AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 210
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....ase is that the assessee is engaged in the development, manufacture, assembly and supply of air- conditioning and refrigeration equipments. It is incorporated in and is a tax resident of Japan. The assessee is having a wholly owned subsidiary in India by the name and style of DAIPL. Earlier, DAIPL was a joint venture company of the assessee and Shriram Group. In the immediately preceding year, the joint venture was terminated and the assessee acquired all the shares in it. During the course of the first round of assessment proceedings, for which assessment was completed on 26.12.2008, the Assessing Officer held DAIPL to be a dependent agent PE of the assessee in India and also attributed some income to the PE. In such proceedings, the AO noticed that the assessee sold air-conditioners etc. worth Rs. 55.15 crore to DAIPL. In addition, the assessee also claimed to have made direct sales worth Rs. 45.40 crore to third parties in India. The AO obtained certain information from the assessee as well as DAIPL. On perusal of such information, it was observed that the price charged from direct sales to customers was higher than that charged from DAIPL. For example, in respect of model FT35B....
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....re, in fact, done by DAIPL simultaneous with making sales in respect of their own distribution activity. In the backdrop of such a position, DAIPL was held as a Dependent Agent Permanent Establishment of the assessee in terms of paragraphs 7(a) and 7(c) of Article 5 of the Double Taxation Avoidance Agreement between India and Japan (hereinafter also called `the DTAA'). Thereafter, the AO proceeded to compute profits attributable to PE at Rs. 5,96,34,440/-. This amount was added to the total income of the assessee. In an appeal against the assessment order, the assessee contended before the Tribunal that necessary information could not be supplied to the AO as the person holding such details had fallen ill. The Tribunal set aside the assessment order and restored the matter to the AO for a fresh decision. It is an admitted position that such order of the Tribunal has attained finality. In the fresh consequential proceedings also, the assessee failed to satisfy the AO on its line of reasoning, which led to the reiteration by the AO of the conclusions drawn in the first round of assessment. The assessee has again come up in appeal before the Tribunal. 4. We have heard both the side....
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....ricted to forwarding the customers' request for procuring products to it and forwarding its quotation and contractual proposal to the customers, the Assessing Officer sought details from the assessee as to who was identifying customers, approaching them, making presentations and demonstrations along with price catalogue and negotiation of prices and finalization of prices in respect of sales to third parties. The assessee submitted that it was: "trying its best to procure the relevant documents/details. Unfortunately, substantial records for the year under consideration are not traceable with the assessee." Certain sketchy details were submitted in relation to some of the customers by claiming: "that the person responsible for handling tax matters of the assessee has not been able to attend office for some time on account of ill health, which has also added to the difficulty in procuring and furnishing the required documents." To verify the assessee's claim that it was directly negotiating and finalizing prices, payment terms, delivery schedules and other contractual terms with the customers in India, the Assessing Officer required the assessee to furnish copies of e-mails/correspo....
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....er hand, the customers are scattered all over India and the amount of sale price in many cases is even below Rs. 25,000/-, which is overt from the statement drawn by the AO on pages 10 and 11 of the assessment order in the first round. 10. In the absence of the assessee furnishing any shred of credible evidence showing its direct involvement from Japan in making sales to customers in India and proving that the role of DAIPL was simply confined to a communication channel, the inescapable conclusion which follows is that the entire activity starting from identifying customers, approaching them, negotiating prices with them and finalization of products and prices were done by DAIPL in India not only for the products sold directly by them as distributor, but also for which the assessee is claiming to have made direct sales. 11. At this juncture, it is relevant to mention that the assessee argued before the Tribunal during the first round of proceedings that the Assessing Officer erred in holding that DAIPL constituted dependent agent PE of the assessee. The Tribunal, vide order dated 13.07.2012 in ITA No.3005/Del/2011, has recorded in para 11 of its order that the assessee pleade....
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.... in our previous quotation. We gave you 5% discount only for the products on original quotation. This opposite pricing is occurring not only for this product but also for the other products. Please understand it'. This communication demonstrates that it was DAIPL only which was negotiating and finalizing deals with Indian customers and then conveying it to the assessee. Not only that, DAIPL in this process, was also requesting for reduction in the price of products at the instance of the Indian customers, wherever requested by them. This belies the assessee's contention that the process of negotiation and finalization of prices was done by it. Page 215 of the paper book is another e-mail from DAIPL to the assessee, mentioning : `I have sent 4 no. requests for approval of pricing on VRV projects on 5th May, 2005. I hope you would have received them. Please let me know as when can I get the approval sheets so that we can release the order.' This e-mail reinstates that DAIPL was negotiating prices with customers in India and then sending such prices to the assessee for approval. On getting such prices approved, it was initiating the process of releasing the order. Page 224 of the pape....
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.... paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority, but habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise. 8. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business." 15. A cursory look at para 7, which starts with a non-obstante clause qua paras 1 and 2, shows that where a person, other than an agent of an independent status as discussed in para 8, is acting i....
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....y the TPO, who found the same at arm's length price (ALP). Our attention was invited towards the TPO's order dated 26.10.2009 passed for the year under consideration in the hands of DAIPL in which the international transaction of 'Commission received on direct sales (Market Support Services' was accepted at ALP. It was submitted that in such circumstances, no further income could have been attributed to the operations carried on by the assessee in India. This argument was bolstered on the strength of the ratio laid down by the Hon'ble Supreme Court in Director of Income-tax (IT) vs. Morgan Stanley & Co. Inc. (2007) 292 ITR 416 (SC) holding that once the transfer pricing analysis is undertaken, there is no further need to attribute profits to PE which is an associated enterprise and has been remunerated on an arm's length basis taking into account all the risk taking functions of the multinational enterprise. 18. There can obviously be no dispute, in principle, on the applicability of the ratio decidendi laid down by the Hon'ble Apex Court in Morgan Stanley (supra). However, we find that the ratio propounded in this case is not applicable to the facts and circumstances of....
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....ustomers. As such, the other functions performed by DAIPL in negotiating and finalizing contracts in India on behalf of the assessee remained excluded from the process of determination of the ALP by the TPO. Under such circumstances, the argument of the ld. AR becomes untenable. 20. Although the Hon'ble Supreme Court in Morgan Stanley (supra) has held that once a transfer pricing analysis is undertaken, there is no further need to attribute profits to a PE as, in such cases, nothing further would be left to be attributed, yet, their Lordships carved out an exception to the above general rule by lying down that : `The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case'. The extant ....
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....ibuted to the PE. This was opposed by the ld. DR, who stated that the global profit rate of 5% is not backed by any evidence and hence the same cannot be accepted. 23. It is vivid that the AO computed profits attributable to PE by firstly reducing the amount of commission paid to DAIPL from the amount of direct sales to end-customers in India determining net sale value at Rs. 40.86 crore; then applying the percentage of 79.58% as discussed in an earlier part of the order to the amount of net sales value for determining the sale value at Rs. 32.62 crore if such products had been sold to DAIPL; and then allowing deduction for expenses at 5% of the sales value from the differential amount of Rs. 8.23 crore (Rs.40.86 crore minus Rs. 32.62 crore) for finally determining the amount of profit attributable to the PE at Rs. 5,96,34,440/-. It is apparent that the mechanism followed by the AO in computing the amount of profits attributable to the PE is unique in nature and suffers from several infirmities. It is not understandable as to why the amount of commission was reduced straightway from the amount of direct sales and then what is the logic in applying 79.85% and then allowing expens....
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....% of the amount of sales of Rs. 45,40,11,720/-, which comes to Rs. 4,54,01,172/-. 26. Now we turn to the second sub-step, being, calculation of that part of the profit rate of 10%, which is attributable to the operations carried out in India. The Delhi bench of the Tribunal in Rolls Royce PLC vs. DDIT 2007- TII-32-ITAT-DEL-INTL held 35% of global profit from sales in India as relatable to the marketing activities carried out in India. The said order of the Tribunal has been affirmed by the Hon'ble Delhi High Court in Rolls Royce PLC vs. DIT(IT) (2011) 339 ITR 147 (Del). The Delhi Bench of the Tribunal in ZTE Corporation vs. Addl. DIT (2016) 159 ITD 696 (Del) has also attributed 35% of the profits attributable to marketing activities in India. The Delhi Bench of the Tribunal in GE Energy Parts Inc. vs. Addtl. DIT (IT) (2017) 49 CCH 0021 DelTrib, after considering the nature of activities carried out in India, estimated 26% of total profit in India as attributable to the operations carried out by the PE in India. 27. It goes without saying that there can be no hard and fast rule of determining the rate of profit attributable to marketing activities carried out in India. It is a....
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....136.20 lac minus Rs. 40.86 lac). If such commission income of DAIPL is, say, 8% of gross commission receipts, at Rs. 36.32 lac, then additional income attributable to the PE in India as chargeable to tax in the hands of the assessee would be Rs. 99.88 lac (Rs.136.20 lac minus Rs. 36.32 lac) so on and so forth. Since necessary details of income offered by DAIPL from the receipt of commission at Rs. 4.54 crore are not readily available on record, it is not possible at our end to work out the exact amount of further income chargeable to tax in the hands of the assessee as attributable to the PE in India. We, therefore, set aside the impugned order and remit the matter to the file of the AO to determine the amount attributable to the PE in India in the manner indicated above. Needless to say, the assessee will be allowed an opportunity of hearing in deciding the issue. 30. The assessee is seeking credit of TDS and taxes paid after original assessment through ground no. 4. The Assessing Officer is directed to verify the assessee's contention and allow necessary credit available as per law. 31. The last ground of the assessee's appeal is against charging of interest u/s 234B of the....