TaxTMI 
TaxTMI 
2024 (3) TMI 1384
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....ee. The coordinate Bench of the Tribunal has decided only on the issue of existence of PE, but not adjudicated the part of attribution of profit as the same was academic. 2. As against the orders of the Tribunal dated 26/12/2022 and 29/04/2022 for A.Y 2017-18 to 2019-20, the Department of Revenue approached Hon'ble High Court of Delhi in ITA No. 800/2023 & CM APPL No. 66565/2023, ITA No. 801/2023 & CM APPL No. 66672/2023 and ITA No. 803/2023 and CM Appeal No. 66727/2023. The Hon'ble High Court, vide order dated 21/12/2023 noted that the Tribunal has dealt only with first issue and concluded that the assessee neither fixed place (PE) nor a dependent PE in India as the Tribunal reached the said conclusion, observed that the other issues was academic. Further observed that as the assessee had raised an alternative plea concerning the second issues, without disturbing the orders of the Tribunal and with the consent of the parties, remitted the matter to the Tribunal for rendering a decision with regard to second issue i.e. attribution of profit. The Relevant portion of the order of the Hon'ble High Court is reproduced as under:- 7. The record shows that two issues a....
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....e in complete violation of the various legal principles, applicable provisions of DTAA (Double tax Avoidance Agreement) and international guidance set out in this regard. Ground 6: The Ld. AO and the Hon'ble DRP grossly erred in law in ignoring the jurisprudence of the Hon'ble Supreme Court in the case of DIT vs. Morgan Stanley [2007] 7 SCC 1 holding that once the AE is remunerated on arm's length basis, there should be no further attribution. Ground 7: On the facts and circumstances of the case, the Ld. AO/ Hon'ble DRP erred in attributing excessive profits to the alleged PE on an ad-hoc and arbitrary basis, by not considering commercial and economic factors governing the business of the Appellant and completely ignoring all submissions of the Appellant in this regard. In doing so, the Ld. AO erred in: 7.1 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 transaction; 7.2 I....
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....he functional and factual analysis) (ii) the remuneration of any such dealing with reference to the functions performed, assets used and risk assumed by the enterprise through the PE. Since in the present case the functional analysis carried out in step 1 by the Hon'ble Tribunal was already answered in negative that the India entity did not perform any additional functions that would lead to creation of a PE in India, the remuneration for the same would ideally be NIL Thus, the amount of profits already offered to taxes by the Indian entity should be considered to be at arm's length and no further attribution is required. Owing to the following: Methodical benchmarking analysis submitted by the Appellant on a without prejudice basis DHR India has received the following remuneration from AB Sciex w.r.t. provision of services which were alleged to create a PE in India: * DHR India has received the following remuneration from AB Sciex w.r.t. provision of services which were alleged to create a PE in India: (i) Commission of 9% under the Sales Commission Agreement (ii) Cost-plus arm's length markup(10%) under the Mark....
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....has filed a written submission which is reproduced as under:- "11. In this regard as seen from the above assessment order, the transactions between the assessee and it's AE are reported to be at arm's length with respect to the reported transactions as per the Transfer Pricing documentation. The functions/activities as performed by the assessee's AE, DHR India as PE of the assessee are additional functions/services such as DHR India acting as an Indian representative of the assessee company, maintains inventory warehouse in its premises, habitually exercised a predominant role in negotiating and concluding of contracts, for which no attribution has been made by the assessee since the assessee all along held that it does not have any PE in India. In view of the above, once it is held that the assessee has a PE in India, there is requirement for attribution of profits to the PE of the assessee, namely DHR India for the additional functions/ activities and services (as PE) performed by it. 12. Regarding the rate of attribution, the assessing officer has taken support from decision of Hon'ble Delhi ITAT in the case of Rolls Royce P/c. v. DDIT (2008) 11....
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.... terms of the Contracts between the assessee and DHR India it is clearly established that DHR India was undertaking activities/ functions that were beyond the scope of the said commission agreement. Hence, it cannot be said that DHR India has been adequately compensated at arm's length. Further, even if no adverse inference is drawn by the Transfer Pricing officer in the case of DHR India on the arms length nature of the commission transaction between the assessee and DHR India, it was not possible for the TPO to comment on the additional functions carried out by DHR India in the capacity of the dependent agent PE of the assessee in India. Furthermore, the additional functions performed by DHR India would also not have been reported by DHR India in its Form 3CEB and TP study. Hence, the arm's length transaction and no further attribution argument of Morgan Stanley Case cannot be relied upon by the assessee in the present case. It is pertinent to mention here that the case of neither the assessee company nor its PE, DHR India has been referred to the TPO. (vi) Lastly the assessee contended that employees referred to in the Statement recorded u/s 131 viz Him....
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....ndent agent PE of the Assessee in India. The Ld. A.O. attributed profits to the alleged PE of the Assessee i.e. DHR India by using the following methodology. # Particulars 1 Direct sales made by the Company to India customers including AMC income as provided by the Assessee was considered 2 • Resale discount of 46% provided to DHR India under Buy-Sell segment was considered as the gross profit earned by the alleged PE for the commission segment • Total remuneration on sales earned by DHR India through provision of support service (i.e. commission of 9% and cost-plus 10% mark up) was converted to an equivalent return on sales of 17%. • Net attribution was worked out to 46%-17%=29%. 3 Global profitability rate (9.5%) was applied to the effective remuneration expected to be earned in step 3 above. 10. It is the claim of the Assessee that the aforesaid approach adopted by the Ld. A.O. for attribution of profit to the alleged PE of the Assessee is flawed due to the following reasons:- "DHR India does not make 46% gross profit in the buy sell segment as owing to the following, DHR India bears custom duties o....
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.... under the Sales Commission Agreement (ii) Cost-plus arm's length mark up (10%) under the Marketing Support Service Agreement DHR India offered the above incomes to tax in India, which ought to be the maximum remuneration/attribution for the functions performed by it, since the Assessee does not have a PE in India. * Based on the functional, assets and risk analysis of the alleged PE, the Assessee has undertaken a methodological search on public databases to identify independent distributors in India engaged in sale of similar products. * The Gross Profit Margin ('GPM') earned by independent distributors were adjusted to bring their GPM comparable to the commission earning entities considering the alleged PE was not performing the functions w.r.t. (i) Inventory; (ii) Credit holding; and (iii) Custom duty Results are provided below: Assessment Years Adjusted Average independent companies GPM 2017-18 13.64% 2018-19 11.80% 2019-20 15.50% 13. In view of this matter, since the AE has already been remunerated at arm's length, no further profit ought to be attributed to the alleged PE of the Assessee in India, this view is sup....