TaxTMI 
TaxTMI 
2012 (4) TMI 354
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....dustries (Middle East) FZE, UAE] as its proprietary concern and treating income of Rs. 5.54,98.000 earned by the said wholly owned subsidiary as that earned by the Appellant. 1.2 The AO failed to intimate his conclusion and grant an opportunity to the Appellant and show cause why he should not treat Vega UAE as the Proprietary Concern of the Appellant and the DRP as well failed to appreciate that Vega UAE is a separate and an independent body corporate incorporated in UAE as substantiated by various details and submissions such as the Tax Residency Certificate. Ajman Free Zone Authority Certificate and the Legal Opinion from the Overseas Lawyer obtained in this regard. 1.3 On the facts and in the circumstances of the case and in law. the AO erred in and the DRP further erred in not considering the documentary evidence furnished by the Appellant which demonstrated that Vega UAE was wholly managed and controlled in UAE and concluding that the Appellant failed to submit any details to demonstrate the same. 1.4 On the facts and in the circumstances of the case and in law. the AO erred in and the DRP further erred in alleging a case of round tripping on the gr....
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....an Free Zone Authority, Government of UAE. It was also submitted that the certificate also confirms that Vega Industries (Middle East) FZE is a body corporate based in the Free Zone of Ajman and is also registered with Ajman Free Zone Authority - Government of UAE. The assessee also enclosed the certificate dated 11.02.2009 issued by Executive Director of Revenue & Budget i.e. Ministry of Finance of UAE certifying that in pursuance of agreement between Government of UAE and Government of India for avoidance of double taxation, Vega Industries (Middle East) FZE qualifies to enjoy the benefit of above mentioned agreement. As per Annexure 3, assessee also enclosed Memorandum of Incorporation of the Company M/s. Vega Industries (Middle East) FZE and it was submitted that the article clearly mentions and certify that this FZE with limited liability is established as corporate entity and independent of separate financial liability from those of its owner and therefore, it is clearly established that it is a company, which is having its own separate entity independent stature and has its separate financial liability. The A.O. was not satisfied. He has stated in para 7.4 of the assessment ....
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....AE, Government of Ajman. He further noted that tax residency certificate issued by Ministry of Finance UAE merely states that it is eligible for the benefit under the treaty without taking any responsibility, whatsoever on the Ministry of Finance. He also stated that this letter of Ministry of Finance of UAE does not fulfill the requirement of the treaty definition of the company. He has concluded that in view of this, the said entity is treated as proprietary concern of the assessee which is carrying out business from Ajman free zone. One more objection has been raised by the A.O. that the assessee was not able to prove that this FZE was managed and controlled wholly in the UAE. He also observed that as per the Memorandum of Incorporation, Mr. P R Shah has been shown as Manager of FZE but as per the copy his passport furnished by the assessee, it does not show that he stayed in UAE during that period. On this basis, he has stated that Vega Industries (Middle East) FZE cannot be treated as resident of UAE for treaty purpose. On this basis, the A.O. treated the income of the Vega Industries (Middle East) FZE of Rs. 554.98 lacs as income taxable in India in the hands of the assessee ....
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....submitted that even if it is presumed that the Indian Tax Authority could go into the issue, the conclusion drawn by them, is erroneous. He submitted that UAE is a Federation established in 1971 in the area previously known as the Trucial Coast in Gulf by seven Emirates that were semi independent British protectorates namely, Abu Dhabi, Dubai, Ajman, Fujairah, Sharjah, Ras Al Khaimah, Umm Al Quwain. The rulers of the seven Emirates agreed to the UAE Provisional Constitution, changed later to become the UAE Constitution. He further submitted that prior to the establishment of UAE as a Federal State; each of the Emirates regulated its own affairs by passing local laws and regulations. To maintain harmony between the Emirates and ensure continuity of the Federation, the UAE Constitution provided that whilst the jurisdiction to promulgate substantive legislation was confined to the Federal Government, the local Governments of the Emirates were authorized to regulate local matters. Reference was drawn to Article 120 and 121 of UAE Constitution which lists down matters in which the Union have exclusive legislative jurisdiction wherein under Article 121 'Company Law' is included. ....
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....t with limited liability and shall have the body corporate status and shall belong to one natural person or one judicial person. It was submitted that under this Amiri Decree, the Free Zone Authority of the Emirate of Ajman was set up, and this Free Zone Authority has the power to register Companies, and regulate them. It was the submission that Emirates in UAE can promulgate their own legislation for company law in their respective Emirates in UAE and since Vega UAE is incorporated in Ajman, the relevant provisions to be examined are the provisions of the Amiri Decree of 1996 and accordingly, Vega UAE is a registered company and a body corporate incorporated in the Free Zone of Ajman (UAE) under the provisions of the Amiri Decree of 1996. Regarding UAE Commercial Company Law (CCL), it was submitted that DRP/A.O. have wrongly relied on the provisions of UAE CCL in reaching to the conclusion that Vega UAE is not a company. 6. The Ld. Counsel for the assessee also submitted that Vega UAE is a body corporate u/s 2(17) of the Income tax Act, 1961. He further submitted that the A.O. has incorrectly interpreted the Circular No. 8 (26)/2(7)/63-PR dated 13.03.1963 under the Companies Ac....
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....any body corporate or any entity which is treated as a company or body corporate under the taxation laws in force in the respective contracting states." 8. He further submitted that at the time of signing above treaty on 29.04.1992 and even today, there are no taxation laws in force in UAE and more particularly in Emirates of Ajman. He also submitted that the Government of UAE have signed the above agreement and agreed to the definition of the Company knowing fully well that there is no taxation law in force in the UAE. He went on to submit that the term "taxation laws in force' cannot be treated as redundant in this context more particularly when in other treaties which India has signed with other countries, no such word has been used. It clearly means that Indian Taxation Authorities are to apply definition of company as per their domestic law. It is also submitted that it is clearly provided in Article 3(2) of the India -UAE treaty that any term not defined in the said treaty will have the meaning which it has under the laws of that State (India) concerning the terms to which the agreement applies. Regarding Certificate regarding tax residency form Ajman Free Zone Authori....
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....elow: "[(17) "company" means- (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company : Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ;] 10. As per these provisions of Section 2(17), for other than an Indian company, a company means any body corporate incorporated by or under the laws of a country outside India and Vega UAE is definitely not an Indian company. Now,....
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....any force in this contention of the A.O. because as per Article (1) of the said Memorandum of Incorporation, it has been stated that this entity is established with corporate entity and independent and separate financial liability from those of its owner in accordance with this memorandum of incorporation and the only situation where the owner will be treated as personally responsible is regarding omission of some specified information that the entity is a free zone establishment (FZE) and it will be pursuant to Amiri Decree No. (3) of 1988 as amended. In our considered opinion, this is a situation where it specifies that corporate veil may be lifted. This may differ from country to country and in India also, in some situations, corporate veil can be lifted and, therefore, because of this restriction alone, it cannot be said that Vega UAE is not a separate legal entity. 12. The main objection of the A.O. is that since the assessee is the only shareholder and holding 100% shares of Vega UAE, it is not a valid company because as per Indian Companies Act and as per UAE CCL, two shareholders are required. The argument of the revenue is this that as per CCL of UAE, two shareholders a....
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....2,70,240/- in respect of sales made to Vega UAE and of Rs. 95,56,360/- in respect of commission payment to Vega UK. There is one more contention raised by the assessee in respect of both these issues that benefit of 5% range should have been allowed as provided in proviso to Section 92C(2) of the Income tax Act, 1961. 16. It is noted by the DRP on page 19 of its order that TPO during the course of proceedings required the assessee to furnish the gross and net margin of Vega entity. The same was submitted by the assessee before the TPO and it has been reproduced by the DRP as per which gross profit percentage of Vega UAE is @ 14.5%, Vega UK @ 14.2% and Vega US @ 9.1%. Similarly, net operating profit percentage has been shown as Vega UAE @ 7.4%, Vega UK @ 4.9% and Vega US @ 2.9%. This contention was raised by the assessee before the TPO that the difference in the gross and net margins of various Vega entities is because of difference in ultimate sale price and the level of operating expenses and not for this reason that different purchase price had been paid to the assessee. A working has been submitted regarding total operating expenses of these three Vega entities and its percen....
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....ed by the TPO. In such eventuality, when the transfer pricing analysis conducted by the assessee was defective and the comparables selected by the assessee have not been found to be appropriate, benchmarking has to be carried out by the TPO based on the limited information that may be provided by the assessee to the TPO. Under the circumstances, the TPO had to resort to the comparison of operating profit to the total cost of the subsidiaries/entities of the assessee company and the said ratio for the US entity computed at 26.49% was rightly applied by the TPO to Vega UK and Vega UAE, It may be mentioned here that the focus of transfer price of determination is on the reasonableness of the result and not the details of the methodology employed, if the comparability and reliability level is of high degree, there could be no objection in taking transactions with related parties as truly comparables. In view of the above, the TPO was justified in comparing the operating profit to the total cost of the three subsidiaries/entities of the assessee company. Hence, the upward adjustment of Rs. 4,32,70,2407- made by the TPO in the sale price to Vega UAE is hereby upheld. 23. The ass....
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....stries Limited, USA (Vega US) and Vega Industries (Middle East) FZE, UAE (Vega UAE). It is also submitted that the assessee primarily sells its products in the domestic market whereas marketing and distribution of its products in the international markets is undertaken by Vega entities in their specified jurisdictions. This is also submitted that Vega UK was additionally responsible for sales in Europe, Russia, Africa, Turkey and other erstwhile Commonwealth of Independent States, (CIS countries), Vega US was responsible for sales in North America and Vega UAE was responsible for sales in Far East, Middle East and Asian countries. It is further submitted that specifically, the revenue proceeded on the aspect assuming that Vega UAE was neither bearing any inventory risk nor conduct risk and hence is entitled only to a markup on value added expenses incurred by it. It was submitted that the activities carried out by various Vega entities in their respective jurisdiction are as under: (a) Estimation of market size and sales forecast; (b) Customer visits; (c) Quotation/offer to the customer; (d) Interaction with customers for pricing and performance ....
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....mestic market but in financial year 2007-08, Vega UAE has made provision for bad debts on account of unrecoverable amount from its end customer in overseas market. It is submitted that under these facts, Vega UAE must be categorized as a distributor and not as a market service provider. 19. As against this, it was submitted by the Ld. D.R. that Vega UAE is not a distributor as it does not have inventory risk and the products are being dispatched directly by the assessee company and Vega does not have warehousing facility. He further submitted that Vega did not bear any credit risk as amounts are being paid to assessee after receipt by Vega from customers. He further submitted that as per the annual repot, assessee has stated that the assessee company has sales offices in UAE, UK, USA, Australia, and Philippines and two warehouses in USA and one warehouse in UK. He further submitted that manpower of Vega has been created by the parent company by transferring the part of its own employees and it does not have any person to look after distribution and logistics but consists only of technical persons. He further submitted that Vega UAE does not have capacity to handle technical issu....
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....on the basis of operating cost/operating profit percentage of Vega UAE, Vega UK and Vega US. Regarding this aspect that as to whether Vega UIAE is a distributor or simply marketing service provider, we find that the objection of the revenue on this aspect is not sustainable in view of the facts of the present case because we find that the assessee company has executed proper distributor agreement with Vega UAE and it has been adhered to also and since the objection of the revenue that Vega UAE is not bearing any inventory and credit risk, we find that as per the facts of the present case, both these objections are not correct and Vega UAE is carrying both the inventory risk as well as credit risk and therefore, we hold that Vega UAE is not a marketing service provider in the facts of the present case but it is a distributor of the assessee company. Once it is accepted that Vega UAE is a distributor, ALP has to be determined on the basis of profit on sale of goods by the assessee company as compared to the comparable companies. The assessee has demonstrated that the arithmetic mean of 3 years weight age average NOPM of 12 comparable companies was 7.92% as against NOPM of 18.89% of t....
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....e find that the same is also on the same basis that operating profit/operating cost ratio of Vega UK should be comparable to operating profit/operating cost ratio of Vega US. While deciding the TP adjustment issue in respect of Vega UAE, we have held that on the basis of operating profit/operating cost ratio of Vega US, it cannot be held that some TP adjustment can be made. Hence, with regard to this TP adjustment also, we hold that the same is not sustainable and, therefore, it is deleted. Ground no. 3 of the assessee is also allowed. 23. Ground No. 4 of the assessee's appeal is regarding disallowance of Rs. 1,23,58,175/- u/s 14A of the Income tax Act, 1961. Regarding the disallowance made by the A.O. u/s 14A, it was submitted by the Ld. counsel for the assessee that earning dividend income is not the objective of the assessee and the assessee was holding investment in mutual fund being incidental to its main business and in addition to this, assessee was holding shares of the companies' i.e. Paramount Centrispin Castings Ltd., Reclamation Welding Limited and Welcast Steels Limited and these are strategic investments and had been made with a view to have additional manu....
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.... hence, this entire investment of Rs. 14 crores has been made by the assessee out of its own funds. Regarding investment of Rs. 127.49 lacs in shares of Welcast Steel Ltd., it was submitted that the same were made in earlier years out of own funds in the year 2003 and only an investment of Rs. 60 lacs in the year 2004 was made out of borrowed funds for the period 11.02.2004 to 04.03.2004 and the interest on the said borrowed funds worked out to approximately Rs. 50,000/-. Regarding investment in shares of Rs. 166.91 lacs, in Paramount Centrispun Castings Private Limited, it was submitted that investment was made in 1991-92, 1992-93 out of own funds and thereafter in the year 2002-03, acquisition was made by way of amalgamation of AIA Export Pvt. Ltd. with the assessee firm from 01.04.2002 and no borrowed funds were used. Regarding investment of Rs. 157.21 lacs in shares of Reclamation Welding Ltd. it was submitted that the said investment in the year 1992-93 and 1993-94 was made out of own funds and thereafter an amount of Rs. 150 lacs was invested in the year 2003-04 out of inter corporate deposits with RWL. The assessee worked out total interest expenditure regarding all these in....
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.... the Ld. A.R. that Mr. Eur Ivan Monje Castro, Bolivia is the assessee's representative for Bolivia Cement Market. The assessee company has got business due to the representative's interaction with Cement Group SOBOCE located in Bolivia, Latin America. He further submitted that SOBOCE decided to increase their Cement production capacity at their El Punte Plant and they placed their order on Chanderpur Works, India (Original Equipment Manufacturer) to execute the whole project. An order of Mill Internals was placed on the assessee by Chanderpur Works which is a part supply of El Punte Plant. In this connection, the assessee paid commission of US$ 5504 (Rs. 251,092) to Mr. Eur Ivan Monje Castro. It is the submission of the assessee that no services had been rendered by the agent in India and, therefore, income earned by this agent cannot be deemed to accrue and arise in India because the agent does not have any business connection in India. He further submitted that even assuming without admitting that there exists a business connection of this agent in India, no part of his operations has been carried out in India. He further submitted that it has never been the case of the r....