TaxTMI 
TaxTMI 
2018 (4) TMI 394
X X X X Extracts X X X X
X X X X Extracts X X X X
....case are that the assessee is a Japanese company (hereinafter also called `Fujifilm'). It filed return declaring loss of Rs. 6,14,06,692/- in respect of its operations carried out in India through an Indian branch. The Indian branch is engaged in import and resale of Fujifilm products in India and 'Provision of marketing and technical support services' to its head office, Fujifilm. Seven international transactions including `Provision of Marketing and Technical Support services' were reported by the assessee in Form No.3CEB. The AO made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. Transacted value of the international transaction of 'Provision of marketing and technical support services' was shown at Rs. 3,65,54,360/-. The Transactional Net Margin Method (TNMM) was employed by the assessee with Profit level indicator (PLI) of OP/TC for demonstrating that this international transaction was at ALP. The assessee declared net profit margin of this transaction at 7.50%. Six comparables were chosen with their mean margin of 5.17%. On this basis, the assessee claimed that its international transaction of 'P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, market driven requests for new products and modification of products. After - sales and warranty service FDEL provides after-sales and warranty services to its customers in India. It includes normal servicing, handling of complaints, technical support and repair services. If the service is provided during the warranty period, FDEL does not charge its customers for rendering the after sales service." 6. It is clear from the above that the Indian branch provided customer relations, technical support, market research and after-sales and warranty services to its head office, for which it was compensated at actual cost incurred plus 7.5% mark-up. With the above understanding of the nature of services rendered by the assessee to its head office, let us examine the three companies assailed before us. (i) Apitco Ltd. 7. This company was selected by the TPO as comparable. The assessee challenged the inclusion of this company on the basis of different functional profile. Unconvinced, the TPO included it in the final tally. 8. We have analyzed the Annual report of this company, which is available at page 981 onwards of the paper book. From this Report, it can ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pted. Ex consequenti, it is no more open to argue that the functional dissimilarity of the companies under the overall broader category can be ignored under the TNMM. In view of the foregoing discussion, we find the functional similarity of Apitco Limited lacking on entity level with the assessee company. As such, we order for its exclusion from the final set of comparables. (ii) Choksi Lab Ltd. 12. The TPO included this company in the list of comparables despite the assessee's objection that it was a commercial testing house and hence functionally different. 13. We have gone through the Annual report of this company, which is available in the paper book. Note no. 8 to Part B - 'Notes forming part of the accounts' - provides that this company is a commercial testing house engaged in testing of various products and also offers services in the field of pollution control as allied activity. From the above description of the nature of services carried on by this company, it becomes evident that it is basically engaged in providing testing services for various products and also offers services in the field of pollution control. As against this, the services provided by the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... expenses, it is relevant to mention that the assessee, in this context, has taken the following two additional grounds, reading as under : - (i) That the Assessing Officer ("AO")/ Dispute Resolution Panel ("DRP")/ Transfer Pricing Officer ("TPO") erred, in law and on facts, in not appreciating the fact that the Appellant being a branch, is just an extension of its head office Fujifilm Corporation, Japan ("FFHO") in India, therefore, there could not have been(a) any rendition of brand building services to own; (b) could not be held amenable to transfer pricing provisions and thus liable to transfer price adjustment. (ii) Without prejudice, the AO/ DRP/ TPO erred, in law and on facts, in not appreciating that the advertisement, marketing and promotion expenditure ("AMP") are general administrative expenses and the Appellant, being a permanent establishment ("PE") of FFHO in India, is entitled for claiming deduction of all expenses incurred by the Appellant, including executive and general administrative expenses so incurred, whether in India or elsewhere, under Article 7(3) of India- Japan Double Tax Avoidance Agreements ("DTAA"). 18. We have heard both the side....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent that a permanent establishment is also an 'enterprise' for the purposes of the transfer pricing provisions and hence any transaction between two enterprises, namely, the foreign enterprise and its permanent establishment in India, is also subject to the transfer pricing regulations. In fact, the assessee itself reported 7 international transactions between the head office and the branch office, which have been reproduced on page 3 of the order of the TPO. Not only that, the assessee itself determined their ALP by applying the most appropriate methods, such as, RPM or CUP method or TNMM to demonstrate that they were at ALP. 21. The Delhi Bench of the Tribunal in Aithent Technologies Pvt. Ltd. VS. DCIT (2015) 155 ITD 0266 (Delhi) (authored by the V.P. in the instant case) and some other cases of the same assessee dealt with a situation in which the assessee therein was an Indian resident having branch office in Canada. Some transactions took place between the head office in India and branch office in Canada. The question arose of the determination of the ALP of such transactions. The Delhi Bench held that no transfer pricing adjustment can be contemplated on account of transac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t there can be no transaction between a head office in a foreign country and its branch office in India. There is no dispute on the proposition of law expounded in this judgment that a person cannot transact with self. However, the facts in the instant case are different. The assessee in question is a non-resident respect of its total income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.' Section 9 of the Act prescribes the instances of: `Income deemed to accrue or arise in India'. Thus a non-resident assessee is also chargeable to tax in respect of its income accruing or arising or deemed to be accruing or arising in India. Section 9(1) provides, inter alia, that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to accrue or arise in India. A non-resident assessee is, therefore, liable to tax in respect of income deemed to be accruing or arising to him in India. The factual matrix divulges that the assessee is carrying on its b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Japanese assessee, as is relatable to the operations carried out in India through its Branch office, is chargeable to tax in India not only under the Act but also under the DTAA. 24. Again reverting to the argument of the ld. AR about the applicability of the principle of mutuality and the consequential no accruing or arising of income, we find that the same is not the case here. The assessee is chargeable to tax in India in respect of its income earned through its branch office in India from business connection/permanent establishment both under the Act/DTAA. There is no applicability of the principle of mutuality insofar as income from the operations of the branch office with outsiders are concerned. We have noticed above that all the transactions between the H.O. abroad and the B.O. in India, even though mutual, but are required to be done at arm's length price in terms of Chapter X of the Act, so that correct amount of income attributable to the operations carried out in India is ascertained. Subjecting an international transaction between a H.O. abroad and a B.O. in India to the transfer pricing provisions does not in any manner vitiates the rule of mutuality, as has been....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d as deduction in terms of Article 7(3) of the DTAA. 26. There is no dispute on the fact that the Indian branch office of Fujifilm Corporation, Japan, constitutes its PE in India. Article 7 of the DTAA explicitly provides that if an enterprise of a contracting state carries on its business in the other contracting state through a permanent establishment situated therein, then such profits as are attributable directly or indirectly to the PE may be taxed in the other contracting state. To put it simply, if an enterprise of Japan carries on business in India through its PE, as is the case under consideration, then, the profits attributable to the PE shall be chargeable to tax in India in the hands of the Japanese enterprise. Para 2 of Article 7 unfolds that where a Japanese enterprise carries on business in India through its permanent establishment, then the profit to be attributed to the PE shall be such amount which it might be expected to make if it were a distinct and separate enterprise `dealing wholly independently with the enterprise of which it is a permanent establishment'. 27. Clause 3 of Article 7 provides that : `In determining the profits of a permanent establishme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment' independent of its enterprise, for the purposes of computing the profits attributable to the permanent establishment. As a PE in India is also an enterprise independent of the foreign enterprise, the mandate of Article 9 of the DTAA makes it vivid that if the transactions between the general enterprise abroad and PE in India are not at ALP, the same are required to be suitably done accordingly. When we read Article 9 along with para 3 of Article 7 of the DTAA, the position which emerges is that albeit deduction of AMP expenses is to be allowed, but simultaneously, the ALP of AMP expenses for brand promotion is also to be determined and adjustment to the profits so determined under Article 7(3) to be made accordingly. There is no qualitative difference between the two situations, namely, one in which a foreign enterprise has an associated enterprise in India which promotes its brand by incurring AMP expenses and transfer pricing adjustment is warranted on that account in the hands of the AE in India and the second in which the foreign enterprise has a permanent establishment in the shape of a branch office in India. Promotion of brand by a branch office in India is also requir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mitted that there is no blanket rule of the AMP expenses as a non-international transaction. He further stated that the Hon'ble High Court in Whirlpool (supra) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expenses exists. It was argued that the Tribunal in several cases has restored this issue to the file of TPO to be decided afresh in the light of the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and others. He also relied on still another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expenses is an international transaction, has been restored for a fresh determination. He still further referred to three later judgments of the Hon'ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been admitted, the binding nature of such judgments is not mitigated in any manner. Unless the Hon'ble Supreme Court reverses the judgment of a High Court, the same holds the field and remains binding on all the authorities working under its jurisdiction. It is, therefore, directed that selling expenses should be excluded from the overall purview of the AMP expenses for the benchmarking exercise, if necessity arises. 34. At this juncture, it is significant to mention that the assessee carried on business in India through its branch office in India for the assessment years 2007-08 and 2008-09. Thereafter, a new private limited company was incorporated with name and style of Fujifilm India Private Ltd. It is a matter of record that in the assessment year 2009-10 onwards also, AMP expenses were incurred by the Indian AE in the same way in which these have been done for the years under consideration. Additions on account of AMP expenses were made. When the matter finally came up for consideration before the Tribunal, the issue of AMP expenses has been restored to the Assessing Officer for re-doing it in terms of the judgment of the Hon'ble Delhi High Court in the case of Son....