TaxTMI 
TaxTMI 
2023 (4) TMI 1089
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..... The Appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab initio addition the original assessment order of the Assessing Officer be restored. 2. On the facts and circumstances of the case and in law, the CIT erred in holding that the assessment order is erroneous and prejudicial to interest of revenue on the issue of profits attributable to Appellant's Permanent Establishment ('PE') in India even though the same had been discussed and scrutinized by the Assessing Officer in detail while framing the assessment under section 143(3) of the Act and passing order dated 15 April 2021. The Appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab initio. 3. Without prejudice to Ground numbers 1 and 2, on the facts and circumstances of the case and in law, the CIT erred in holding that the method of computing profits of Rs. 4,79,33,403 attributable to PE as adopted by appellant is inappropriate whereas the CIT has adopted the same method and arbitrarily changed allocation of weights of....
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....sidering that since the PE in India was remunerated at arm's length price no further attribution of income is warranted as per decision of Hon'ble Supreme Court in the case of Morgan Stanley & Co. 292 ITR 416 (SC) and thus the original assessment order of the Assessing Officer is not erroneous and prejudicial to interest of revenue. The Appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab initio." 03. The assessee has also raised following grounds of appeal for A.Y. 2019-20:- "1. On the facts and circumstances of the case and in law, the order passed by the CIT under section 263 of the Act enhancing and modifying the assessment framed under section 143(3) of the Act vide order dated 29 October 2021 as erroneous and prejudicial to the interest of the revenue is without jurisdiction, bad in law and void ab-initio. The appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab initio and the original assessment order of the Assessing Officer be restored. 2. On the facts and circu....
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....ofits attributable to its PE in India should be determined on net basis after granting deduction of full operating expenses incurred by the appellant from the gross profit to derive income attributable in India. 6. Without prejudice to Ground number 1, 2, 3, 4 and 5 above, on the facts addition circumstances of the case and in law, the CIT erred in not applying the operating profit ration of 6.70% for computing the profits attributable to India PE which would have been in line with the decision in the case of Rolls Royce PLC 339 ITR 147 (Del) as relied on by the CIT himself to compute the income of the Appellant. The Appellant prays that the CIT to be directed to apply 6.70% operating profit ratio to arrive at net profit attributable to India operations. 7. Without prejudice to Ground numbers 1, 2, 3, 4, 5 and 6 above, on the facts and circumstances of the case and in law, the CIT erred by not considering that since the PE in India was remunerated at arm's length price no further attribution of income is warranted as per decision of Hon'ble Supreme Court in the case of Morgan Stanley & Co. 292 ITR 416 (SC) and thus the original assessment order of the Ass....
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....for scrutiny was the large claim of refund, which has arisen because of ratio of attribution of profit. The learned Assessing Officer has not applied his mind on the FAR analysis submitted by the assessee on the issue of attribution of income to the permanent establishment. The learned Assessing Officer has also not conducted proper enquiry. Further, marketing expenses accepted as borne exclusively by the assessee is again incorrect and without due application of mind. Therefore, the profit further reduced by the assessee by Rs.11.68 crores is not correct. Accordingly, a notice under Section 263 of the Act was issued on 4th April, 2022 holding that the assessment order passed on 29th April, 2021, was erroneous and prejudicial to the interest of the Revenue. 07. The assessee submitted his reply stating that the learned Assessing Officer has conducted specific enquiry as per notice dated 24th February, 2021, which was replied by the assessee on 2nd March, 2021. Assessee further submitted that assessment proceedings from A.Y. 2013-14 to A.Y. 2019-20, attribution rate of 24% is consistently applied and accepted. Therefore, there is no error in the assessment order. It was further st....
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....ssessee appellant has called into question correctness of the order dated 25th March 2022, passed by the learned Commissioner of Income Tax, under section 263 r.w.s. 143(3) of the Income Tax Act, 1961, for the assessment year 2017-18. The first and core grievance of the assessee is as follows: On the fact and in the circumstances of the case and in law, the order passed by the CIT under section 263 of the Act, enhancing and modifying the assessment framed under section 143(3) of the Act vide order dated 18 December 2019, as erroneous and prejudicial to the interest of the revenue is without jurisdiction, bad in law and void ab initio. 2. To adjudicate on this appeal, only a few undisputed material facts need to be taken note of. The assessee before us is a company incorporated in, and tax resident of, Malaysia, and there is no dispute on the point that the assessee is entitled to the benefits of the India Malaysia Double Taxation Avoidance Agreement [Indo-Malaysian tax treaty, in short]. The assessee group has a wholly owned subsidiary in India, by the name of MFE Formwork Technology India Pvt. Ltd (MFE-India, in short). The assessee has entered into a Marketing S....
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....e to the activity of PE in India from the sales made in India. From the Computation of Income filed by the Assessee, it is seen that for the purpose of determining the profits attributable to tax in India, the Assessee Company had attributed 24% of Gross Profits based on FAR Analysis carried out. The AR explained the basis of Computation as under: Step Particulars Basis Amt (Rs) 1. Sales made in India Sales made to customers in India during the relevant financial year. 1,691,493,506 2. Less: Cost of Sales In ratio of overall cost of sales incurred by the Assessee Company for global operations, based on the Global Financial Statements of the Assessee Company. 1,305,157,104 3. Gross Profits from Sales made in India Sales as reduced by proportionate cost of sales (Sr 1 - Sr 2) 386,336,402 4. Profits attributable to Indian Operations 24% of Gross Profits. The rate of 24% has been determined on the basis of a detailed FAR analysis based on Function Performed, Asset Deployed & Risks Assumed by each party. 9,27,20,736 5. Less: Marketing Fee paid to agent (MFE Formwork Technology India P Ltd) in India As per the Marketing....
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....PE in question. It was worked out at 35%, as exactly was the profit rate in Rolls Royce (supra) and that is what, according to the learned Commissioner, was supported by the DAPE‟s FAR analysis as well. The learned Commissioner observed that based on this decision, and the revised FAR analysis, the profit attribution comes to 35%. The matter was remitted to the file of the Assessing Officer for passing consequential order to give effect to the findings of the learned Commissioner. The assessee is aggrieved and is in appeal before us. 5. When this appeal came up for hearing, it was noticed that admittedly the form of permanent establishment is a dependent agent permanent establishment (DAPE), and there also does not seem to be any controversy about the position that the assessee has paid an arm's length remuneration for the services rendered by the agent constituting the DAPE, i.e. MFE-India, as there is no ALP adjustment in respect of the payment made by the assessee to the MFE. Yet, there is a dispute about the FAR analysis, but that is because the assessee has proceeded on the dual taxpayer approach, recognizing the distinction between the dependent agent and the d....
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.... it the case of the Commissioner that such an ALP adjustment was warranted on these facts. Learned counsel submits that for this short reason alone, the impugned revision proceedings must be quashed. Without prejudice to this line of argument, he, however, seeks to argue the matter on merits as well. Learned Departmental Representative, however, points out that once an assessee opts for the computation of profits on a certain basis, the Commissioner was fully justified in revising the assessment order in question to correct the obvious and glaring errors in the FAR analysis necessary for computation of profits on that basis. Learned Departmental Representative relies upon the stand of the authorities below, but he does not, however, dispute that the permanent establishment of the assessee is indeed a dependent agency permanent establishment. 6. We have heard the rival contentions, perused the material on record and duly considered the facts of the case and in the light of the applicable legal position. 7. We find that section 263 of the Income Tax Act, 1961 provides that "The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissio....
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....ictional High Court‟s judgment in the case of Set Satellite (supra), the answer is in affirmative. That is the view the coordinate benches of the Tribunal are taking, such as in the case of ADIT Vs Asia Today Ltd [(2021) 129 taxmann.com 35 (Mum)]. Clearly, therefore, the non-levy of short levy of taxes on the hypothetical profits of the DAPE, independent of the taxability of the dependent agent, cannot be said to be prejudicial to the interest of the revenueas long as the dependent agent has been paid an arm's length remuneration for the services performed. In the present case, it is not even the case of the Assessing Officer at any stage that the dependent agent has not been paid arm's length remuneration, even though there is repeated reference to the FAR analysis of the DAPE. Learned Commissioner has made reference to the Rolls Royce decision (supra) in this context of profit attribution to the PE, but then this is a decision in the context of a fixed place PE as evident from question number 2 before Hon'ble Delhi High Court, i.e. whether the office of Rolls Royce India Limited at New Delhi constituted a permanent establishment of the assessee under Article 5 of the Double....
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....has applied the TNM method to determine the arm's length price for its international transaction. It, however, clarified that the order is in respect of reference received for the assessment year 2002-03 and not for subsequent assessment years. 12. We may now consider the judgment in Morgan Stanley & Co. Inc's case (supra). The Appeals dealt with the Double Tax Avoidance Agreement (DTAA) between India and United States. That treaty advocated application of the arm's length principle or provided a mechanism for avoiding double taxation on income. The issue involved, Morgan Stanley and Company (for short, "MSCo.") and one of the group companies of Morgan Stanley, Morgan Stanley Advantages Services Pvt. Ltd. (for short "MSAS"). An agreement was entered into for providing certain support services to MSCo. MSCo. outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled such as back office operations, data processing and support centre to MSCo. On 5-5-2005 MSCo. filed its advance ruling application . The basic question related to the transaction ....
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....sidering the various methods by which arm's length price can be determined the Court observed as under:- "As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm's length principle we have quoted Article 7(2) of the DTAA. According to the AAR where there is an international transaction under which a nonresident compensates a PE at arm's length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by the Central Board of Direct Taxes. This is the key question which arises for determination in these civil appeals." After discussing the various issues the Court in its conclusion held as under:- "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....
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....than the arm's length price of services rendered by the dependent agent, in the present case, even though there is a finding about questioning the DAPE's FAR analysis. The Commissioner ought to have examined the arm's length price determination in respect of the services rendered by the dependent agent, in this context. That exercise has also not been done. 9. In view of the above discussions, as also bearing in the entirety of the matter, we are of the considered view that unless the order sought to be revised cannot be said to be prejudicial to the interest of the revenue, its being erroneous, even if that be so, cannot be said to reason enough to invoke section 263 of the Act, and the order cannot be said to be prejudicial to the interests of the revenue unless there is a categorical finding that the dependent agent has not been paid arm's length remuneration for the functions performed, assets employed and risks assumed by the dependent agent. The order being prejudicial to the interest of the revenue, inasmuch as the payment to the dependent agent not being at an arm's length, is a sine qua non for holding that the order is prejudicial to the interest of the revenue. ....