TaxTMI 
TaxTMI 
2021 (2) TMI 945
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.... Officer under section 147/143(3) read with section 144C(3) of the Income-tax Act, 1961 (for short 'the Act') qua the Assessment Years 2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 & 2016-17 respectively on the identical grounds inter alia that :- "1. That on the facts and circumstances of the case, the order passed by the ld. Commissioner of Income Tax (Appeals)-43, New Delhi ("ld. CIT(A)") is bad in law. 2. That the ld. CIT(A) has grossly erred in law and on facts of the case in upholding the erroneous order passed by the ld AO assessing the total income of the Appellant at INR 14,624,822 as against the returned income of Nil without any proper basis and appreciation of the facts of the case. 3. That the ld ClT (A) has disregarded the provisions contained in Section 9(1) (i) of the Act read with the relevant explanation that a foreign entity having a permanent establishment in India shall be liable to income tax only to the extent as is reasonably attributable to the operations carried out in India. 4. That in attributing the business profits to the Indian operations, the ld CIT (A), without appreciating the functional profile o....
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....nd governments. The assessee is having profound technical experience required for the services provided. 4. During the year under consideration, the taxpayer had filed return of income declaring "NIL" income claiming that the income earned by the assessee was not taxable in India. Assessing Officer (AO) proceeded to held that the taxpayer has a Permanent Establishment (PE) in India in the form of domestic subsidiary company, namely, Ricardo India Pvt. Ltd. (RIPL) and thereby computed the income of the taxpayer by adopting the global profit ratio and applying the same to India-centric revenues to allegedly impute the India-centric profitability. AO proceeded to attribute 50% of the business profit i.e. Rs. 1,46,24,821/-, Rs. 38,97,594/-, Rs. 63,30,619/-, Rs. 1,00,91,845/-, Rs. 1,21,89,053/-, Rs. 91,24,923/-, Rs. 90,02,297/- & Rs. 4,50,38,195/- for AYs 2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 & 2016-17 respectively to Indian PE and considered the same as taxable income of the assessee in India to be taxed @ 40% plus applicable surcharge and education cess. 5. The assessee carried the matter before the ld. CIT (A) by way of filing the appeals who has upheld ....
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.... execution of the business/projects of the assessee and the scale of operation of RIPL is insignificant as compared to the size of operation of the assessee because RIPL has a miniscule set up of 5 - 7 employees (including administration and other support staff) and has been operating out of a small premises in Delhi. It is further contended by the ld. AR for the assessee that for the marketing services received from the Indian subsidiary, RIPL, it has been adequately remunerated inasmuch as commission/remuneration has been paid to RIPL on an arm's length basis. It is further contended by the ld. AR for the assessee that transfer pricing analysis showing transaction between assessee and RIPL at arm's length has not been disputed by the AO/CIT(A). 11. Aforesaid contentions raised by the ld. AR for the assessee when examined in the light of the profits attributed to PE and commission/remuneration paid on arm's length basis, commission/remuneration paid in all the cases is more than profit attributed to the PE, which is extracted from the synopsis filed by the ld. AR for the assessee for ready perusal as under :- Assessment Year Profits attributed to PE (A) Commission/remu....
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....s in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. 2. Subject to the provisions of paragraph 3, where en 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 profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly or independently with the enterprise of which it is a permanent establishment. 3. In the determination of the profits of a permanent establishment, there ....
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....stion or whether profits should be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods and merchandise for the enterprise was not resolved. It should therefore be settled in bilateral negotiations." 31. Article 7 of the U.N. Model Convention inter alia provides that only that portion of business profits is taxable in the source country which is attributable to the PE. It specifies how such business profits should be ascertained. Under the said Article, a PE is treated as if it is an independent enterprise (profit centre) decors the head office and which deals with the head office at arm's length. Therefore, its profits are determined on the basis as if it is an independent enterprise. The profits of the PE are determined on the basis of what an independent enterprise under similar circumstances might be expected to derive on its own. Article 7(2) of the U.N. Model Convention advocates the arm's length approach for attribution of profits to a PE. 32. The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profi....
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....ship activities. As regards income attributable to the PE (MSAS) we hold that the Transactional Net Margin Method was the appropriate method for determination of the arm's length price in respect of transaction between MSCo and MSAS. We accept as correct the computation of the remuneration based on cost plus mark-up worked out at 29% on the operating costs of MSAS. This position is also accepted by the Assessing Officer in his order dated 29.12.06 (after the impugned ruling) and also by the transfer pricing officer vide order dated 22-9-2006. As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE} is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE....." 14. Even otherwise, when we examine this proposition alternatively by reducing the commission/remuneration paid to RIPL from the profits attributed to the PE, detailed in the table extracted in pr....