TaxTMI 
TaxTMI 
2011 (8) TMI 769
X X X X Extracts X X X X
X X X X Extracts X X X X
....sier to understand the grounds on which the impugned orders are challenged by both the parties. 3. The assessee viz . Rolls Royce Singapore Ltd. (hereinafter referred to as the 'Singapore Company') is a company incorporated under the laws of Singapore. The principal activities of the Singapore Company are sale of spares parts for oil field equipment and engines and turbine compressor systems and electronic retrofit projects and services rendered in connection with repair and overhauling of such equipment. The Singapore Company is a non-resident for the tax under the provisions of Income-tax Act, 1961. 4. The Singapore Company rendered repair and maintenance services and supply spares to customer in India in the Oil and Gas industry. The major clients of the Singapore Company in India include public sector undertakings like ONGC, Gail etc. The largest customer of the Singapore Company in India is ONGC. As per the standard practice adopted by ONGC, before making remittance to foreign suppliers/service provides, ONGC used to obtain a certificate from the tax authorities at Dehradun to apply the appropriate withholding rate and thereafter obtained a 'No Objection Certificate', on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come was earned by it in the assessment years 1998-99 and 1999-2000. Though, the Assessing Officer did not accept this plea and made the assessment, the CIT (A) granted the relief agreeing with the contention of the Singapore Company and his order has been affirmed by the ITAT as well. Insofar as assessment year 2000-01 is concerned, against the declared income of Rs. 28,00,120, the Assessing Officer made addition of Rs. 5,135,140 towards business income and accepting the FTS income as declared by the Singapore Company. 8. With this, we revert back to the assessment years 2000-01 to 2004-05 which are the subject-matter of appeals filed by the Singapore Company. It can be seen from the returns filed by the Company that during this period, the Singapore Company has been offering its service fee income on cash basis as "Fees for Technical Services" under section 9(1) (vii) read with section 115A of the Act, section 43(2) and section 145 of the Act. According to the Company, the income from supplies is not taxable in India on the ground that it does not have any Permanent Establishment in India. This plea was not accepted by the Assessing Officer who held that the Singapore Company ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....asis' on the ground that this was the method of accounting followed by it. The Assessing Officer had not accepted the same in respect of assessment years 1998-99 and 1999-2000 holding that the method of accounting of Singapore Company should have been mercantile basis as per the Income-tax Law and the income of the company was accordingly re-casted. Insofar as assessment years 2002-03 and 2004-05 are concerned, the Singapore Company had declared the receipts from Indian companies as FTS and subject it to tax under section 115A of the Act. Again, the Assessing Officer held that the Singapore Company was supposed to maintain the accounts on accrual or mercantile basis. This view of the Assessing Officer was affirmed by the CIT(A) and the ITAT has also upheld the same in the impugned order. We may add at this stage itself that this issue does not arise in the present appeals as the decision of the ITAT in this aspect has been accepted by the Singapore Company. 11. The second issue taken up by the ITAT pertained to the validity of Assessing Officer's action in initiating the proceedings under section 147 of the Act in respect of assessment years 1998-99 to 2001-02. We have already p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee, who could provide such services to the Indian clients. The AO, therefore, had taken a view that the assessee company has business connection and source of income in India in terms of section 9(1)(i) of the Act. The AO has also taken a view that the assessee company has permanent establishment in India as well. The AO, therefore, held that by reason of existence of business connection and source of income and permanent establishment in India, the assessee is liable to pay tax in respect of income earned on supply of spares as business profit. It was further observed by the AO that assessee has an executive agent in India in the form of ANR, whose only source of income in India is from the assessee, and M/s ANR was responsible to the assessee and was not doing any activities other than what were directed by the assessee. The AO, therefore, had taken a view that the assessee has a business connection or PE in India in the form of ANR. 15. The AO further stated that the income of the assessee from maintenance services accrues or arise in India by deploying engineers and personnel for undertaking maintenance of the equipment at the sites of the Indian clients located in I....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and, therefore, having regard to the provisions of the Double Taxation Avoidance Agreement (DTAA), there was no question of taxing any income at the hands of the Singapore Company in respect of supplies made by it to Indian customers. 20. We would like to point out at this stage that on multiple grounds, the Assessing Officer and the CIT(A) had held that the Singapore Company had PE in India. Many of these grounds have not been accepted by the Tribunal. It has given detailed reasons for knocking out the various basis adopted by the Assessing Officer for forming the opinion that the assessee had PE in India. For example, the ITAT has not accepted that merely because the Singapore Company is a part of a Group Company of Rolls Royce which has world vide operation, because of other operations of the Group Companies, the Singapore Company shall be deemed to have PE in India. According to ITAT the Singapore Company, like each company belonging to Rolls Royce Group is a separate entity and a separate tax assessee. Likewise, merely because some income has accrued to the Singapore Company in India from deployment of Engineers and personnel in undertaking the maintenance and service of e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal proceeded to discuss the question as to whether in the light of nature of activities carried out by the ANR as per the agreement, the Singapore Company can be said to have a PE in India in the form of ANR. The Tribunal after extracting the terms of the agreement as to the nature of the services to be provided by ANR to the Singapore Company and terms relating to "Limitation and Restrictions", "Representations and warranties of ANR", "Confidentiality" etc. in the light of provisions of DTAA held that relationship between the Singapore Company and ANR was not on principal to principal basis. Instead, the ANR acted as a dependent agent of Singapore Company and its activities were controlled by the Singapore Company. The ANR was, therefore, could not be regarded as an agent of an independent status within the meaning of Article 5(9) of DTAA. For arriving at this conclusion, the Tribunal has, inter alia, recorded the following findings:- (1) Activity of ANR Associates during the period from 1-1-2002 was more or less similar what has been stipulated in the written agreement dated 1-1-2002, except the amount and basis of payment of commission/remuneration to ANR. &nb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ision of the Singapore Company as it was to report to take instructions and advice from and make the services available to Singapore Company through Mr. Sudhir, Mr. Dave and Mr. Robert Turner. Consequently, ANR has to perform its services under the exclusive control and detail instructions of the Singapore Company which goes to suggest lack of legal independents on the part of ANR. 27. According to the ITAT, the ANR was the sole agent of the Singapore Company and it was "almost wholly" earning from Singapore Company. Likewise, the Singapore Company was the client of ANR. This conclusion was drawn from the circumstances that though it was stated that the ANR was providing services to other companies and was earning commission from them, the extent of service rendered by ANR and the amount of commission had not been disclosed. Only a certificate was given by ANR by rendering services and earnings commission from other companies which were not sufficient to prove and establish that ANR was not getting "almost wholly" on behalf of the Singapore Company. The effect and difficulties about the services rendered and commission earned from other companies was within the knowledge of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is makes it clear that ANR or its offices are used by the assessee company for soliciting order by performing the activities or services mentioned in paras 3 and 4 of the agreement. It also makes it clear that ANR is acting almost exclusively for assessee in relation to promotion of assessee's products in India. Therefore, in the light of the aforesaid factors discussed and pointed out by us, that is, (i) that ANR was not acting in its ordinary course of business while acting for the assessee to provide services as per agreement dated 1-1-2002, and (ii) an extensive control was being exercised by the assessee upon, ANR who was bound to take instructions and advice from the assessee or its representative, (iii) that assessee has been rendering services almost wholly for the assessee, and (iv) and the transaction between them is not at Arm's length, we hold that ANR is not an independent agent within the meaning of para (9) of the Article 5 of DTAA between India and Singapore." 30. On this basis, the ITAT concluded that Singapore Company had Permanent Establishment in India within the meaning of Article 5(1) of DTAA through its dependent agent ANR. The Tribunal has also held th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entiality would show that ANR was instrumental in securing orders in India for the assessee company and was acting at the instructions of assessee company. Therefore, ANR shall be deemed to be agency PE in India within the meaning of paras (8) and (9) of Article 5 of the Treaty." 31. After giving the aforesaid findings, the Tribunal proceeded to determine the income that would be chargeable to tax in the hands of Singapore Company in India from the business activity of the sale of spare parts in view of Article 7 of the DTAA which provides that "so much of the profit as is attributable to PE in India can be taxed in India". As lump sum commission of US$ 40,000 was not treated at arm's length, the Tribunal went into the issue of percentage of the income and arrived at a conclusion that the amount of profit attributable to PE at 10%, as determined by CIT(A) would be proper as against the Assessing Officer's view that it should be 25%. As a result, the order of the CIT(A) on this aspect has been sustained and appeals filed by the Revenue for increase of the profits from 10% to 25% have been dismissed. 32. In the appeals filed by the Singapore Company, the appellant has confined ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the activities carried out by ANR in India and should be chargeable to tax in India under the Act?." 35. However, focus of learned counsel for the appellant remained on the aforesaid two aspects viz. question of law at 'e' and 'f'. Infact, Mr. Ganesh, learned Senior Counsel appearing for the appellant submitted that the issue of arm's length price be decided first because of the reason that if it is held that the payment of aforesaid commission to the ANR was at arm's length, the issue as to whether the Singapore Company acted through ANR as its PE in India or not would be rendered academic. He thus, opened his arguments on the alternate issue of ALP and in fact entire emphasis of Mr. Ganesh was to convince this Court that the commission payable was at ALP. 36. In view of the aforesaid approach of the learned counsel for the appellant limiting scope of its challenge to the ITAT order, we proceed on the basis that the assessee has business connection in India through ANR. It is also an admitted fact that ANR is an agent of the assessee in India. In these circumstances, we answer questions of law No. 'a' to 'd' in favour of the Revenue and against the assessee. 37. In this....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... person - other than an agent of an independent status to whom paragraph 9 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if- (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority but habitually maintains in the first-mentioned State a Stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprise controlling, controlled by, or subject to the same common control, as that enterprise. 9. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, gen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y or indirectly advice or represent or be concerned with or interested in the business of any other person, firm or company in India competing with assessee. It is, thus, clear that ANR was prohibiting from promoting the identical products of any other person, firm, or company competing with assessee. This unusual restriction imposed upon ANR would suggest that ANR never intended to act as an independent agent in the ordinary course of its business. Reading the agreement as a whole would suggest that ANR has been rendering services to assessee company exclusively in respect of the nature of the products mentioned in Schedule A of the agreement, and has been restrained or prohibited from assisting, advising or representing any other person, firm or company competing with the assessee in the same line of business. This short of restriction and limitation imposed upon ANR associates would suggest that ANR associates was not acting in the independent status and in the ordinary course of their business while rendering to the assessee in-country support services of the nature described in condition Nos. 3 and 4 of the agreement in relation to promote and supporting the sale of products i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee through Mr. Sudhir Mayor for the products identified in section 1 of Schedule A and Mr. Dave Klug for the products identified in section 2 of Schedule A, or their nominees, and Mr. Robert Truner will handle liaison on all administrative aspects of this agreement on behalf of company. The assessee may change the person or persons nominated under this clause at any time by notice in writing to ANR. This makes it clear that ANR has to perform his services under the extensive control and detailed instructions of the assessee company, which goes to suggest a lack of legal independence on the part of the ANR. Furthermore, the stipulations about representations and warranties of ANR and confidentiality, which has already been reproduced above, also indicate an extensive control exercised by the assessee company over ANR while ANR was acting for the assessee." 43. Mr. Ganesh, learned Senior Counsel appearing for the assessee rebutted those reasons by arguing that ANR was already an existing company and was not created by the assessee. The said ANR had its own infrastructure and its own business etc. before it entered into the agreement with the assessee. He submitted that Arti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee that the assessee was not the sole client of ANR and that activities of ANR were not devoted wholly or almost wholly on behalf of the assessee. The assessee produced a communication dated 18th January, 2007 addressed to it by ANR conforming that ANR had rendered services and had earned commission from companies other than the assessee during the final year 2003-04 and that the assessee was not the only source of income during the year. After this letter was produced, the Assessing Officer did not ask for further information. The learned counsel for the Revenue could not show anything to the contrary or dispute the fact that the Tribunal has gone on the wrong premise that the assessee failed to furnish all such details even after requisitioned by the Assessing Officer. It could not be denied that there was no such requisition made and the assessee was never asked to furnish any such information. On this wrong premise, the Tribunal has arrived at wrong conclusion. 46. We may record here that Mr. Ganesh produced the Income-tax Returns of M/s ANR for certain relevant years which show that ANR had been rendering services to other companies as well from where it had been....
X X X X Extracts X X X X
X X X X Extracts X X X X
....earing on the fixation of the price i.e., commission agreed to between the parties. Stress was laid down to the fact that there was no way the assessee could dictate the commission to be charged by ANR. ANR was negotiating at third party in the market place and, therefore, sum of US$ 40,000 agreed to between the parties which was payable by the assessee to ANR was at arm's length and could be treated as reasonable. In support of his submission, he relied upon the judgment of the Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley & Co. Inc. [2007] 292 ITR 416 and specifically referred to paras 29, 31 and 32 of the said judgment which reads as under: "29. As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm's length principle we have quoted Article 7(2) of the DTAA. According to the AAR where there is an international transaction under which a non-resident compensates a PE at arm's length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 2004 also issued by CBDT. This is the key questio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....flect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporate on the basis of the concept of Economic Nexus is an important feature of Attributable Profits (profits attributable to the PE)." 49. He also referred to the judgment of the Bombay High Court in Set Sattellite (Singapore) Pte. Ltd. v. Deputy Director of Income-tax, International Taxation [2008] 307 ITR 205 wherein the Court held that when an agent in India was taxed on the fair value of activities in India, the same could not be taxed all over again in the hands of the assessee as being income attributable to deem permanent establishment. This very treaty between Singapore and India was interpreted in the following manner: "From a reading of Article 7(1) of the DTA....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on under which aforesaid commission of US$ 40,000 per annum was fixed, was dated 1st January, 2002 made effective from that date. Prior to this agreement executed between the parties in writing, the arrangement between the assessee and ANR profit for 5% commission of invoice value by the assessee to ANR on the sales. The Tribunal thus held that this sort of fixation of remuneration is usually not done between two independent parties in any uncontrolled transaction. The remuneration payable, therefore, seems to be in the nature of transaction controlled by the Singapore Company and cannot be considered to be made on arm's length. More so, when Singapore Company had not furnished any instance of transaction entered into between the two independent parties in uncontrolled manner in support of its contention that remuneration of lump sum amount of US$ 40,000 was determined at arm's length. 51. From the aforesaid it is clear that the assessee could dictate the terms of the payment by altering the same and reducing it to the US$ 40,000 per annum from 5% of invoice value when assessee found that on the basis of 5% total commission payable could be much higher. This clearly leads to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of Law 'g' "Whether in the facts and circumstances of the case, the ITAT grossly erred in holding that 10 per cent of the profits on sales of spare parts made in India by the Appellant should be attributable to the activities carried out by ANR in India and should be chargeable to tax in India under the Act." 55. Once we hold that commission of US$40,000 per annum does not represent the ALP, it is difficult to find fault in the order of the CIT(A) as well as ITAT fixing 10% of the invoice value for the purpose of taxation, inasmuch as the test is "profits accepted to make". The CIT(A) has pointed out in this behalf that the performance of ANR is to render support service in relation to promotion of sale and the products of the assessee in India and it has no authority negotiate, accept any order or make or vary any contract or to make any warranty or representation in terms of paragraph 8.1 of the Agreement. Therefore, the risk assumed by the ANR is limited. Even otherwise, it has not come on record that ANR has performed or assumed responsibility for anything beyond what is written in the agreement. ANR is performing the functions of promoting the sale, soliciting orders....