2022 (11) TMI 1561 - AT - Income Tax

Fixed Place and Dependent Agent PE Established Under Transfer Pricing Rules; Profit Attribution Based on Audited Books

M/s. Redington Distribution Pte. Ltd. Versus The Dy. Commissioner- of Income Tax, International Taxation, Circle-2 (1), Chennai.

ITAT Chennai upheld the existence of a fixed place PE and dependent agent PE of the non-resident assessee in India through the activities of the Indian ... Fixed place of PE in India - Income deemed to accrue or arise in India - India Singapore DTAA - establishing fixed place of business for the non-resident existed in India -Whether the functions carried out by ‘Dollar Team’ of Indian holding company constitutes a fixed place PE? - HELD THAT:- We are of the considered view that there is no error in the reasons given by the AO to hold that the activities carried out by a ‘Dollar Team’ of Indian holding company for the assessee constitute a fixed place PE of assessee in India. Dependent agent PE - The statements of the clients indicate that they do not directly deal with Redington, but they deal with vendor. We find no substance in the arguments of the assessee for the simple reason that the ‘Dollar Team’ of Indian holding company acts as an agent of the assessee for Indian customers and further, they had authority to conclude contracts and such authority has been habitually exercised to conclude contract on behalf of the assessee company. Evidences gathered during the course of survey and during the course of assessment proceedings clearly indicate that right from sourcing of customers, supply of equipments and follow-up payments, all activities have been carried out by ‘Dollar Team’, except preparation of shipping and export documents from Singapore Office. Therefore, we are of the considered view that the activities undertaken by the ‘Dollar Team’ of Indian holding company constitutes a dependent agent PE and thus, on this count also the argument of the assessee fails. Further, to constitute agent PE, what is required to be seen is activities carried out by the agent but not economic conditions. We find that the facts brought on record and also evidences gathered during the course of assessment proceedings clearly indicate existence of dependent agent PE and thus, we are of the considered view that the case laws relied upon by the assessee has no application. ‘Dolor Team’ of Indian holding Company constitutes a fixed place PE of assessee in India and thus, we conclude that there exists a fixed place of PE and also dependent agent PE of assessee company in India and hence, income of the assessee is liable to tax in India. AO and the DRP has rightly held that there is a PE in India of the assessee and the income is taxable in India and thus, we are inclined to uphold the findings of the DRP and reject the ground taken by the assessee. Attribution of profits - AO for the purpose of attribution of profits took unaudited turnover as the starting point which was found during the course of survey for computing the profit of the assessee - AO has considered unaudited profit before tax for the purpose of attribution of profits to PE in India - HELD THAT:- There is no dispute when audited figures are available the question of adopting profit from unaudited financial statement does not arise. What needs to be attributed to PE is the profits of foreign entity i.e. M/s.RDPL. Therefore, the AO needs to distribute profits shown in the books of M/s.RDPL between foreign entity and PE in India. Therefore, we are of the considered view that there is no error in the directions given by the DRP to adopt profit as per books of Assessee Company for attribution of profits to PE. AO had adopted profit margin of Indian entity for the purpose of attribution of profits to PE. However, the correct legal position is that the AO should adopt margin of Singapore entity and attributing the same between the Indian PE and Singapore entity. The assessee had also disputed non-Indian sales included by the AO for the purpose of computing profits and argued that only sales made in INR to end customers’ needs to be considered. The assessee had also disputed inclusion of royalty receipts in the turnover. Facts are not clear and further, assessee has also unable to file the correct computation of sales made through Indian PE to compute profit which can be attributed to PE in India. Therefore, we are of the considered view that the issue needs to go back to the file of the AO for fresh consideration in light of the directions given by the DRP as well as the Tribunal and also in light of the decision of Annamalai Timber Trust & Co [1960 (2) TMI 54 - MADRAS HIGH COURT] and also Motorola Inc. [2005 (6) TMI 226 - ITAT DELHI-A] Appeal filed by the assessee is partly allowed for statistical purposes. ISSUES: Whether the foreign company has a Permanent Establishment (PE) in India under the Income Tax Act, 1961 and the India-Singapore Double Taxation Avoidance Agreement (DTAA).Whether the 'Dollar Team' of the Indian holding company constitutes a fixed place PE or dependent agent PE in India.Whether the business model and functions performed by the 'Dollar Team' amount to concluding contracts or merely back-office support.Whether the Assessing Officer (AO) and Dispute Resolution Panel (DRP) correctly attributed profits to the PE in India.Whether the AO/DRP correctly applied turnover and profit figures for profit attribution, including the treatment of channel partner commissions and royalty income.Whether the statements recorded during survey proceedings have evidentiary value in establishing PE.Whether the AO followed the directions of the DRP regarding profit attribution.Whether the reopening of assessment under section 147 was justified based on available evidence. RULINGS / HOLDINGS: The foreign company was held to have a fixed place PE and dependent agent PE in India, as the 'Dollar Team' carried out substantial business functions including negotiation, price finalization, order processing, and payment follow-up, constituting a 'fixed place of business' and 'dependent agent' under Article 5 of the India-Singapore DTAA and relevant provisions of the Income Tax Act.The 'Dollar Team' was not merely performing back-office support but was engaged in core business activities, including concluding contracts and securing orders, thereby establishing PE in India.The AO and DRP erred in initially adopting the profit margin of the Indian entity for profit attribution; instead, the profit margin of the foreign entity (Singapore company) should be used and apportioned between the PE and the foreign entity.The AO's use of unaudited turnover and inclusion of non-Indian sales and royalty income for profit attribution was improper; the AO was directed to consider audited financials and exclude non-Indian sales and double taxation elements.The statements recorded during the survey, although recorded on oath, cannot be completely discarded and have evidentiary value in establishing the existence of PE.The AO failed to follow the DRP's directions to distribute profits as per the audited books of the foreign entity, necessitating reconsideration of profit attribution.The reopening of assessment under section 147 was upheld as justified by sufficient material evidence including survey findings and non-filing of returns. RATIONALE: The Court applied the statutory provisions under sections 5, 9, 133A, 147, 148, 144C of the Income Tax Act, 1961, and the definition of PE under Article 5 of the India-Singapore DTAA, including the concepts of fixed place PE and dependent agent PE.The Court relied on detailed survey findings, employee statements, email correspondences, and financial data demonstrating that the 'Dollar Team' performed all essential functions of the foreign company's business in India, except shipment, thereby satisfying the criteria for PE.The Court emphasized that to constitute a fixed place PE, the premises must be at the disposal of the foreign enterprise, which was established by the continuous occupation and business operations of the 'Dollar Team' in the Indian holding company's premises.The Court recognized that the dependent agent PE requires proof that the agent habitually exercises authority to conclude contracts on behalf of the foreign enterprise, which was established through evidence of the 'Dollar Team's' functions and authority.The Court noted that the profit attribution must be based on the profits of the foreign entity (Singapore company) and not the Indian entity, aligning with the DRP's directions and established transfer pricing principles.The Court acknowledged the evidentiary value of statements recorded during survey proceedings, referencing precedents that such statements cannot be entirely disregarded despite procedural limitations.The Court set aside the profit attribution issue for fresh consideration by the AO in accordance with the DRP's directions and relevant judicial precedents, including decisions of the Madras High Court and ITAT Special Bench, emphasizing accurate and fair profit allocation.The Court upheld the reopening of assessment on the basis of material evidence including non-filing of returns and survey findings, rejecting the contention that no evidence existed for the relevant assessment year.