TaxTMI 
TaxTMI 
2022 (11) TMI 1561
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....9 issued by Deputy Commissioner of Income Tax, International Taxation Circle 2 (1) (here-inafter referred to as the 'AO') in pursuance to the directions issued by Dispute Resolution Panel -2 ('DRP'),Bangalore under section 144C(l 3) of the Income-tax Act, 1961 ('Act') on the following grounds: A. Corporate Tax Related: 1. No Permanent Establishment ("PE") in India i. The Ld. AO/DRP have erred in stating that the Appellant has a Permanent Establishment in India. ii. The Appellant does not have a Fixed PE nor Dependent Agent PE in India under the provisions of both the Act and the India-Singapore OT AA which was not appreciated by the AO/DRP. iii. The AO/DRP failed to appreciate that a separate assessment has already been initiated against Redington (India) Ltd, the Holding Company in India, for cross-charge of the expenses of the same 'Dollar Team' of the Appellant which is again said to form the PE, thus a disallowance in the Appellant's hands is unwarranted and lead to a double tax incidence. 2. Incorrect understanding of Business model i. The Ld. AO/DRP have fundamentally erred in factual u....
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....ill lead to double taxation. • the revenue stated in the audited books of accounts are net of commission paid to such partners. • accordingly, such sales made through channel partners ought to be excluded from PE. iv. Average ratio of asset, employee based on incorrect comparables: The Ld. AO/DRP have erred in adopting the average ratio of asset, employee by comparing it with Redington India which is wholly illogical as both entities are fundamentally not comparable. v. Ad-hoc risk at 20% attribution: The Ld.AO/DRP further erred in adopting an arbitrary risk attribution of 20% without any' basis and without appreciating that there was no risk whatsoever undertaken by the 'Dollar Team' in India. vi. Royalty double addition: The Ld. AO has erred in including the Royalty income again for the purpose of computation which is already included in the turnover of the Appellant, resulting in double taxation. vii. The Ld. AO/DRP have ended up in arbitrarily assuming the manpower requirement for the Appellant's business with a particular quantum of profitability/turnover exceeding their jurisdiction 5. Err....
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....sence in various geographies viz., India, Middle East, turkey, Africa, Singapore and South Asian countries. A TDS survey was conducted at the premise of the M/s. REDIL, wherein certain details were found which showed that the assessee, M/s. RDPL, is having a Permanent Establishment (in short "PE") in India. During the course of survey conducted on 12.12.2017, it was noticed that the team called 'Dollar Business' was identified from the employee list and on a detailed enquiry with the sales staff, it was found that the said 'Dollar Business' pertains to the USD business of Indian customers like Cognizant Technology, Sify Technology, Zoho Corporation, etc. It was further noticed that the 'Dollar Team' of employees of M/s. REDIL oversee the import requirements of customers of M/s.REDIL. It was further noticed that the 'Dollar Business' is the same business with the distinction that the billing was done in USD instead of INR and such request is usually made by companies having Units in SEZ etc., who can avail import duty benefits from imports made in USD. During the course of survey, employees of 'Dollar Team' were questioned about the work being done by them. At the same time, support....
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....he assessee in India for taxation. The AO while doing so, had considered statements of Mr. Prabhakaran, Sales Manager of 'Dollar Team' and Mr. Ashish Arora, who is head of Singapore operations of the assessee and observed that right from appointing staff required for Singapore operations to carry out various business activities in India for the assessee, the employees of M/s.REDIL, are doing the work. Therefore, said services come under dependent agency PE also. Therefore, the Assessing Officer opined that income is also liable to tax in India, even on this count. Therefore, rejected the arguments of the assessee that 'Dollar Team' of Indian entity was only doing back office work and all other work, including concluding contracts is lies with the assessee i.e. M/s.RDPL, Singapore, and thus, assessed total income of the assessee to tax in India. As regards profit attribution, the AO after considering total employee cost of M/s.REDIL& M/s.RDPL, Singapore, and also asset base, come to the conclusion that the assessee is having 89.65% profit attributable to Indian operations. Therefore, computed net profit of the assessee at Rs.19,64,44,881/- and attributed 89.65% profits to Indian ope....
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....y the AO after due verification. The AO based his findings heavily on the findings of survey during which the existence and functioning of "'Dollar Team'" came to light. Hence it is relevant to delve on the issue of "'Dollar Team'" and it's functions. As stated earlier, this is a specialized team employed by REDIL in India whose primary/sole function is to take care of dollar-based purchases of Indian customers, meaning purchases which require import of goods and services. The AO discussed the issue at para 7 of her order REDIL has a host of customers in India. Most of their purchases are in Rupees meaning the Indian entity acts as a distributor for the supply. However, when the customers have a requirement to make zero duly purchases from their SEZ units etc., the distribution activity is referred to the "'Dollar Team' in REDIL office. That is when 'Dollar Team' is activated and the members of 'Dollar Team' perform all the ingredients of sales' function and post sales function. These functions include identification of suitable vendor for the customer. Negotiation of price etc., is done by the 'Dollar Team' of RED!!, except that the final billing is done in the na....
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.... to my team head as I am only aware of the prevailing circumstances. E. I am producing a sample copy of said proposal dl 30.10.2017 in respect of a proposed order from Cognizant Technology Solutions. F. On receipt of the purchase order from the customer, I have to receive a formal quote (ready to sell the agreed quantity at agreed rate) from the respective OEM. On receipt of the quote from the vendor by mail, I'll forward the same to the team which loads the order onto the vendor system through the online interface. The Proforma invoice will be generated automatically through our JBA based on purchase order given by the customer which will be downloaded and sent by me to the customer. G. Post order loading by Redington to the vendor interface, mail will be received from OEMs regarding the order status, readiness of the item ordered at the vendor facility. H. Based on that I will take a confirmation on the shipment plan from the customer. I. Mail will be sent to Mr. Muthu stationed at Singapore for both hardware. J. As per the agreed terms in the purchase order, payment follow up will be made by me. K. The terms in r....
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.... business models of REDIL and RDPL are different, it is contended that customer base of RDPL consists of entities like SE7 units, customers with duty scripts etc., who wish to avail duty benefits on import while REDIL caters to the requirements of local INR purchases. In this regard, it is seen that many customers who are big technology companies have composite requirements. They need purchases in INR for normal units and Dollar purchases for SEZ and duty free units. Further, even if the customer base are different, the role played by 'Dollar Team' cannot be overlooked. Further the assessee admitted that both RDPL and REDIL work through channel partners and commission is paid by them. The assessee contended that 'Dollar Team' performs only fulfilment activity and do not finalize the prices or sign-off the orders. But this assertion is not based on evidence. The AO has put on record sufficient evidence to show that 'Dollar Team' performed all the functions of distribution what the rest of REDTL performed. The AO demonstrated that RDPL establishment in Singapore was bare minimum with least deployment of assets and skeletal staff has no wherewithal to perform the distributor function;....
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....esident, unless his activities are limited to the purchase of goods or merchandise for the non-resident: or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not. include any business, activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by-the principal non-resident or nave a controlling interest in the princi....
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....ues are discussed at relevant paras of this Order separate adjudication is not warranted on these issues, : 2.7. With regard to the attribution of PE profits, the assessee alleged that AO erred in adopting the PBT ratio of Redington India (REDIL) which according to assessee is not comparable. The assessee contends that PBT ratio of RDPL should be used for profit attribution. The Panel has considered the issue. What needs to be attributed to PE is the profits of foreign entity i.e.RDPL; Singapore. The profits shown in the books of RDPL needs to be distributed between foreign entityand PE. Hence, we concede the argument raised by the assessee and that the margin of RDPL, Singapore should be adopted to arrive at the profits attributable to the PE. 2.8 The next issue of profit attribution is the allocation of ratio of profit to the PE. The AO allocated ratio of 17.73% and 82.27% between RDPL and PE (through REDIL). 'While working out the percent of risk the AO arrived at various risks as under: 1 Ratio of employee cost 11.02% 2 Ratio of assets 0.046% 3 Risks assumed by RDPL (estimated) 20% Average 10.35% (wrongly taken as ....
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....ferred to as 'Dollar Team' in respect of certain back-office operations. The support provided by the 'Dollar Team' is mainly that of acting as a communication channel between the assessee and the customer/vendor and channel partners. 8. The Ld. Counsel for the assessee further rejected observations of the AO in light of survey conducted u/s.133A of the Act, and submitted that the AO predominantly relied upon statement recorded from some employees of Indian entity called 'Dollar Team' and certain e-mail communications between the assessee and its holding company in India and came to conclusion that there is a fixed place of PE in India and dependent agent PE in India. The AO had mainly relied upon one junior employee namely Mr. Prabhakaran who was not even employed with the assessee during the relevant assessment year. Further, Mr. Prabhakaran himself in his statement highlights that if the customer is not satisfied with the commerce, then the customer is directed to report Original Equipment Manufacturers (in short "OEMs") for further negotiation. The sworn statement of Mr. Prabhakaran is contrary to statement of various representatives of customers and other senior employees an....
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....the impugned assessment year. The Revenue does not show that employee of a foreign company had travel to India to occupy the premise of M/s.REDIL and such a place was habitually available at the disposal of the foreign company through the persons of those employees in India. The Revenue has ignored the statement of all employees indicate that their work is confined to clerical or support activities such as invoicing purchase order, listing, credit evaluation, coordinating for payments and passing on all information relating to shipping, etc. The Revenue had also ignored the statement of clients of the assessee which clarifies the position of the assessee. Therefore, he submitted that merely on the basis of statement of one employee who was not employed during the relevant assessment year, the AO cannot take a stand that the 'Dollar Team' has performed all sales functions of the assessee in India and thus, said functions constitutes fixed place of PE in India. In this regard, he relied upon the decision of the Hon'ble Supreme Court in the case of E-funds IT Solution Inc. reported in [2017] 399 ITR 34 (SC). The assessee had also relied upon the decision of the Hon'ble Supreme Court i....
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....profit attributable to India sales made to other countries through channel partners must be excluded for attribution. The AO had also arrived at the attribution percentage by taking average of three components i.e. percentage of employee cost of the assessee as compared to that of M/s.REDIL, percentage of assets of the assessee as compared to that of M/s.RDPL and arbitrary risk, weightage of 20% to the assessee on the basis of invoicing is done under the name of the assessee. Accordingly, the average of 10.35% was attributed to the assessee and the balance 89.65% was attributed to the PE. Therefore, he submitted that if at all, it is held that there is a PE in India and profits is liable to tax, then a reasonable amount of profit needs to be attributed and in this regard, relied upon the decision of the Hon'ble Madras High Court in the case of Annamalais Timber Trust & Co. v. CIT reported in [1961] 41 ITR 781 (Mad.) and the decision of Special Bench of ITAT in the case of Motorola Inc. reported in 95 ITD 269. 13. The Ld.DR strongly supporting the order of the AO as well as the ld.DRP submitted that survey conducted u/s.133A of the Act, reveals that although the assessee is havin....
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....itute a PE in India. As regards, attribution of profits, the Ld.DR relied upon the findings of the DRP. In this regard, he has filed detailed written submissions, which has been reproduced as under: 1. Survey and detection of 'Dollar Business' of Redington India (REDIL); A survey operation carried out in the business* premise of Redington India (RED IL) resulted into detection of group of employees of Indian company REDIL were working as 'Dollar Team'and they looked after the business activities of appellant Redington Distribution Pte Ltd, Singapore (RDPL). i. In page no.5, the A.O had explained the 'Dollar Business'. Some of the Indian customers for their import requirement for I. T infrastructure booked the items to Singapore subsidiary in US dollar instead of INR for the import duty benefit of their units operating in SEZ. In the employee list certain employees were shown as being in the 'Dollar Business' Department. ii. Paragraph-6 is a crucial finding recorded by the A.O. It was recorded that the 'Dollar Business' was happening from India and was being performed by 'Dollar Business' team of Redington India (REDIL). iii. At paragraph....
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....fit on their goods imported from foreign countries. REDIL had the strong customer base in India over a period of years. In the year 2005 only, R.DPL was formed outside the country in Singapore. This fact is evident from the audit report of RDPL submitted by the company for the A.Y 2011-12 in the paper book. [refer page no.212]. To meet out their client's demand 'Dollar Business' of REDIL-India was started in the office premise of REDIL in India. 2.1 Whether any dispute that 'Dollar Team' of RED IL assisted those customers to get duty benefit of their units situated in SEZ? No dispute on the above facts. This was accepted categorically that the 'Dollar Team' of REDIL actively involved in this business to book the invoices in US$ value in the name of RDPL Singapore to enable the Indian customers to get duty benefit of their SEZ unit. 2.1 Whether the employees of RED IL, India engaged in the said business? YES. This has been proved by gathering sufficient material evidences from the survey premise of RED IL through a survey operation. 3. Recruitment and management of 'Dollar Team': How the 'Dollar Team' supported RDPL and who m....
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....REDIL already has existing INR business. REDIL developed client base over a period of years. RDPL, Singapore which is only a branch office of RED IL catered to the existing clients of RED IL for the zero-duty business of SEZ units. These evidences placed at page no.28 to 30. 4.1 Evidence from Financials of RDPL, Singapore: This fact is can also be supported with RDPL financials placed in paper book of the appellant at page number 236. Out of total receivables of 35,555,125 USS, nearly 75% of the receivable were from India. Srilanka and Bangladesh contribution was negligible. 4.2 Whether the credit term negotiations of RDPL were done by REDIL employees? YES. Attention is drawn to e-mail correspondences reproduced in P.No. l O & 11. This was also explained in detail by Mr.Prabhakaran, that is discussed at para-8 in page no.8 to 9 of the assessment order. 5. Who did vendor payment follow-up? REDIL or RDPL? Ample evidences were brought on record that only REDIL, Indian employees of 'Dollar Team' followed up the vendor payment on behalf of RDPL, Singapore. This was once again demonstrated through sufficient e-mails ....
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....ion no.3 dated 31.12.2017 is crucial. vi. At paragraph-12 at page no.15, he had discussed about the role of Sri N. Venkateshwara Rao, Dy. Manager (Credit). He is working in Redington India Ltd since January, 2006. The questions and replies given by him at question no.4,5.7 and 10 are crucial for the relevant issue on hand. In reply to question no. 10, he was able to give details of entire sales particulars of RDPL, Singapore. vii. At paragraph-13, the A.O had explained the entire process, activity done, activity of 'Dollar Team' of REDIL and activity of RDPL. He had summarized that all the activities were carried out by 'Dollar Team' of RED IL in India in a tabular Format. RDPL, Singapore only carried out packing, bill of lading, preparation of airway bill. viii. As per the findings of the AO, RDPL Singapore was only doing logistics service for sending the goods to various destination and rest of the activities were handled and controlled by REDIL-India 6. Process Flow Explanation-Demonstration that RDPL just provide logistic services for Units in SEZ: At paragraph-8, the whole process explained by Mr. Prabakaran, the team leader was dis....
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....e Assessment Order. It was mentioned that if Ashish Arora of RDPL was not available, the other employees of RDPL should have been addressed by the vendors in their e-mails and not to the employees of REDIL. If it was a simple back-office support, RED IL must have charged RDPL for all those services rendered. In the present case no such back-office support services were charged by REDIL. 8. Whether RDPL can be just a branch office of REDIL existed solely for bill trading in USS for the units operating in SEZ? YES. RDPL cannot function without the support of REDIL. It doesn't have any separate client base in India. The A.O in paragraph-13 of the order presented the functions of RDPL in a tabular format. This had clearly demonstrated that except preparation of packing list, bill of lading, airway bill and shipment plan coordination, no other activities were performed by RDPL. This fact was also confirmed in the sworn statement of Shri Abraham Cherian, recorded on 18.12.2017 u/s 131 of the IT Act. Attention is drawn to question no.14. He had mentioned the names of some of the RDPL employees, where all those persons he mentioned in the sworn statement were....
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.... by repeatedly mentioning that not even a single piece of evidence was available in the hands of Department to reopen the assessment for A.Y.2011-12. Whether it was correct? Answer is NO. Attention is drawn into page no.28 and 29 of the assessment order. This was the e-mail dated 22.11.2010 sent by Mani Kumar to Ashish Arora regarding Wipro orders. The Area Sales Manager, Mani Kumar has sent this mail to approve the order of Wipro. On the same day i.e. 22-11-2010 at 11.15 A.M. Ashish Arora sent reply to Mani Kumar by confirming that if the payment terms are okay In the above mail, Mani Kumar of 'Dollar Team' of REDIL was calculating the profit margin of Wipro. Manikumar requested Mr. Ashish to approve the same so that he can finalize the order. Another mail dated 30.09.2010 was A VP of Real-time solutions to Abraham Cherian. Mr. Chandrasekaran was a person working in A VP Finance and Commercial and sent the mail to Abraham Cherian regarding finalization of the terms and conditions. It is to be mentioned here that N.Venkateswara Rao(Dy. General Manager-Credit) has been working in REDIL since January, 2006. Sri Abraham Cherian, General Man....
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....e disproved the claim that the functions were performed by channel partners. iv. At paragraph-62, the A.O relied upon the Wipro mails as well as some of the mails from Oracle and held that it was REDIL people were following up the vendor payment of RDPL. Before Hon'ble ITAT, the appellant's counsel has only questioned and challenged the evidences gathered by the Revenue during the course of survey without giving their independent evidence that the entire business activities were totally managed only in Singapore. He could not come out with their set of evidences in support of their contention. 13. Whether RDPL, Singapore had any tangible or intangible asset? Analysis of Financials of RDPL, Singapore for the AY 2011-12: It is placed at page number 200 of the paper book 1. It was audited by Ernst and Young LLP. The directors are Sri. RangareddyJayachandran, Sri. Ramanadhan Srinivasan and Sri. Raj Shankar. 2. The profit for the year 31-03-2011 was 2,156,746 US$ and the Rupee equivalent was Rs.9, 70,53,570/ out of total sales of 225,766,277 US$. It is equal to Rs.1015.94 Cr approximately. 3. For such a huge....
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....dings recorded in the assessment order. ▷ Regarding attribution of profit, the findings given by the DRP is relied upon. ▷ It is pertinent to mention here that I have also made a written submission dated 18-02-2022 on defective Form-36B filed by the appellant company where I have brought to your attention that the appellant mentioned at first page that the name of the company as Redington Distribution Pte Ltd, Chennai. It is not only in the first Form-36B, but also in the revised form the same name and place was mentioned. It is for these reasons I have requested for the passports of the Directors of the appellant company. 14. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The facts borne out from the records indicate that the assessee is a part of Redignton Group, which is Indian based listed company. The assessee is a subsidiary M/s.REDIL. The group is engaged in the business of providing end-to-end supply chain solutions for all categories of IT products, Consumer & Lifestyle products. The assessee follows business-to business (B2B) model wherein, the company p....
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....onditions of sales. He further stated in his statement recorded during survey that except shipment of goods from Singapore Office, all other activities are carried out from Indian Office. The AO had also discussed the modus operandi of the assessee company in light of various email correspondence between the 'Dollar Team' of Indian holding company and assessee company in Singapore along with quotations submitted to customers and observed that the business of assessee company was totally carried out by 'Dollar Team' of M/s.REDIL. Therefore, he opined that there is a fixed place PE in India and also dependent agency PE in India of the assessee. 16. In light of above factual back ground, if you examine whether the functions carried out by 'Dollar Team' of Indian holding company constitutes a fixed place PE, one has to understand the term PE as defined in Article-5 of India Singapore DTAA. Article-5(1) of India Singapore DTAA, defines the term 'PE' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Similarly, Article-5(8) of India Singapore DTAA, defines the term 'dependent agent' PE which means where a person, other than an ....
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.... list, airway bill, has been prepared by Singapore Office. From the above, it is very clear that except preparation of shipping documents, other work has been done by 'Dollar Team' of Indian holding company. Therefore, we are of the considered view that there is a fixed place of PE of the assessee in India and thus, income of the assessee is liable to tax in India. Although, the Ld. Counsel for the assessee vehemently argued in light of statement of Mr.G.N.Nageswaran of Zoho Corporation and statement of Mr.Venkataraman of Sify Technologies that price offered by the assessee is subject to confirmation of OEMs and also OEMs are directly negotiating with customers, but other facts brought out by the AO in the statement of various employees, e-mail correspondence between the assessee and Indian employees, and copies of sample quotation issued to various customers, it is undoubtedly clear that the activities carried out by 'Dollar Team' of Indian holding company constitutes a fixed place of PE in India. Further, the arguments of Ld.Counsel for the assessee that work done by 'Dollar Team', is nothing but a back office, services are devoid of merit, because from the nature of work carried....
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....this case, there is no dispute of whatsoever with regard to existence of fixed place PE in India of the assessee, because of continuous occupation of 'Dollar Team' of Indian holding company premises and further, the business of assessee is continuously carried out from said location. Therefore, we are of the considered view that there is no error in the reasons given by the AO to hold that the activities carried out by a 'Dollar Team' of Indian holding company for the assessee constitute a fixed place PE of assessee in India. 18. As regards dependent agent PE, no doubt, onus is on the Revenue to prove that the assessee has a dependent agent PE in India and to show this, the Revenue has to prove that the 'Dollar Team' acted as agent and further, the agent is legally and economically dependent and also authority to conclude contracts and such contracts were habitually used. The arguments of the assessee that vendor directly negotiates with the customers in terms of pricing and credit and thus, the question of existence of dependent PE does not arise. The Counsel for the assessee further argued that the AO completely disregard the role of channel partners who have also been paid Ov....
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....bution of profits took unaudited turnover as the starting point which was found during the course of survey for computing the profit of the assessee. The DRP in Para No.2.7 of its directions directed the AO to distribute the profits shown in the books of the assessee between the assessee and the PE in India. The Ld. Counsel for the assessee submitted that the AO has included non-Indian region sales for the purpose of attribution of profits to PE in India and clearly, this is against the principles of taxation. He further submitted that without prejudice only the Indian sale should be the starting point. He further submitted that royalty receipts have been separately offered to tax and thus, same needs to be excluded from turnover for the purpose of attribution of profits. Therefore, he submitted that the AO may be directed to attribute a reasonable amount of profits to PE in India. In this regard, he relied upon the decision of the Hon'ble High Court of Madras in the case of Annamalais Timber Trust & Co. (supra) and also Special Bench Decision of ITAT in the case of Motorola Inc. (supra). 21. The Ld. DR, on the other hand, supporting the order of the DRP, submitted that the DPR ....