Arm's length pricing bars further profit attribution to an alleged permanent establishment when functions and risks are already benchmarked.

Where international transactions between a foreign enterprise and its Indian associated enterprise were accepted as arm's length, no further profit attribution could be made to an alleged dependent agent permanent establishment in India. The Tribunal held that once transfer pricing benchmarking adequately captured functions and risks, nothing remained to be separately attributed to the alleged PE. On that basis, the additions were deleted in favour of the assessee. The existence of the alleged permanent establishment was left open, but the taxability additions relating to software supply and automated services could not survive after acceptance of arm's length pricing.

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Issues: Whether, where transactions between the assessee and its Indian associated enterprise were accepted to be at arm's length, any further profit could be attributed to an alleged dependent agent permanent establishment in India.

Analysis: The transactions between the assessee and the Indian associated enterprise were found to be at arm's length in the relevant assessment years. The Tribunal followed its earlier decisions in the assessee's own case and applied the principle that once transfer pricing analysis has been undertaken and the functions and risks are adequately benchmarked, nothing further remains to be attributed to the alleged permanent establishment. Reliance was also placed on the Supreme Court's view that satisfaction of the arm's length principle precludes further profit attribution even where a permanent establishment is alleged to exist.

Conclusion: Further attribution of profits to the alleged dependent agent permanent establishment was not permissible, and the additions on this account were deleted in favour of the assessee.

Final Conclusion: The assessment additions relating to taxability of software supply and automated services were set aside on the ground that no further profits could be attributed after acceptance of arm's length pricing, while the existence of the alleged permanent establishment was left open.

Ratio Decidendi: Where the international transactions between a foreign enterprise and its Indian associated enterprise are accepted at arm's length and the functions and risks are adequately reflected in that benchmarking, no further profit attribution can be made to an alleged permanent establishment in India.

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