TaxTMI 
TaxTMI 
2025 (2) TMI 151
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.... services, construction, and finance, as well as business investment in various entities in Japan and overseas. Assessee, Itochu India Private Limited ('Itochu India') is a wholly owned subsidiary of Itochu Japan in India and undertakes the activities of general trading, procurement and supply of chemicals, textiles, machinery and equipment. Further, it also provides business support services to its associated enterprises and third parties. 2.1 In this case, the return of income was filed on 30.11.2017 declaring an income of 3,77,25,763/- and a draft order u/s 143(2) read with section 144C was served on the assessee on 27.12.2019, proposing certain variations in the, income returned. AO in passing the draft assessment order has placed reliance on the draft assessment order for AY 2013-14 and AY 2015-16. 2.2 The assessee has made sale of Apps. INR 1790,12,21,208 and AO observed that assessee could not produce even a single document/ contract to substantiate its position of no PE no tax in India pertaining to its so called business activities. 3. Now from the submission made before us by Ld. Sr. Counsel and as made before the tax authorities below it comes up that as....
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.... negotiating terms and conditions of the contract and finalization of prices of contracts with the Indian customers. Itochu India is not being compensated of all costs incurred and Itochu India bears all the cost arising from the performance of its duties. Further that the Itochu India is not habitually exercising authority in India to bind the assessee under any contracts with the Indian customers. It was also pointed out that the Transfer Pricing Report of Itochu India specifically mentions that the role of Itochu India is limited to act as a communication channel between the associated enterprises and the customers. 4. Now all these aspects when put up before the DRP, the same were not found sustainable and we consider it appropriate to reproduce the relevant part of DRP order here in below; Decision and Directions of the DRP "3. The Panel has very carefully considered the grounds of objections and written and oral arguments made on behalf of the assessee. The grounds raised by the assessee are descriptive and detailed. For the sake of convenience, they may be reduced to two core issues before the Panel for consideration: (a) Issue of permanent esta....
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....vt. Ltd shall perform following additional activities in connection with the Principal's purchase of the goods being imported to Japan. • • To negotiate the goods on behalf of the assessee and to render any other services. • To negotiate with suppliers on behalf of the assessee for amicable settlement of claims or complaints. • Any other services which may be authorized or instructed by the assessee in connection with conclusion or execution of the Purchase Contract. 3.1.2 He also noted that Itochu India Pvt. Ltd. was being compensated on all the cost incurred including the cost incurred for the contracts with the third parties. He, accordingly, held that Itochu India Pvt. Ltd. (Itochu India) secured orders in India for the assessee (which is controlling Itochu India) and Itochu India also negotiated and finalized the prices with the customers of assessee in India, though such authority was not vested in them through any agreement, but in practice they were deciding the prices and such prices were later on being confirmed by the assessee through documents. Such prices decided by Itochu India have the binding effect on....
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.... the assessee in both purchase and sales function which are clearly described in para 3 of the Agreement. The purchase and sales functions mentioned in the agreement are different from each other and cannot be intermixed and that the AO erroneously relied upon the activities undertaken by Itochu India in relation its obligations for purchase transactions to hold that Itochu India secures orders in India for Itochu Japan. The services in relation to the purchase of goods from Indian suppliers are said to be different and distinctly mentioned in the said agreement and were different from those relating to sale of goods. This fact was clearly highlighted to the AO during the course of assessment proceedings. It is further submitted that negotiation of prices with Indian Customers, as alleged by the AO did not relate to the activity of sales at all. Itochu India had no authority whatsoever to conclude contracts on behalf of the Itochu Japan with regard to sale of goods as available to it in relation to purchase of goods. Clause 2 "Power of the Agent" specifically provides that all contracts, orders, proposal and offer for sale or purchase of the goods shall be subject to final and form....
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....DRP) erred in making an addition of Rs.79.48.43,605/-and holding that Itochu India Private Limited (Itochu India'), and other agents constitute a dependent agent Permanent Establishment (PE') of the appellant in India in terms of Article & of the India- Japan Double Taxation Avoidance Agreement (DTAA'). 3 On the facts and in the circumstances of the case & in law, the Ll. AO has failed to appreciate that the Itochu India has not fulfilled either of the pre-requisite conditions to constitute a dependent agent PE of the Appellant in India. 4. On the facts and in the circumstances of the case and in law, the addition of Rs. 79.48.43.605 made in the final assessment order is bad in law and needs to be deleted/quashed as it is a mere replica of the assessment order passed for AY 2013-14 and AY 2015-16 and based on account of incorrect appreciation of facts. 4.1 On the facts and in the circumstances of the case & in law, the Ld. AO erred in holding that the Appellant has not produced evidence to substantiate its position that it does not have a PE in India and has failed to appreciate that the company has provided all the documentary evidences inclu....
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...., primarily engaged in trading activities with major source of income being revenue from such trading activities only. 5.4 The Ll. AO/ Ld. DRP also erred in disregarding the appellant's submission that the conditions mentioned in Article 5(7) of India-Japan DTAA to constitute a dependent agent PE are not satisfied in the present case and thus, Itochu India should not be considered as a PE of the appellant. 6. On the facts and in the circumstances of the case and in law, the Id. AO/ Ld. DRP have not discharged their primary onus to prove that the appellant has a PE in India as per Article 5 of India-Japan DTAA. 6.1 That the Ld. AO/ Ld. DRP has made unsubstantiated allegation on the appellant that the appellant has a PE in India and have not even controverted to the voluminous details filed by the appellant before the Ld. AO and the Ld. DRP. 7. Without prejudice to the above grounds, the Ld. AO/ Id. DRP has erred on facts and circumstances of the case and in law in attributing 50% of the total sales made by the appellant and assuming a profit margin of 10% to the alleged PE, thereby assessing the income attributable to the alleged PE amounting ....
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.... circumstances of the case and in law, the Ld. AO has erred in initiating the penalty proceedings under Section 270A of the Act. The above grounds are independent and without prejudice to each other. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing. 6. The submissions of Ld. Sr. Counsel have been rebutted by Ld. DR, submitting that this is second round of litigation and that AO has examined the fact about the presence of key personnel on secondment. Ld. DR has heavily relied the findings of the Co- ordinate bench in assessee's case for AY AY 2013-14 and AY 2015-16, and submitted that in this year too the issue may be restored to the files of AO for further verification of facts and assertions of assessee. 6.1 The Ld. Sr. Counsel however, contended that engagement of personnel on secondment is not the case of AO. It was submitted that these personnel were employees of ITOCHU India. 7. Giving thoughtful consideration to the material on record we find that following is the summary of International transactions entered into by t....
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....y the Principal terms of payment for each transaction shall be arranged as follows : 1) In case of the export of the Goods from Japan irrevocable letter of credit to cover payment shall be opened by or for a customer in the Territory by cable or airmail immediately after a sales contract is finalized. 2) In case of the import of Goods into Japan irrevocable letter of credit shall be opened by the Principal i by cable or airmail immediately after a purchase contract is finalized. (e) The Agent shall try to minimize the increased costs such as minimum freight charges, government imposition and others that the Principal may encounter in the course of carrying out a contract with buyer or seller in the Territory." 8.2 Then as to commission in clause 5 of the agency agreement it is agreed as follows; "5. COMMISSION The Principal shall pay commission to the Agent at the rate described in the Schedule (A) hereto for all transactions with sellers or buyers of the Goods in the Territory made by the Principal with the assistance of the Agent as paragraph 3 including the transactions made as a result of dealings under paragraph 2 (b) hereof. ....
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....1. The functional analysis of the two entities as per the TP study, available in PB at page no.77-129 reveals that as far Negotiation with suppliers is concerned Itochu Japan negotiates prices and other terms with the suppliers. Itochu India does not negotiate price, etc. with suppliers. The role of Itochu India in identification of suppliers, and in negotiation processes with suppliers is very limited. Services rendered by Itochu India to Itochu Japan are recommendatory in nature and decision as to the sale / purchase is taken by Itochu Japan directly. Also, the final decision of approving/ rejecting the supplier (along with prices) lies with Itochu Japan, and ltochu India only facilitates the negotiation process. 11.1 In contract with suppliers Itochu Japan is the party to contract with suppliers and therefore bear any consequential liability. Itochu India does not enter into contracts with suppliers. In trading transactions, Itochu India enters into contracts with Itochu Japan from whom it takes title to the goods. 11.2 In regard to the Identification of customers. The majority of India customers are either existing customers of Itochu Japan i.e. companies having headquart....
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....acts with the customers and bears the consequential contractual liability. However, such liability is passed on to the supplier since all orders are confirmed orders and are entered into on back-to-back basis. 11.7 In marketing, since the Itochu Group does not sell products directly to consumers, marketing is not an extensive activity for any Group member. Nonetheless, having a strong reputation across a diverse range of companies and industries is an important business driver for the Group. Itochu Japan decides the brand image for the Itochu Group globally. Itochu India is responsible for coordination, keeping contacts and providing current economic information to Itochu Japan on a regular basis to enable Itochu Japan to consider these factors in formulating its strategy for India. 11.8 In regard to the ordering and order processing, Itochu Japan receives, negotiate, and process all sales orders for third party customers in India. For trading transactions, Itochu India is responsible or receiving and processing sales orders for Indian customers. 11.9 As far the pricing is concerned, Itochu Japan is solely responsible for developing the pricing for products and services. I....
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....esponsible for staying abreast of market, regulatory, and political conditions in India and updating Itochu Japan on a regular basis to enable them to consider these factors in formulating its strategy for India. Itochu India undertakes industry analysis and identifies industry trends and business opportunities on a continuous basis in India with the objective of understanding the prevalent demands/ market price, competitive environment and trends in the industry. This is based on specific requests from Itochu Japan. Itochu India provides the results of its research to Itochu Japan in order to enable them to undertake decisions. Itochu India collates such information through various sources such as published reports, journals, newspapers, magazines and attending seminars organized by industry trade bodies. 11.14 However, Itochu Japan and Itochu India are responsible for their respective administrative, financial and legal matters, "they may coordinate certain activities, and may rely on certain central systems (e.g., information technology System). 11.15 Coming to facilitation support by Itochu Japan (resultant commission income for Itochu Japan) we find in certain cases, Ito....
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....of the India-Japan DTAA provides that to constitute a Dependent Agent PE, it is necessary that the following conditions are satisfied: "7. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 8 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if (a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would hot make this fixed place of business a permanent establishment under the provisions of that paragraph;" 15.1 In this regard, based on the agency agreement we find that ITOCHU India does not have any authority to conclude any contract on behalf of ITOCHU Japan in India in relation to the sale activities. ITOCHU India does not have the power to negotiate any term of the contract with the Indian customer. Thus, the first condition is no....
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....th price, no further profits can be attributed to such PE in accordance with the provisions of the DTAA. In this regard, the case of assessee is also that for the preceding years, the transaction of receipt of service fees by ITOCHU India from the Assessee was also examined by the Transfer Pricing Officer and was found to be meeting the arm's length criteria. 17. Then the Revenue cannot dispute the fact that the major sources of Itochu India is from independent trading activities undertaken by it. The audited financial statements of Itochu India for the year ending 31st March, 2017 is available at pages 33 to 62 of the paper book and we find that sales of traded goods mentioned at page 53 of the paper book under 'Revenue from operations' is Rs.628,15,19,264/- and the details of traded goods is provided along with purchase of stock in trade of the traded goods which are similar to the details of sales of traded goods. Further, going through the copy of non-consolidated financial statement of Itochu Japan for the year ending 31st March, 2017 available at pages 63 to 76 of the paper book, we find that the total trading transactions for the year ending 31st March, 2017 was Rs.44,70,....