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2023 (3) TMI 782
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....the facts and circumstances of the case and in law, the Ld. AO has erred in passing the final assessment order dated 27 January 2023 without considering the direct ions of the Hon'ble DRP dated 2 December 2022 as mandated by Sect ion 144C(13) of the Act . Consequently, the final assessment order dated 27 January 2023 deserves to be quashed. Grounds with respect to al legation of constitution of Permanent Establishment ('PE') in India Ground 3: On the facts and circumstances of the case and in law, the Ld. AO as well as Hon'ble DRP have erred in assessing the total income of the Appellant under sect ion 147 read with section 144C of the Act , for the AY 2013-14 at INR 2,09,26,235 as against the NIL returned income. Ground 4: On the facts and circumstances of the case and in law, the Ld. AO has erred in completely ignoring the orders passed in favour of the Appellant by the Hon'ble Income Tax Appel late Tribunal (ITAT) in the Appellant 's own case for AY 2017-18, AY 2018-19 and AY 2019-20, wherein the ITAT after careful examination of the facts of the case (which are identical to the facts of the year under consideration) held that" ....
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....pletely ignoring al l submissions of the Appellant in this regard. In doing so, the Ld. AO erred in: 10.1 Applying an ad-hoc methodology to attribute unreasonable profits to the alleged PE. In this regard, the AO erred in benchmarking the profits attributable to the alleged PE with the resale discounts agreed by the Appellant with its AE, DHR India, under a buy-sell distribution arrangement , which is a controlled transact ion; 10.2 Ignoring the significantly higher level of functions performed, assets employed and risks assumed by DHR India under the distribution arrangement versus those alleged to have been performed by the PE, leading to excessive and unreasonable profits attribution. Ground 11: On the facts and circumstances of the case, the Ld. AO/ Hon'ble DRP erred in summarily rejecting the content ions placed by the Appellant for a reasonable profit attribution, without appreciating the analysis filed by the Appellant during the course of proceedings. In doing so, the Ld. AO/ Hon'ble DRP erred in: 11.1 Ignoring the third-party arrangement furnished by the Appellant that is comparable to the functions alleged to have been performed by the P....
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....at the assessee has PE in India. However, at the outset, we will deal with the core issue as to whether the assessee has a PE in India. 4. Briefly the facts relevant for deciding the issue are, the assessee is a company incorporated in Singapore and is a tax resident of that country. As stated by the Assessing Officer, the assessee is engaged in the business of manufacturing and sale of scientific research instruments and peripheral. For the assessment year under dispute, the assessee had filed its return of income in India declaring nil income. In course of assessment proceeding, after calling for necessary details and examining them, the Assessing Office noticed that the products sold by assessee require maintenance, calibration, which involves servicing, repairing and supply of spares. Therefore, the assessee offers maintenance service to its customers worldwide, including India. From the details furnished, the Assessing Officer noticed that the assessee, during the year under consideration, had received revenue of Rs.8,96,73,757/- towards receipts from Annual Maintenance Contract (AMC). Since, the assessee did not offer any income in India, the Assessing Officer raised....
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....ubmitted, the Assessing Officer has not properly understood the legal relationship between the parties. He submitted, since the assessee did not have either fixed place PE or dependant agent PE in India, no part of its income is taxable in India. Therefore, attribution of profit to the PE in such scenario will not arise. In support of his contention, learned counsel relied upon the following decisions: (i) ADIT Vs. M/s. E Funds IT Solution Inc. (Civil Appeal No.6082 of 2015) (ii) DCIT Vs. Lubrizol Corporation, USA (2017) 83 taxmann.com 13 (Mum. - Trib.) 13. Strongly relying upon the observations of Assessing Officer and learned DRP, learned Departmental Representative submitted, the terms of agreements between assessee and DHR Holding India Pvt. Ltd., coupled with the statement recorded from two of the employees of a customer of the assessee in India clearly demonstrate that DHR India is carrying out functions of an agent of the assessee for sale of scientific equipments and spare parts manufactured by the assessee. Drawing our attention to the statement recorded under section 131 of the Act, he submitted, the Indian customers are negotiating with DHR Ind....
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....essee that all AMC and warranty related work has been sub-contracted to DHR Holding India Pvt. Ltd. As stated by the Assessing Officer, the assessee had entered into three separate agreements with DHR Holding India Ltd. The first agreement between the assessee and DHR Holding India Pvt. Ltd. is Sales Commission Agreement. On a perusal of this agreement placed at page 13 of the paper-book, it is noticed that the assessee has appointed DHR Holding India Pvt. Ltd. on non-exclusive basis for providing services related to sales, installation, warranty for the products and spare parts sold directly by the assessee to customers in India. Clause 1.1 of the agreement says that the assessee may solicit or, upon an order being placed by a customer, take orders requiring delivery of products, whereas, the assessee designates DHR India Pvt. Ltd. as an authorized warranty-related service provider. Clause 1.2 stipulates the scope of services as per Exhibit - A to the agreement. The scope of services under Exhibit - A are as under: "EXHIBIT A SCOPE OF SERVICES * Interaction and liaising in relation to orders from customers on behalf of AB Singapore. * Other inci....
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....e of the invoices for the products shipped to the customers. Clause 11 of the Treaty say, DHR India shall report all warranty claims made in respect of all products to the assessee. In case of providing any spares under warranty/maintenance, DHR India will provide for the same out of its own stock and DHR India shall have the right to get a replacement product/part free of cost from the assessee or cross charge the cost of the product/part to the assessee. 17. Thus, the Sales Commission Agreement not only defines the scope of services of DHR India but also makes it clear that DHR India will have to provide the services stipulated under the agreement, regardless, whether the product was purchased from assessee or from DHR India. The scope of services under Exhibit - A to the agreement indicates that the DHR India is required to do liasoning in relation to orders from customers on behalf of the assessee. It also has to do other incidental activities like, tracking of delivery schedule for the customers. It also has to do the installation of products and provide warranty services. Thus, the scope of services do not envisage or grant any authority to DHR India to conclude any ....
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....iscount. Clause 3 of the agreement provides for prices of products and terms for distribution activities as well as discounts to be provided thereon. 19. Thus, a reading of the Distribution Agreement as a whole, makes it clear that the purchase of products by the DHR from assessee for the purpose of resale in India is on principal to principal basis and no agency relationship is there between the parties. This fact is further clarified from Clause 11.1 which provides that DHR India shall at all times act only as an independent contractor, and never as a legal representative of the assessee. It further provides that nothing in this agreement shall be construed to give either party the power to direct or control the daily activities of the other party, or to allow DHR India to negotiate or conclude contracts on behalf of the assessee, or to constitute the parties as principal and agent, employer and employee, franchisor and franchisee, partners, joint venture partners, co-owners, or otherwise as participants in a joint undertaking. It also makes it clear that DHR India has no right or authority to assume or create any obligation of any kind, express or implied, on behalf of ....
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....es, the assessee is to be remunerated at cost plus markup at arm's length basis. Clause 4 of this agreement defines the status of DHR India as an independent contractor which does not have and cannot represent itself as having any authority to enter into any obligation on behalf of the assessee or to bind the assessee contractually in any way. It also stipulates, DHR India has no authority to negotiate or conclude or procure any contract or order on behalf of the assessee or any of its group companies or otherwise bind the assessee or any other group companies in any way in this regard. It also provides that DHR India shall conduct or deal with any potential or existing customers in a manner that may lead to the belief that DHR India has the authority to conclude the terms of the contract or to bind the assessee in any manner. It also provides that DHR India may take up/provide such services to any other parties if such arrangement does not prejudice the assessee or its group associates in any manner. Thus, even the Marketing Support Agreement makes it clear that DHR India does not have any authority or power to conclude contracts or enter into any negotiations with the customers o....
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....makes it clear that any replacement of products/spares under warranty/maintenance has to be provided by DHR India out of its own inventory and DHR India will have the right to either get a replacement from assessee or cross charge the cost to the assessee. Therefore, the terms of the agreements make it clear that assessee does not have a warehouse or sales outlet in India to constitute a fixed place PE in India under Article 5(1) of the Treaty. Thus, in our view, the conclusion drawn by the Assessing Officer that the assessee has fixed place PE or dependant agent PE is not borne out from any cogent material/evidence brought on record. 24. Unfortunately, learned DRP has not properly appreciated the facts and simply adopted the version of the Assessing Officer. There is nothing on record to suggest that the assessee is utilizing the premises of DHR Holding India Pvt. Ltd. either as warehouse for storage of its products or as a sales outlet for soliciting/procuring orders from Indian customers. Further, there is no cogent material on record to demonstrate that DHR Holding India Pvt. Ltd. habitually exercises authority to conclude contracts on behalf of the assessee or maintai....
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.... so because the revenue authorities have failed to discharge their initial burden of proving such fact. 27. As regards DHR India constituting the dependant agent PE, we have already deliberated on the issue and have held that no material has been brought by the departmental authorities to demonstrate that the Indian entity habitually exercises its authority to conclude contract etc. in terms of Article 5(8) or its activities are wholly devoted on behalf of the assessee. Thus, there cannot be any PE under Article 5(8) and 5(9) of the Indian - Singapore Tax Treaty. Thus, applying the legal principle to the facts emerging on record, we hold that the assessee does not have any PE in India. Therefore, in absence of PE, the business profits of the assessee cannot be taxed in India. Accordingly, the additions made by way of attribution of profit to the PE in India deserve to be deleted. Accordingly, we do so. 28. For the sake of completeness, we must observe, in course of hearing, learned counsel for the assessee had taken an alternative contention to the effect that, even assuming that assessee has a PE in India, no further attribution of profit can be made to the PE as....