Attribution of foreign enterprise income to Indian operations upheld on FAR analysis and factual assessment.

Section 9(1)(i) read with Explanation 1(a) limits deemed Indian accrual to income reasonably attributable to operations carried out in India. The extent of attribution depends on a factual assessment of the business model, including functions performed, assets used and risks assumed. Applying a FAR analysis, the Tribunal attributed 15% of the foreign enterprise's revenue to Indian operations and treated the commission paid to Indian distribution agents as exceeding that attributed income, leaving no further taxable income in India. The High Court accepted that approach as reasonable, and no error justifying interference was shown. The attribution to Indian operations was therefore upheld and the Revenue's challenge failed.

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Issues: Whether only such part of the income of the foreign enterprise as is reasonably attributable to operations carried out in India can be taxed in India, and whether the Tribunal and High Court were correct in limiting attribution to 15% of the revenue on a FAR analysis.

Analysis: Section 9(1)(i) of the Income-tax Act, 1961, read with Explanation 1(a), confines deemed accrual or arising in India to the part of the income reasonably attributable to operations carried out in India. The quantum attributable to Indian operations depends on the factual appraisal of the business model, including the functions performed, assets used and risks undertaken. On the facts found, the Tribunal applied a FAR analysis, attributed 15% of the revenue to Indian operations, and held that the commission paid to Indian distribution agents already exceeded the attributed income, leaving no further taxable income in India. That approach was accepted by the High Court as reasonable. The question of the proportion of profits attributable to Indian operations is essentially factual, and no error warranting interference was shown.

Conclusion: The attribution of income to Indian operations was upheld and the Revenue's challenge failed. The appeals were dismissed, with the assessee succeeding on the issue of taxability beyond the amount already attributed.

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