Non-resident assessee's Indian profits taxable due to permanent establishment; 35% of Indian sales profits are taxable.

The Tribunal determined that the non-resident assessee had a permanent establishment (PE) in India, which included a fixed place of business and a dependent agent. Consequently, profits were attributable to this PE. The Tribunal rejected the argument that remuneration to the dependent agent sufficed, noting additional activities by the assessee in India. It upheld the AO's computation of profits, clarifying that 35% of the profit from Indian sales is taxable, excluding R&D expenses as they were not conducted in India. The Tribunal's decision considered relevant judicial pronouncements and clarified the profit percentage for tax purposes.

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Issues Involved:
1. Business connection/permanent establishment (PE) in India.
2. Attribution of profit to the PE.
3. Consideration of judicial pronouncements and circulars.
4. Clarification on the profit percentage to be adopted for tax purposes.

Issue-wise Detailed Analysis:

1. Business Connection/Permanent Establishment (PE) in India:
The primary issue was whether the assessee had a business connection or PE in India. It was held that the assessee had a business connection and a PE in India, which included a fixed place of business, premises used as a sales outlet, and a dependent agent. This conclusion was based on Article 5(1), 5(2)(f), and 5(4) of the DTAA between India and the UK.

2. Attribution of Profit to the PE:
The Tribunal held that since the assessee had a PE in India, profit was attributable to it. The applicant argued that the remuneration paid to the dependent agent (RRIL) at arm's length should mean no further income is attributable to the PE. However, the Tribunal found that the activities in India were not limited to those performed by RRIL under the agreement. The assessee's own employees and additional activities carried out in India meant that further profits were attributable to the PE.

3. Consideration of Judicial Pronouncements and Circulars:
The applicant contended that the Tribunal did not consider the Supreme Court's decision in Morgan Stanley & Co. Inc., Circular No. 23 of 1969, and the Madras High Court decision in Annamalais Timber Trust & Co. The Tribunal clarified that the decision in Morgan Stanley was considered, but the facts differed as the remuneration to RRIL did not cover all risk-taking functions. Circular No. 23 was not applicable because the assessee's activities were not wholly channeled through RRIL. The Annamalais Timber Trust decision was deemed irrelevant as it depended on specific case facts.

4. Clarification on the Profit Percentage to be Adopted for Tax Purposes:
The Tribunal had held that 35% of the profit from sales in India was chargeable to tax, but the specific profit to be adopted was not clear. The Tribunal clarified that the global profit should be considered as trading profit, which is gross profit less commercial marketing and general administration costs, but before R&D expenses. Since R&D activities were not conducted in India, these expenses should not reduce the trading profit for attribution purposes.

Conclusion:
The Tribunal concluded that the non-resident assessee's business activities in India were not wholly channeled through the agent (RRIL), and thus, further profits were attributable to the PE. The Tribunal upheld the computation of profit by the AO, subject to the observations regarding the exclusion of R&D expenses. The Tribunal's order should be read together with this clarification.

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