AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (11) TMI 202
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....927/- made by the AO. 4. Facts of the case in brief are that the assessee filed its return of income declaring a loss of Rs. 44,88,297/- on 12.12.2006 which was processed u/s 143(1) of the Act on 18.03.2008. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had presence in India through a branch office, which commenced its operations in India on July 27, 2004 in accordance with the approval obtained from RBI and was selling machine tools manufactured by it in India and the neighboring countries and was primarily involved in providing marketing and sales services to the Head Office. It was also providing post sales, technical and consumer support services to dealer network of the Head Office and received an amount of Rs. 60,72,269/- from the Head Office as commission and also received service fee income of Rs. 1,03,508/- from its Indian customers with whom it was dealing directly and after incurring expenses amounting to Rs. 1,07,54,690/-, the assessee had shown a loss of Rs. 45,78,913/-. The AO asked the assessee to furnish the copies of agreements entered with the Head Office. The assessee furnished copies ....
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....ation to the market trends in India; iv) MS-BO will expand sales in India by holding exhibition and similar activities relating to the machines; v) MS-BO will get a sales commission @ 5% of shipment price of the machines; vi) MS-BO will be responsible for installation and maintenance of the machines sold by HO in India. The payments of fees will depend on the number of installments of the machine in India; vii) MS-BO will maintain a stock of machines in India; viii) Any delay on MS-BO's part to sell the entrusted machines will add to the expenses to be borne by the HO. For this, the commission to be received by MS-BO will be reduced in accordance to the months left of the guarantee for machines for which the sales was delayed, The above points very clearly show that MS-BO is fully involved in the sales of the machines made by the HO in India; to the extent that it is deciding the price of such machines (in consultation with the HO) and also bearing the risk of not selling/delaying the sales of the entrusted machines in India. In my opinion, these findings are more than sufficient to hold that MS-BO was fully involved in the sales transactions taken up by the HO in....
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....enterprises controlling, controlled by, or subject to the same common control as that enterprise." Thus we can observe from above that the assessee is fulfilling the conditions laid down under Article 5(7)(b) as it is maintaining stock of machines on behalf of the Head Office which is regularly delivered to the customers in India and neighboring countries. Thus there comes into existence a DAPE of the HO in India. It need not be further elaborated that the sales which are made by the HO in India are attributable to such DAPE. d) After having established that the MS-BO/DAPE (PE) is involved in the sales made by HO in India, it becomes essential to attribute profits on such sales to such PE in India." 6. During the course of assessment proceedings, the assessee furnished its transfer pricing updation study of the assessee (TP study) wherein it was mentioned that:- "given the fact that the margins of the branch, under normal business circumstances are likely to meet the arm's length standard, the transactions involving provisions of business support services during F.Y. 2005-06 can be considered to be at arm's length from Indian transfer pricing perspective." 7. The AO h....
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....worked out at Rs. 4,50,34,060/- out of which 50% was held to be attributable to the PE in India i.e. the assessee, which worked out to Rs. 2,25,17,030/- and as HO has made a payment of Rs. 60,72,269/- to the assessee for rendering various services, the AO considered those expenses were exclusively incurred for the purposes of sales made by the HO in India and accordingly the same were deducted from the gross profit and the net profit attributable to the assessee was worked out at Rs. 1,64,44,761/- (Rs.2,25,17,030 - Rs. 60,72,269). The AO further observed that the assessee received commission income of Rs. 60,72,269/- from HO in respect of various services rendered under the agreement but it had not made any effort to carry out a proper risk analysis because of lack of information. The AO determined the arm's length price entered between the HO and the assessee by taking net operating margin @ 20% on the operating cost and the net operating profit was worked out at Rs. 21,50,938/- which was also added to the income of the assessee. 9. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the AO fixed the margin without making any reference to any comp....
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.... only the profits attributable to the PE in India are taxable in India. It states as under: "The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprises may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment". Accordingly, the India-Japan tax treaty provides that only those profits attributable to the activities carries out by MS-BO in India can be taxed in India. Further, as per Article 7(2) of the Treaty the profits attributable to the PE in India ' shall be determined based on arm's length principle. It states that: "Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profit which it might be expected to make if it....
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....that for the succeeding assessment year, the DRP directed the AO to take following 5 comparables in consideration: S. No. Company Name Operating Profit/Operating Costs FY 2005-06 1. Agrima Consultants International Ltd. -10.29% 2. Hincon Technoconsult Ltd. 5.47% 3. ICRA Management Consulting Services Ltd. 15.50% 4. IDC (India) Ltd. 14.05% 5. NTPC Electric Supply Ltd. 3.29% Arithmetic Mean 5.60% 12. The ld. CIT(A) was of the view that the aforesaid set of comparable can be considered for the year under consideration because there was no significant change in the functions, assets and risk profile of the assessee. The ld. CIT(A) further observed that the assessee had filed set of 13 comparables in its transfer pricing study before the AO as per following details: S. No. Company Name Operating Profit/Operating Costs FY 2005-06 1. Agricultural Finance Corporation Ltd. -8.22% 2. Besant Raj International Ltd. -14.45% 3. Capital Trust Ltd. -9.18% 4. Crisil Ltd. 11.49% 5. Educational Consultants Ltd. 16.60% 6. Electronica Machine Tools Ltd. NC 7. Epic Energy Ltd. NC 8. ICC Internati....
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....ponsible to install the machine sold by head office in India and maintained stock of such machines. Therefore, the AO was justified in holding that 50% of the gross profit arising from such sales was attributable to the assessee in India. Therefore, the ld. CIT(A) was not justified in reducing the addition made by the AO. 16. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A). It was further submitted that in the subsequent year, TNMM was used to benchmark the similar transaction which was approved by the DRP and accepted by the department. Therefore, for the assessment year under consideration also TNMM was the most appropriate method and the assessee by selecting 13 comparables in its transfer pricing study worked out the margin at 5.84% which has not been doubted by the AO. Therefore, the ld. CIT(A) rightly applied 5.84% as average margin on the operating cost to work out the arm's length price adjustment. 17. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present c....