TaxTMI 
TaxTMI 
TaxTMI 
2016 (7) TMI 698
X X X X Extracts X X X X
X X X X Extracts X X X X
....ribunal") read as under:- "(1) Whether, on the facts and circumstances of the case and in law the Hon'ble DRP is correct in holding that the assessee did not have PE in India in the A.Y's. 2004-05, 2005-06 and 2008-09 in term of Article 5(1), 5(2), 5(4) & 5(5) of the Indo-USA Treaty and the addition made by the AO being the profit margin of 5% of the sale made by the assessee is not sustainable. (2) Whether on the facts and under the circumstances of the case, the Hon'ble DRP was correct in holding that interest u/s. 234B is not leviable in the case of non-resident despite a specific finding by the Hon'ble Delhi High Court in the case of DIT Vs. Alcatel Lucent USA Inc. dated 14/11/2013 in ITA Nos. 328 and 329/2012 wherein it has been specifically stated that a non-resident assessee which does not admit income chargeable to tax must be inferred to have induced the Indian payer not to deduct TDS, thus, rendering itself liable for advance tax interest." 3. The brief facts of the case are that in the instant case draft assessment order dated 21.03.2013 was passed by the AO u/s 144C(1) r.w.s. 143(3) of the Act. The assessee filed objections against the draft assessm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s not secure orders on behalf of the assessee and in absence of any PE, no profits could be taxed in India under Article 7 of Indo-US treaty. The assessee relied upon the decision of the Tribunal in assessee's own case in ITA No. 7420/Mum/2010 for the assessment year 2006-07 dated 3rd June, 2011 , and orders of the Tribunal in ITA No. 6443, 6444 and 6445/Mum/2012 for the assessment years 2004-05, 2005-06 & 2008-09 wherein the Tribunal has held that the assessee does not have PE in India and is not taxable for sales which have been made from outside India. However, the Revenue filed appeal before the Hon'ble Bombay High Court against the afore-stated decisions of the Tribunal which was pending for adjudication by the Hon'ble Bombay High Court , and hence the submission of the assessee was not considered by the AO in its draft assessment order dated 21.03.2013 passed u/s 144C(1) r.w.s. 143(3) of the Act. The A.O. observed that the assessee has entered into Exclusive Sales Representation Agreement dated 1st April, 2000 with LIL and as per the agreement, LIL is the Exclusive Marketing Co-ordinator for Lubrizol products in India and later on extended the territory to include Sri Lanka....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d involvement continues up to the stage of sale as it is to be kept informed about all development related to the sale. LIL has also maintained stocks of various products made by the assessee and the A.O. held that LIL is PE of the assessee under the Article 5(1), 5(2) and 5(4) of Indo-US DTAA. The assessee submitted in response to the observations of the AO that LIL has been remunerated by way of commission for the services provided by it and nothing more can be brought to tax in India. The A.O. rejected the contentions of the assessee holding that LIL has been remunerated by way of commission only for the functions performed but for determination of profits, three things namely functions performed, assets deployed and risk undertaken have to be seen. For the sales made in India, the assessee has assumed all the risks. While the production is taking place outside India, still the risk undertaken by the assessee in sales and marketing of the products in India exists, hence, assessee's profits for the same is taxable in India. Further , as per Article 7(1) of Indo-US DTAA, profit arising on sales done in India even directly by the assessee of the same or similar products as done by....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... customers and communicates information in relation to tenders and competitive bids from the customers. The LIPL does not have authority to negotiate the terms of the sale or conclude the contract on behalf of the assessee. The final decision regarding price, terms and conditions is taken by the assessee. The assessee has no operation in respect of manufacture or sale of product carried out in India. Sales are made by the assessee to LIPL on principal to principal basis. The assessee also does not have a right to use LIPL premises. Having regard to all these facts of the case, we are of the view that the learned counsel has demonstrated by (sic) the assessee does not have a PE in India. For this conclusion, we derive support from the decision of ITAT, Mumbai in the case of DDIT v. Daimler Chrysler AG, Germany, 39 SOT 418 wherein it was held that "there should be some definite activity of the PE to which profits can be attributed and merely acting for a non resident principal would not by itself render an agent to be considered as PE for the purpose of allocating profits taxable in the hands of the principal. It is further held that merely calling a person as agent acting on behalf ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r under appeal . 9. The ld. Counsel for the assessee, at the outset, submitted that the matter is squarely covered in favour of the assessee by the decision of the Tribunal in assessee's own case in ITA No. 6443 to 6445/Mum/2012 for assessment years 2004-05, 2005-06 & 2008-09 vide orders dated 18th January, 2013 and also in assessee's own case in ITA No. 7420/Mum/2010 for assessment year 2006-07 vide orders dated 3rd June, 2011 wherein it was held by the Tribunal that the assessee did not have PE in India in terms of Article 5(1), 5(2), 5(4) and 5(5) of the Indo-US Treaty and the additions to the income made by the A.O. being a profit margin of 5% on the sales made by the assessee in India was held to be not sustainable in the absence of assessee's PE in India and the Tribunal deleted the same. The Tribunal order in ITA No. 7420/Mum/2000 for assessment year 2006-07 vide orders dated 03-06-2011 is reproduced below:- "This appeal filed by the Assessee is directed against the order of (IT)-Range-4, Mumbai, passed on 01/10/2010 for the assessment year 2005-06 wherein the assessee has raised the following grounds of appeal:- "On the facts and in the circumstances of the case and in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come taxable in India without considering the profit attribution principles under IT act and the Tax Treaty. 8. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in levying interest of Rs. 52,73,244 u/s 234B of the Act despite the fact that the appellant was not liable to discharge any advance tax, since it is a non-resident whose entire income is tax deductible at source. 9. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in initiating penalty proceedings u/s 271 (l)(c) of the Act." 2. Briefly stated the facts of the case are that the assessee is a foreign company incorporated under the laws of the United States of America (USA). It is engaged in the business of manufacture and sale of high performance chemicals which are used in transportation and industrial lubricants. The assessee is a tax resident of USA, which is not disputed by the AO and, therefore, it is entitled to the benefits under the India-USA Double Taxation Avoidance Agreement (India-US Treaty). During the year under consideration, the assessee filed its return of income on November 6, 2006 declaring total income of Rs. 14,48,32,15....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any services in India or made any sales in India as all such sales were executed and completed outside India, the risk and title in such goods also passed to the customers outside India, and so there are no income taxable in India. It is also submitted that the AO has alleged that the sales made by the assessee to LIPL and also those made to third parties have given rise to income taxable in India by alleging that the assessee had a PE in India under Article 5 of the India-US Treaty. It is submitted that on such sales made by the assessee to LIPL and third parties, the AO has computed a profit margin of 5% and made an addition of Rs. 2,29,26,152/- to the income of the assessee. 6. It is submitted that as per Article 7 of the India-US Treaty, the assesee would be taxable in India only if the assessee has a PE in India and the taxability shall be limited to the extent of profits which are attributable to such PE in India. It is submitted that if the assessee has no PE in India, then the assessee would not be liable to tax in India in respect of the above mentioned business profits. It is pointed out that the force of attraction rule under Article 7 of the India- US Treaty would be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise. d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise 4. Notwithstanding the provisions of paragraphs. 1 & 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 the other contracting state, that enterprise shall be deemed to have a permanent establishment in the first mentioned state, if a) he has an habitually exercises in the first-mentioned state an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te a demand for products in the territory, except India. iv) LIPL shall have no power, right or authority to bind or obligate Lubrizol, except as set forth in this agreement. Rates and prices The prices of the products .will be determined by Lubrizol. Prices and terms of sale are subject to change by Lubrizol at any time upon notice to LIPL. LIPL shall have no authority to change or fix the prices or rates in any manner other than as notified by Lubrizol in accordance with the terms of this agreement. 7. Procedure for placing orders Customers will place orders for the purchase of the products directly with Lubrizol. It is anticipated customers will open confirmed irrevocable letters of credit directly with Lubrizol for the purchase of the products. The customer will be required to make its own arrangements to obtain necessary import license, permissions for outward remittances or such other permissions, consents or other sanctions as may be required to be obtained under the laws of the country of the customer or elsewhere, LIP will send quotations directly to the customers and will keep Lubrizol informed of such quotations. Lubrizol will send invoices directly to the cust....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed counsel for the assessee has submitted that i) the assessee had no presence or fixed place whatsoever in India, ii) no portion of LIPL's premises was under the assessee's control, iii] the activities in India were carried out by LIPL's own employees, and such employees were under control/ supervision of LIPL. It is also submitted that though the AO has alleged the existence of PE under Article 5(1) of the treaty, he has not brought any material on record to establish that the assessee has PE in India. It is, therefore, submitted that since the assessee does not own or have access to any fixed place of business in India, it cannot be said to have a PE in India under Article 5(1) of the India-US treaty. It is submitted that an independent agent is said to be one who is both legally and economically independent of its principal, for which other aspects of independence include:- i) extent of obligations which the agent' has vis -a-vis the principal; ii) extent of detailed instructions and comprehensive control of principal; iii) sharing of entrepreneurial risks; iv) reliance on the special skill and knowledge of the agent by the principal; and v) number of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....behalf of the assessee. The learned counsel for the assessee referred in this connection to Clause 13 of the Exclusive Sales Representation Agreement - Lubrizol and Clause 13 of the Sales and Marketing agreement - Metal working products. In view of the above facts, it is submitted that the conditions mentioned at point nos. 2,3, & 4 referred in the protocol for the purpose of determining 'securing orders' were not satisfied, hence, the LIPL did not 'secure orders' on behalf of the assessee and so did not satisfy the test for it to be regarded as a dependent agent PE under Article 5(4) of the India-US treaty, It is, therefore, submitted that there did no t exist a PE of the assessee under any of the clauses of Article 5 of the India-US treaty, hence, the conclusion of the AO is not justified and his order may be reversed. 12. The learned counsel for the assessee has submitted that the assessee carried out all its operations outside India and carried on only customer support operations in India, through LIPL. In terms of the agreements, the income attributable to these operations could only be such amount as an independent enterprise carrying on similar activity wou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....shall not disclose such confidential matter to third parties without the prior written consent of assessee whether during or after the terms of this agreement. The Id. D.R submitted that the LIPL thus is a sole agent of the assessee and as per Article 5 (2) (1), it constitutes PE of the assessee in India. The D.R further submitted as per Indo-US treaty Article 5 (5) LIPL is a dependent agent and constitutes PE of the assessee in India from this angle also. The Id. D.R further submitted that as per Sec.9 (l)(i) of the Indian Income Tax Act 1961, the income of the assessee thus is taxable in India. The Id. D.R further submitted that the case of Dailmer Chrysler (supra) relied upon by the assessee has no application to the facts of the case in hand as in that case, it was held by the Ld. CIT (A) that assessee had no PE in India whereas in the present case, the AO has held that the assessee is having PE in India. In support of revenue's case, the 'learned DR has relied upon the following decisions:- 1. Rolls Royce Plc. Vs. DDIT, 113 TT J 446 (Del Trib) 2. Rolls Royce Singapore (P) Ltd. Vs. ADIT, 40 DTR 289 (Del Trib.) 16. In the case of Rolls Royce Plc. (supra) the cost o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vant record and gone through the order of the AO as well as decisions cited. The issue to be adjudicated in this appeal is whether the AO is right in holding that the assessee has PE in India and thereby taxing the profits earned by the assessee in India. The assessee is a foreign company incorporated under the laws of United States of America and is engaged in the business of manufacture and sale of high performance chemicals, which are used in transportation and industrial lubricants. The assessee is a tax resident of the USA which is not disputed by the A.O. and hence it is entitled to the benefits under the India-USA Double Taxation Avoidance Agreement (India-US Treaty). The assessee filed its return of income declaring total income of Rs. 14,48,32,150/-, against which the AO made a reference to the TPO u/s 92CA of the Act for computation of arm's length price of the international transactions entered into by the assessee with its Associated Enterprise (AE), namely, Lubrizol India Pvt. Ltd. (LIPL). The arm's length value of the international transactions entered into by the assessee with its AE were accepted by the TPO vide order dated 27, 2009 passed u/s 92CA(3) of the act....
X X X X Extracts X X X X
X X X X Extracts X X X X
....licits order on behalf of assessee and is involved in marketing and sale from finding a customer up to finalization of sale. In view of these facts, profits earned and attributable to function, assets and risk in India undertaken by the assessee through its PE, is taxable in India. 1.16 Thus, after careful consideration of facts of case, we are of the view that no interference in the action of the AO is required and the AO is directed to proceed as proposed in draft assessment order. 2. The AO shall give effect to the above directions as per provisions of section 144C(3) of the Act. " 20. Consequent to the said directions of the DRP, the AO passed final assessment order determining the income of the assessee at Rs. 16,77,58,302/ - as against the income returned by the assessee of Rs. 14,48,32,150/-, resulting into addition of Rs. 2,29,26,152/- being profit margin of 5% on the sales made by the assessee to LIPL and third parties. 21. The main argument of the learned counsel for the assessee before us is that the assessee is a tax resident of USA it is neither having any fixed place of' business In India nor any business connection in India. He was contended that the AO h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he customers. The LIPL does not have authority to negotiate the terms of the sale or conclude the contract on behalf of the assessee. The final decision regarding price, terms and conditions is taken by the assessee. The assessee has no operation in respect of manufacture or sale of product carried out in India. Sales are made by the assessee to LIPL on principal to principal basis. The assessee also does not have a right to use LIPL premises. Having regard to all these facts of the case, we are of the view that the learned counsel has demonstrated by the assessee does not have a PE in India. For this conclusion, we derive support from the decision of ITAT, Mumbai in the case of DDIT Vs. Daimler Chrysler AG, Germany, 39 SOT 418 wherein it was held that "there should be some definite activity of the PE to which profits can be attributed and merely acting for a non- resident principal would not by itself render an agent to be considered as PE for the purpose of allocating profits taxable in the hands of the principal. It is further held that merely calling a person as agent acting on behalf of foreign non-resident would not by itself render him to be considered as an agency PE and pr....