TaxTMI 
TaxTMI 
2013 (11) TMI 195
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....nt of dealer's commission 9,81,966 - - - Addition on account of attribution of profits to Permanent Establishment (PE) 63,25,580 36,23,371 40,09,360 8,76,559 36,06,267 2. Brief facts of the case are that the assessee is an Indian Branch of Varian India Pvt. Ltd. (for short "VIPL"), which is incorporated in U.S.A. VIPL in turn is held by Varian Inc., U.S.A. and is thus 100% subsidiary of Varian U.S.A. VIPL has only an Indian Branch which is primarily engaged in the distribution of Varian products manufactured by Varian Group of companies (for short "VGCs") all over the world. These products mainly relate to analytical instruments, laboratory equipments and other scientific instruments and electronic items. In the assessment year 2002-03, the assessee had shown sales of Rs. 52,05,468, in the relevant previous year and has shown other income of Rs. 6,10,74,335, which mainly includes commission income received from various Varian Group of Companies. 3. The Assessing Officer, during the course of the assessment proceedings for the assessment year 2002-03 on a perusal of Profit & Loss Account, noted that the assessee has claimed expenses on a....
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.... Page-5 of the appellate order. The Commissioner (Appeals) upheld the action of the Assessing Officer and rejected the assessee's contentions on the ground that the expenditure pertaining to the earlier years cannot be deducted in the relevant financial year and accrual of dealers' commission is dependent on the execution of sales and the assessee cannot withhold the commission without any mutually agreed terms between the dealer and the assessee company. Accrual of dealers' commission is different from the modalities of the payments and it accrues immediately on the completion of the sale. Further, if the assessee's plea is accepted for allowing the expenditure in this year, it would result in cash system of accounting with no certainty regarding the amount of commission payable in a particular year. 6. Before us, the learned Counsel submitted that the assessee has been following the system of debiting the dealers commission based on dealers invoices which is raised after various formalities have been completed like installation, follow-up for final payment, release of bank guarantee, etc. This system of accounting has been accepted in the earlier years. Therefore, the same can....
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.... payment of commission has crystallized in this year. The sales and expenditure associated with it has to be matched and shown in the same year. The assessee cannot be allowed to follow mixed system of account i.e., accrual of sales in one year i.e., at the time of raising the sale bills and expenses to be allowed in different year when various other formalities relating to the sales have been fulfilled. Thus, the findings of the Commissioner (Appeals), as given in Para-3.3, which for better appreciation of facts, are reproduced below :- 3.3 "I have carefully gone through the order of the Assessing Officer and also the submissions as made by the Authorized Representative of the appellant company. I am inclined to agree with the views of the Assessing Officer that expenses pertaining to earlier years are not deductible in the Financial Year relevant to the Assessment Year 2002-03. The accrual of the dealers commission is dependent on the execution of the sales order by the dealer. The appellant company can withhold the dealer commission in case mutually agreed terms between the dealer and the appellant company are not complied with by the dealer. Accrual ....
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....truments, vacuum technologies, contract electronics manufacturing and analytical lab instruments. The VIPL has entered into distribution and representation agreement (for short "D.R. Agreements") with all the five companies of Varian Group for supply and sale of analytical lab instruments to the Indian customers directly. The assessee carries out two types of sale of Varian products in India - one is direct sale and other is indent sale. Insofar as direct sale is concerned, the assessee directly imports spare parts from Varian Group of Companies (for short "VGCs") and sell them to Indian customers directly on its own account on principal-to-principal basis. These spare parts are made available on discounted price by the various Associates Enterprises (for short "A.Es"), i.e., Varian Group of Companies which is sold by the assessee on its own account. In the activities relating to indent sale, the Varian group of companies sell analytical lab instruments to the Indian customers directly and the assessee carries out pre-sale activities like liaisoning and other incidental post-sale support activities for which it is entitled for commission. In the D.R. Agreement entered with the five....
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....ard warranty terms. C. Notwithstanding the above Varian shall have the right to quote directly and sell to any customer directly within the Territory and/or Contractor may sell on the basis of commission rate specified in Schedule A, however, Contractor's service obligations under section 4 will remain the same and not be otherwise affected Where Contractor obtains only sales orders and does not purchase Products. Contractor's entire consideration in those transactions will be a commission as set forth in Schedule A. If sales of Products are made by through or with the assistance of persons other than Contractor to customers within territory, at Supplier's sole discretion, commission may be allocated by Supplier on a fair and reasonable basis. 4. Obligations The provisions of this section below shall apply only to the extent permitted at any particular time by the laws and regulations or effect in the country in which this Agreement is made or to be performed. If any such restriction or obligation is or becomes prohibited under such laws or regulations, it shall be automatically void and separated f....
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....ntractor shall immediately notify Varian in writing of any claim that a Product or trademark infringes any trademark, copyright, trade secret, or similar law in order to allow Varian to defend such claims. H. Contractor shall be responsible for technical support including Product installation, training, maintenance, and warranty obligations to customer. I. Contractor may employ third parties, whether related or not, in the execution of its responsibilities Contractor may participate with other Varian Contractors, where appropriate, in the joint sharing of costs where such costs provide a proportionate benefit to Contractor. 5. Sale and Payment A. Sale of Products from Supplier to Contractor shall be at prices established by Supplier from time to time in price lists or quotation(s), less the applicable discounts) set forth in Schedule A. Supplier shall have the right to change the schedule of discounts (or rate of commission in Schedule A) with 15 days notice to Contractor. Discounts and or commissions for products not manufactured by Varian shall be separately agreed to o....
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.... shall take responsibility for all customer warranty claims under the terms of Varian's standard warranties. B. Varian owns the exclusive right, title and interest in each Trademark, Tradename, Servicemark and similar items Including related patents, copyrights if any and similar intangibles (collectively referred to as Intangibles). C. Contractor warrants that it will not make any representations, warranty or guaranty in connection with Product other than as authorised by Varian. Contractor shall advise Varian of any claim for damages or breach of warranty in respect to the Product asserted by a customer and shall cooperate with Varian in the defense or handling of such claim. D. Contractor further warrants that it will not at any time do or cause to be done, by any act or omission, directly or indirectly, that would in any way impair Varian's right title or interest in intangibles." 11. In pursuance of the D.R. Agreement with these five A.Es (i.e., VGCs) in relation to the indent sale, the assessee has earned following commission:- (i) Varian Australia Rs. 47,16,563 (ii) Varian U....
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....ion income, import of spare parts, earned by the assessee from various A.Es, it has been found that the assessee has been compensated at arm's length for its activities and functions performed in India. In addition to that, it was also submitted that under the domestic laws under section 9(1)(i) r/w Explanation thereto, in case of a business of which all operations are not carried out in India, the income of such business is deemed under this clause to accrue or arise in India shall be only such part of income as is reasonably attributable to the operations carried out in India. Thus, in view of the provisions of section 9(1)(i) also, the assessee had shown the income which has been reasonably attributed to the operations carried out in India. Reliance was also placed on CBDT Circular No.23 of 1969. 14. The Assessing Officer analysed the assessee's contentions which has been referred to in Pages-9 to 21 of the assessment order. Finally, the assessee's Explanation was rejected by the Assessing Officer mainly on the following reasons:- "9.20 The claim of the assessee that if payment to the agent is made at arm's length, then the non resident is not liab....
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.... interest, trademark, etc. 10.4 From the above, it is seen that the nature of business of the assessee is something more than that of a "commission agent". As the "Indian branch" performs "Sales representation services" for Varian product to the customers in India, it has to render "after sales and maintenance services" under the warranty period of the customers in India. Obviously, for such services, the "assessee" is not getting any thing from the customers. For any sub-standard product supplied by the Varian group the Indian branch has to incur the additional cost required in the "after Sales and maintenance services" of such products. To that extent, the Indian branch is bearing the risk on behalf of foreign supplier. Hence the profits arising on account of such risks taken by the Indian branch, is the income of the branch and not of the agent. In view of the above discussion, it is held that the assessee branch is the PE in respect of the business done out of the supplies made by Varian Group of USA, Australia and Italy." 16. Further, in the absence of actual profit attributable to the P.E., vis-a-vis three VGCs, he applied the provisions of Rule....
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.... on the VGCs. These Varian companies may accept or reject the orders completely at their own discretion. The assessee only is entitled for certain percentage as commission on the order booked and does not, in any manner, carry any obligation vis-a-vis sales made by the VGCs to the Indian customers. Reliance was also placed on the judgment of Hon'ble Supreme Court in DIT (International Taxation) v. Morgan Stanley & Co. [2007] 292 ITR 416(SC), wherein it was held that there cannot be agency P.E. in India if the said P.E. has no authority to enter into or conclude contracts on behalf of the foreign enterprise. It was clarified that the assessee is strictly carrying out its activities as per the D.R. Agreements, wherein the assessee is only engaged or involved with incidental activities relating to pre-sale liaisoning and post-sale customer support. It provides market information and customers to the VGCs and, therefore, technical support including product installation, maintenance, warranty obligations, etc., to the Indian customers. For carrying out these activities, the assessee is compensated quite well in the form of commission income, which have been held to be as arm's length by....
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....nts and works exclusively for securing orders for goods manufactured and sold under the brand name "Varian"; and (vii) He further observed that goods sold by VGCs to Indian Customers are analytical instruments, which are more or less similar in nature and these technical products have been manufactured based on research and development efforts undertaken by the parent company i.e., Varian U.S. 20. On application of Rule-10, he concluded that the rate of 10% applied by the Assessing Officer is neither excessive nor unreasonable. Regarding additional evidence relating to comparative analysis, he rejected the assessee's claim after giving detail reasons. Thus, the entire conclusion drawn by the Assessing Officer and the addition made was confirmed. 21. Learned Counsel, Mr. Kanchan Kaushal, representing the assessee, summarizing the facts of the issue involved, submitted that the assessee which is an Indian Branch of VIPL is incorporated in U.S.A. and does not have any other business operations except for the Indian Branch. The assessee is engaged in two types of sales, one indent sale and the other is direct sale. Under the indent sale, the assessee i....
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....k assumed and pointed out that the assessee is only doing marketing, advertising, customer support service and warranty only and the inventory management are only with regard to spare parts which the assessee deals on principal-to-principal basis. The assessee does not have any intangible assets as it does not undertake any research and development work on its account and the tangible assets are some office equipments. The risk with regard to the indent sales viz. market risk, product liability risk, research and development risk, credit risk, inventory risk, foreign currency risk, etc., solely lies with VCGs only and the assessee does not share any part of such risks. Thus, the assessee, in any manner, cannot be said to be a dependent agent within the meaning of Article-5(4) of Indo-U.S. DTAA or Indo-Australia or Indo-Italian DTAA. For constituting a dependent agency within the meaning of Article 5(4), he submitted that it is very vital that the agent can habitually conclude the contract and similar other conditions enumerated in Para-4 of Article-5, which, in the present case, is completely lacking. 22. The learned Counsel further analysed the remarks and the observations give....
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.... is a branch of VIPL, U.S.A., which is a 100% subsidiary of Varian Inc., U.S.A., which is acting as a dependent agent for various VGCs. The entire activities carried on by the assessee and the obligations carried out by it clearly show that it is a dependent agent of various VGCs for the sale of their products. The assessee not only helps the VGCs in selling their products but also carries out various obligations of pre and post sale activities. The entire D.R. Agreement if it is to be understood in right perspective, then the assessee is not mainly a commission agent but a dependent agent who is carrying out all the activities on behalf of the parent companies. She further referred to various observations and the findings of the Assessing Officer as well as the Commissioner (Appeals) in support of her contentions that the VGCs are having exercising comprehensive control over the branches of Varian India and the assessee is a dependent agent within the meaning of Article 5. She submitted an analysis of various terms and conditions given in Articles 5(4) and 5(5), vis-a-vis the activities carried on by the assessee in India to support her contentions that the findings given by the A....
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....U.S.A. is engaged in designing, manufacturing and marketing of technological products such as scientific instruments and analytical lab instruments and other contract electronic manufacturing. All the VGCs sell these products in India. The VIPL through its Indian branch (for short "VIB"), has entered into separate D.R. Agreement for carrying out various pre-sale activities and incidental and ancillary post-sale support activities. The VIB in India carries out two types of sale viz. (i) indent sale from where it earns the commission from various VGCs and the same is offered to tax in India and (ii) direct sales of spare parts which are imported from VGCs at discounted price and is sold in India on principal-to-principal basis. The profits from such activities are also offered for tax in India. The Assessing Officer as well as the Commissioner (Appeals) have held that VIB is acting as dependent agent for various VGCs and, therefore, it constitute a P.E. in India for various VGCs. Since VIB constitutes a P.E., therefore, by virtue of "Force of Attraction Rule" as envisaged in Article 7(1) of Indo-U.S. DTAA and similar provisions given in Article 7(1) of Indo-Australia and Indo-Italy D....
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....le or owns any risk of loss of the products and does not raise any invoice from the customers. It also does not receive any funds from the customers and the payment which are made by the customers by the VGCs. A title of the product passes directly from the VGCs to the customers. The orders which are placed through the assessee are not binding on the VGCs as they may accept or reject the order completely at their own discretion. The assessee has no authority to negotiate or conclude sale contracts on behalf of the VGCs. Coming to the nature of relationship, as illustrated in D.R. Agreements, VGCs have been termed as suppliers and the assessee as an independent contractor who does not have any right to assume or create any obligation of any kind, either expressed or implied on behalf of the supplier. The contractor will not Act as an agent and will have no power or authority to Act for or bind or commit supplier for any of the activities carried out in India. The orders received through contractor will not be binding unless accepted in writing by the supplier. From the various other obligations which are enumerated in Para-4 of the D.R. Agreement, it is seen that they are mostly in ....
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....n the first-mentioned State a Stock of Goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities Conducted in that State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise." 29. From the above, it can be seen that an agent is deemed to be P.E. if he is not independent and habitually exercise an authority to conclude contracts on behalf of the enterprise or if he has no such authority, but habitually maintains Stock of Goods or merchandise from which he regularly deliver goods or merchandise on behalf of the enterprise or he habitually secure orders solely or almost wholly for the enterprise. If any of these conditions mentioned in Para-4 above, are not fulfilled, the agent cannot constitute a P.E. for the foreign enterprise. We shall examine now whether any of these conditions stands satisfied or not. (i) Regarding the first condition as to whether the assessee is a habitually exercising the authority to co....
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....pends on the extent of the obligations which this person has vis-a-vis the enterprise. Where the person's commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such person cannot be regarded as independent of the enterprise. Another important criterion will be whether the enterpreneurial risk has to be borne by the person or by the enterprise the person represents." Thus, the character of an agent who can be said to be dependent, if - (i) his commercial activities for the enterprise are subject to instructions or comprehensive control; and (ii) he does not bear the entrepreneur risk. Under OECD Modal Treaty, the main thrust of an agent being a P.E. is that "he has an authority to conclude contracts in the name of enterprise". In other words, the agent has sufficient authority to bind enterprise's participation in the business activities and the agent's activity involved the enterprise to a particular extent in the business activities. Thus, the qualified character of the agency is the authorization to act on behalf of somebody else so much as to conclude the contracts. In the present case, as stated several time in this ....
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....) Rate of Commission Total Amount of Commission for 2001 & 2002 Total Amount of Sales (Approx.) for 2001 & 2002 Calendar Year (Rupees) (%) (Rupees) (%) 2001 2002 Varian Australia 33% 45% 47,16,563 8.69% 1,41,91,798 7.70% Varian Inc., U.S.A (average rates) 35% 29% 34,12,975 6.29% 1,03,47,529 5.61% Varian SPA, Italy 15% 15% 58,07,471 10.70% 3,87,16,473 21.00% Varian Chrompak International Netherlands 41% 41% 3,49,91,933 64.44% 8,53,46,178 46.28% Varian AG, Switzerland 15% 15% 53,70,674 9.89% 3,58,04,493 19.42% Total 5,42,99,616 100% 18,44,06,472 100% From the above, it is evident that the percentage of commission income and sales from the three VGCs are quite normal and with regard to Varian Inc. U.S.A., the activities of the assessee are between 5 to 7%. Hence, it cannot be said that the assessee is devoted wholly or almost wholly on behalf of any one VGC. The second condition as to whether the transactions between the assessee and VGC have been made under arm's....
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.... (a) the person has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise, unless the person's activities are limited to the purchase of goods or merchandise for the enterprise; (b) the person has no such authority, but habitually maintains in that State a Stock of Goods or merchandise from which the person regularly delivers goods or merchandise on behalf of the enterprise; (c) the person habitually secures orders in that State, wholly or principally for the enterprise itself or for the enterprise and other enterprises controlling, or controlled by or subject to the same common control as, that enterprise; or (d) in so acting, the person manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise." Article 5(4) of India-Italy, Double Taxation Avoidance Agreement "4. Notwithstanding the provisions of paragraphs 1 and 2 where a person - other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of....
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....sessee has no authority to negotiate or conclude contract on behalf of the VGCs. Further, the goods are delivered by the VGCs directly to the customers and all the risk associated with the sale of products lies with the VGCs and not with the assessee. Thus, the entrepreneur risk is not undertaken by the assessee. This also, inter-alia, means that the VGCs does not have any comprehensive control over the assessee. A lot of emphasis has been given by the Commissioner (Appeals) and the Assessing Officer on certain terms of obligation as per the D.R. Agreement. All those obligations which are undertaken by the assessee are only pre-sale and post-sale facilities provided to the customers by the assessee for which it is amply remunerated in the form of commission. There is nothing such obligation which binds the VGCs. In any case, these are mere administrative support functions and not the functions as are envisaged under Article 5(4). 37. Even at the cost of repetition, we hold that in order to treat any agent as P.E. within the meaning of Paras-4 and 5 of Article-5, it is very vital that such agent should fit into the description of "Dependent Agent" and has to perform either of the....
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....mes which accrue or arise or is deemed to accrue or arise in India. The scope of this deeming fiction is mentioned in section 9 of the Act. Therefore, asfaras the income accruing or arising in India, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet, etc. (hereinafter called 'us' "PE of foreign enterprise"), it is, therefore, important to note that under the Act, while the taxable subject is the foreign general enterprise (for short, "GE9", it is taxable only in respect of the income including business profits, which accrues or arises to that foreign GE in India. The Income-tax Act, does not provide for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under Sections 44BB, 44BBA, 44BBB etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in ....