2024 (8) TMI 1671 - HC - Income Tax

PE in India: additions on attributed profits rejected where transactions were at arm's length and unrelated hardware excluded

Treatment of profits attributable to a permanent establishment is constrained where intercompany transactions have been priced at arm's length; ... PE in India - exercise to attribute profit - working mainly or wholly on behalf of the assessee - ITAT deleted addition - HELD THAT:- As decided by ITAT we find merit into the contention of the assessee that Assessing Authority was not justified in making addition in the hands of the assessee when in the case of alleged PE of the assessee, the transactions have been treated to be arm’s length price. Furthermore, the assessee has pointed out that while making addition, the AO has also included the transaction related to hardware whereas allegation of PE is related to software. Authorities below erred in making the impugned additions. Appeal fails to raise any substantial question of law. Issues: Whether the Income Tax Appellate Tribunal erred in holding that no Permanent Establishment (PE) existed and whether any further profits could be attributed to an alleged PE when transactions of the associated enterprise were subjected to transfer pricing scrutiny and accepted as at arm's length.Analysis: The Court examined the Tribunal's findings that the transactions between the non-resident assessee and the alleged PE (and its associated Indian group company) had already been subjected to transfer pricing analysis and accepted to be at arm's length; considered relevant precedents on service PEs and attribution (including the principles that where transactions between associated enterprises are at arm's length, nothing further may be attributable to a PE unless transfer pricing analysis fails to reflect functions and risks); and noted the binding Supreme Court authority that sale consideration for software, in the facts of the case, does not constitute royalty taxable in India. The Court also observed that an exercise to attribute profit had already been undertaken by the authorities and that the issues raised did not present any substantial question of law for interference.Conclusion: The appeal is dismissed; the result is in favour of the assessee.Ratio Decidendi: Where an associated enterprise's relevant transactions have been subjected to proper transfer pricing analysis and accepted as at arm's length, no additional profits are liable to be attributed to a Permanent Establishment for those transactions unless the transfer pricing analysis fails to capture functions and risks that warrant further attribution.