AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 982
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....missioner of Income Tax, Circle International Taxation 2(1)(1), New Delhi (ACIT) u/s 143(3) r.w.s. 144C(13) in pursuance of directions issued by Dispute Resolution Panel (DRP) is bad in law and void, being contrary to law and principles of natural justice. 2. That the Learned ACIT has erred in assessing and computing Business loss for the year at Rs. 25,68,94,846 as against returned business loss of Rs. 26,19,37,833 thereby making an addition of Rs. 50,42,981/-. 3(a) That the Learned ACIT and DRP have, on mere surmise and guesswork, erred in law and on facts in holding that an income of Rs. 50,42,981/- in relation to contracts with DFCCIL for Offshore Supply of equipment, is directly attributable to the assesse's Permanent Establishment (PE) in India and consequently taxable in India. 3(b) That the Learned ACIT and DRP have erred on facts and in law in ignoring that the offshore supplies were made from outside India and no part of the activities relating to Offshore supplies were carried out by the assessee in India. 3(c) That the learned ACIT and DRP have grossly erred in law and on facts that consideration for sale of equipment from Japan was l....
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....he order of Assistant Commissioner of Income Tax, Circle International Taxation 2(1)(1), New Delhi (ACIT) u/s 143(3) r.w.s. 144C(13) in pursuance of directions issued by Dispute Resolution Panel (DRP) is bad in law and void, being contrary to law and principles of natural justice. 2. That the Learned ACIT has erred in adding an amount of Rs. 90,55,226/- to the returned income thereby reducing the amount of Business loss to be carried forward in comparison to the amount claimed in the return of income filed by the assessee. 3(a) That the Learned ACIT and DRP have, on mere surmise and guesswork, erred in law and on facts in holding that an income of Rs. 90,55,226/- in relation to contracts with DFCCIL for Offshore Supply of equipment, is directly attributable to the assessee's Permanent Establishment (PE) in India and consequently taxable in India. 3(b) That the Learned ACIT and DRP have erred on facts and in law in ignoring that the offshore supplies were made from outside India and no part of the activities relating to Offshore supplies were carried out by the assessee in India. 3(c) That the learned ACIT and DRP have grossly erred in law and on ....
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....hat the assessee filed its return of income for the assessment year under appeal declaring total income of Rs. 45,27,08,220/-. The case was selected for complete scrutiny. In response to the statutory notices issued by the Assessing Officer (AO), the assessee filed the reply regarding details of off-shore supply made by the assessee during the year under consideration. After considering the submissions of the assessee the AO passed a draft assessment order, whereby he proposed addition of Rs. 50,42,987/- to the returned income. Aggrieved against this the assessee preferred its objections before the learned Dispute Resolution Panel ("DRP" in short), who after considering the objections of the assessee, issued certain directions. However, the proposal regarding profit attributable to the India PE @ 35% as computed at Rs. 50,42,987/- was confirmed by the learned DRP. Thereafter the AO passed the impugned assessment order. 4. Apropos to the grounds of appeal learned counsel for the assessee has filed written submissions. For the sake of clarity the submissions of the assessee are reproduced as under: "1. Facts of the case 1.1 The assessee, Hitachi Ltd. is a Japanes....
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.... The assessee has offered the entire amount receivable under Onshore portion of the contract to tax in India and paid tax on NetProfit basis. The Offshore portion for supplies made from outside India are not offered to tax in India as the same relates to supply of goods manufactured in Japan and no part of the activity is attributable to the operations of the PEs in India. 2. Additions made by Learned AO in the assessment order 2.1 The Learned AO, while framing the Assessment Order, made additions to total taxable income of the assessee amounting to Rs. 50,42,987 in AY 2018-19 and Rs. 90,55,2267- in AY 2019-20, by attributing 35% of the Offshore Portion to the PE in India. Further Global profit rate of Hitachi Ltd pertaining to AY 2018-19 (6.87%) was considered as profit from operations to arrive at taxable income of both the years. It may be noted that the income from onshore supply and onshore services were already offered for taxation by the assessee as Business Income. We would like to bring before your kind notice that the Learned AO, in his order, has not given any basis for attributing part of the Offshore Portion relating to supplies from outside ....
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....r: ".....With reference to paragraph 1 of article 7 of the Convention, it is understood that by using the term 'directly or indirectly attributable to the permanent establishment', profits arising from transactions in which the permanent establishment has been involved shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions. It is also understood that profits shall be regarded as attributable to the permanent establishment to the above-mentioned extent, even when the contract or order relating to the sale or provision of goods or services in question is made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment...." The DTA read with its Protocol makes it amply clear that direct and indirect attribution of profits to the PE refer to involvement of the PE in those transactions. Therefore, where the PE of the assessee is not involved in manufacturing or procurement of the offshore supplies, there can be no question of attribution of any profit arising thereon on the Indian PEs. Following the Doct....
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....e having being subjected to tax in India on the activities undertaken related to onshore supplies and services, including custom clearance, it is submitted that the notional profit of 6.87% and attribution of 35% thereof is, in any case, excessive and unjustified." 5. Further, learned counsel for the assessee placed strong reliance on the decision of the Hon'ble Delhi High Court rendered in the case of CIT (International Taxation) Vs. Nokia Solutions and Net Works OY [2023] 147 taxmann.com 165 (Delhi)]. He contended that in view of the decision of the Hon'ble Delhi High Court, no addition could have been made as no profit on offshore supplies can, in any case, be attributed to the PE as offshore portion of the contract is already a loss at operational level. Moreover, the lower authorities failed to appreciate the fact that the Project Office had no activity in respect of the transaction in question. The only activity of Project Office was to the extent of customs clearance. Even otherwise also the attribution of profit is highly excessive which cannot be sustained.] 6. On the other hand, learned DR supported the orders of the lower authorities and submitted that there is no ....
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....r its services by the customer DFCCIL for its shipping and transportation activities. After collection of equipment from Hitachi Ltd., Japan, Mitsui Co. Ltd. shipped the equipment to India and delivered the goods at site in India. Though custom clearance of offshore equipment supply was the responsibility of Hitachi Ltd. Indian Project Office, however, all activities in relation to the same are carried out by M/s Mitsui & Co. Ltd. and goods are only passed through the Project Offices for the purpose of customs duty compliance in India including payment of customs duty and IGST, which in turn was charged back to Hitachi Ltd. Japan by the Project Office. The activities relating to customs clearance are covered under the scope of work for Onshore portion of the contract. Hence, as per the terms of contract with DFCCIL, the offshore goods supplied from Japan were handed over to M/s Mitsui & Co. Ltd. in Japan for transportation and delivery at site. Thus, no activity in respect of offshore portion of the contract is attributable to the PEs of assessee in India. 7.2. We have given our thoughtful consideration to the material available on record. The Revenue has not disputed the fact t....
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....involving. Same business as carried out by the Appellant) as mentioned in the PB Volume C-page 936, at 949-950 (para 287). The Special Bench held that the Appellant Company's world wide Net Profit margins as per its audited accounts are to be applied for determining the quantum of the income to be attributed to the P.E. The effect being if the Appellant Company is in net loss as per its audited accounts or the calendar years 2009 and 2010, which relate to the present A.Y. 2010-11, there would be no profit or income attributable to the P.L. There are losses in both years as per the audited accounts. PB- Volume A of Compilation page 164, at 169 and page 180 at 185. 21. The relevant portion of the said Special Bench Judgment is quoted herein below (page 287 of Volume C, at page 949- 950): "287 .... Taking all these into consideration, we consider it fair and reasonable to attribute 20% of the net profit in respect of the Indian sales as the income attributable to the PE: The following steps are involved in computing the income attributable to the PE: First the global sales and the global net profit have to be ascertained. From the accounts prese....
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....19, at 723 of Volume B of the Compilation. For the - sake of convenience, Article 7(1) is reproduced hereunder: "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprises 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 that permanent establishment. 25. Article 7(1) thus provides as under: NEUTRAL CITATION NO: 2022/DHC/005483 ITA 503/2022 Page 6 of 8 "(a) The profits of an enterprise can ordinarily be taxed only by the country in which it is located. (b) If however, the enterprise has a P.E. located in another country (which is also a signatory to the DTAA), through which it carries on its business, then a portion of its profits, to the extent it is attributable to the P.E. can be taxed in the other country." 26. On a plain reading of Article 7(1) of the DTAA, the question of attributing profits to the P.E. arises only if the foreign enterprise is making a profit. This is....