Arm's length remuneration to Indian subsidiary barred further profit attribution to the permanent establishment under treaty principles.

Where an Indian subsidiary constituting the permanent establishment had already been remunerated at arm's length for its marketing support functions and risks, no further profits could be attributed to the foreign enterprise under Article 7 of the treaty. The Tribunal treated the arm's length remuneration as fully covering the India-related functions, so the proposed attribution of 50% of India-centric profits was unsustainable. Even on the alternative computation, set-off of the arm's length payment against the attributed profits left no taxable income. The additions were therefore deleted.

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Issues: Whether, after the Indian subsidiary had been remunerated at arm's length, any further profits could be attributed to the assessee's permanent establishment in India.

Analysis: The assessee accepted the existence of a permanent establishment in India. The transfer pricing material showed that the commission or remuneration paid to the Indian subsidiary for its marketing support was at arm's length and, in every assessment year in question, exceeded the profits attributed to the permanent establishment. Relying on the arm's length attribution principle under Article 7 of the treaty and the settled position that, where the associated enterprise constituting the permanent establishment is already remunerated at arm's length for the functions and risks performed, nothing further remains to be attributed, the Tribunal held that the assessed attribution of 50% of India-centric profits was unsustainable. Even on the alternative computation by setting off the arm's length remuneration against the attributed profits, no taxable income remained.

Conclusion: No further attribution of profits to the permanent establishment was warranted and the additions were liable to be deleted.

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