in a total income of Rs. 51,63,440.Conclusion:The appeal was partly allowed, with the Tribunal directing to take Rs. 51,63,440 as the total income of the assessee, as opposed to Rs. 80.95 lac determined by the AO and Rs. 16.75 lac computed by the CIT(A). The order was pronounced in the open court on 16.02.2017.