TaxTMI 
TaxTMI 
TaxTMI 
2022 (11) TMI 1561
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....national 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 understanding of the business model of the Appellant. ii. The Ld. AO/DRP ought to have appreciated t....
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..... 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. Erroneous interpretation of directions of Hon'ble DRP i. The Ld. AO has erred in not following the direction of the Hon'ble DRP which pacifically held that "profits shown in the books of RDP L needs to be distributed between the foreign entity" ii. The Ld. AO has erred i....
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....onducted 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, supporting documents like emails, etc., were checked. The Department has analysed statements recorded from employees of 'Dollar Team' and corresponding evidences which shows entire sales process from identification of customers through granting of credit till collection of receivables in this 'Dollar Business' was happening from India and was ....
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....or 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 operations. 5. Being aggrieved by the draft assessment order, the assessee has filed objection before the DRP-2, Bengaluru, and raised various objections against draft assessment order passed by the AO. Before the DRP, the assessee contended that the AO is erred in treating 'Dollar Team' of Indian entity M/s. REDIL, has fixed place of PE in....
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....n 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 name of RDPL The findings of the survey demonstrated that all the functions that are performed for sale in India for rupee business is exactly replicated in Dollar sales also except that the final billing and payment are done in the name of RDPL. The AO has reproduced the Stepwise functions performed by the 'Dollar Team' of REDIL at Para-7 and the same is reproduc....
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....ail, 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 respect of timing of payment i.e. credit or immediate will be decided by me. L. In case of any default by the customer, I will be consistently following up on the same with the customer. M. On receipt of payment, the sales cycle end there". 2.3. The assessee's primary contention is that RDPL has performed all the functions of distribution in case of "Dollar" based sales with the help of wide network of '"Channel partners" to whom commission is ....
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....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; Hence, we are unable to accept the arguments forwarded by the assessee. 2.5. With regard to the type of PE, it is seen that REDIL along with 'Dollar Team' has performed the functions of agent in India and DAPE is accordingly constituted in India. The AO in the Order discussed the legal provisions in view of Sec.5 and Sec.9 and the provisions of Indo-Singapore DTAA as under: "Sub Section 2 of Section 5 of the Act reads that - Subject to the provisions of this Act, the total inco....
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....eral 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 principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. Explanation 3, - Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India. Explanation 4.- For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant a....
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....apore 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 17.73%) 2.9 On careful consideration the Panel do not consider the estimation of risk on right footing. The employees cost, and assets of REDIL and RDPL are compared and the ratio is arrived at. As discussed by the AO in the order, Indian PE has performed all the major functions, assumed risks and deployed the assets, Marketing, sales collection and distribution in India are performed by the PE. The Singapore entity has skeletal staff and performed very minimal functions with regard to pronouncement and warehousing. Accordingly, as computed by the AO profit attribution of 10.35%. and 89.65% between Singapore entity and Indian PE should be computed. The financials provided do not show the revenue generated from outs....
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....r. 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 and therefore, cannot be relied upon. He further referring to the decision of the Hon'ble Madras High Court in the case of CIT v. S. Khader Khan Son reported in [2007] 300 ITR 157, submitted that sworn statement recorded during survey, has no evidentiary value and cannot be relied upon. Further, the Revenue has ignored the statement given by client i.e. Zoho Corporation from its employee Mr. G.N. Nagarajan and Sify Technologies from their employees Mr.V.Venkataraman, whereby it is evident that they negotiate directly with OEM. The Revenue ignored statement given by various other employees who were employed during the relevant year like statement of Mr. Marimuthu, Ms. Nalini, Mr. Venkateswara Rao, Mr. Abraham Cherian and all these....
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.... 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 in the case of UOI v. UAE Exchange Centre Ltd. reported in [2020] 425 ITR 30 and also the decision of Mumbai Bench of ITAT in the case of Airlines Rotables Ltd. v. JDIT reported in [2010] 44 SOT 368. 11. The Ld. Counsel for the assessee further referring to various documents submitted that the 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. In order to bring dependent agency PE, the agent is legally and economically dependent on the foreign company and that the 'Dollar Team' had authority to conclude contracts in India and such authority habitually used and further, such contracts were not purchase of goods or merch....
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.... 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 having a PE in India, but was not filing return of income. Further, during the course of survey, it was noticed that a group of employees called 'Dollar Team' of M/s.REDIL, was looking after the business activities of the assessee, M/s.RDPL, Singapore. The AO had explained the 'Dollar Business' and as per which, some of the Indian customers for import requirement, approaches the Indian holding company and the holding company staff facilitated import of goods through the assessee from Singapore for the purpose of availing duty benefit. During the course of survey, statements from various employees were recorded and in response to a specific question, they admitted that right from procuring orders from customers to recovery of receivables, all ....
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....sidiary 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- 7, the A.O recorded all the factual findings of the survey. Specifically, the modus operandi adopted for business between Cognizant and the appellant/ RDPL. iv. The Team Leader of 'Dollar Team', Mr.Prabhakaran had explained the process flow of the entire business and it was discussed by AO in detail at paragraph-8 by referring some of the email correspondences found and impounded during the course of survey. v. MrPrabhakaran had explained step by step the whole process from point no.A to N. It is starting with approach of procurement team at the respective customer place, understanding their future and current requirement, contacting respective OEM (Original Equipment Manufacturer), preparation of bill of materials, negotiating the deal, finalizing the deal, confirm....
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....heir 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 manages the 'Dollar Team' has been elaborated by the AO in various paragraphs. 3.1. Who recruited 'Dollar Team'? Whether RDPL or REDIL? Ans: The employees of 'Dollar Business' were recruited by REDIL. All their appointment letters, promotion, increment was given under the signature of HR team of REDIL. The AO reported the details in the assessment order. They were all in the pay role of REDIL, India. At paragraph-14 in page no.17, A.O recorded that hiring of 'Dollar Team' catering to RDPL was handled by Redington India Ltd on the request of RDPL. It was recorded that employees of the 'Dollar Business' were always recruited by Redington India, where their appointment letter, promotion, increment letter etc were given under the signature of Sri PS Neogi, Joint CEO and Sri Jabez Selwyn, HR head of REDIL team. Refer the chart reproduced at next page of the order. ....
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....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 found and impounded during the course of survey. This was demonstrated through Wipro mails scanned and presented in page no.28 & 29 and Oracle vendor mails also scanned and reproduced. 5.1 With whom the RDPL customers were interacting? For both INR business of RED IL and USD business of RDPL, the only contact point is the REDIL employees. This was demonstrated at paragraph 37 & 38 of the assessment order. 5.2 To whom the e-mails were addressed? i. The A.O demonstrated this at paragraph-42. The A.O referred that entire set of mails were addressed to Ashish Arora of RDPL, Singapore and all the other addressees were the persons belonging to REDIL 'Dollar Team'. In the next paragraph, he gave the finding that the business of RDPL arises from the existing customer base of REDIL wherever the customer wants duty free equipment for their SEZ unit. ii. If not Ashish why other employees of RDPL were not contacted? The assessee was trying to claim that when Ashish of RDPL was not available, the....
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....EZ: At paragraph-8, the whole process explained by Mr. Prabakaran, the team leader was discussed by the A. 0. He had categorically admitted that he used to approach the procurement team at the respective customer place, based on existing relationship. He had explained the process flow. The entire process flow was summarized at page no.9. 6.1 Whether the statement of Mr. Prabhakaran can be completely ignored? The appellant counsel relied upon the decision of Madras High Court in the case of CIT Vs. S. Khader Khan Son (2007) in 300 ITR 157 and pleaded that the statements recorded on oath u/s 133(A) of the I.T. Act do not have any evidentiary value. However, this decision was overruled by Bombay High Court in the case of Dr. Dinesh Jain Vs. ITO-11(2)-2 (2014) 45 taxmann.com 442(Bombay) and also Allahabad High Court in the case of Sanjeev Agrawal Vs. Income Tax Settlement Commissioner, Allahabad (2015)56 taxmann.com 214. Hon'ble ITAT, Chennai A Bench in the case of ITO Vs. N. Easwaran in ITA No.2117/Mds/2016 have analyzed all these decisions and held that though the Assessing Officer is not permitted to record statement on oath during the course of survey, merely because the ....
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....entioned in the sworn statement were working in logistic department only. Rest of the activities were all carried out by 'Dollar Team' of REDIL employees. He is working as a General Manager of RED IL since 2005. He had explained the nature of business operation from question no.8 to 14. REDIL, India formed a company in Singapore in the name of Redington Distribution Pte Ltd (RDPL) solely to raise some invoices in US$ for helping its existing clients in India to get import duty benefit of their SEZ unit. 9. Reason for reopening - Other evidences from e-filing: The reasons for reopening are enclosed here. It may be appreciated that on account of sufficient data available in the hands of AO, notice u/s 148 of the IT Act was issued by the AO. Coupled with non- filing of tax return, the AO also gathered sufficient evidences during survey to demonstrate the existence of PE in India. The information available in the hands of AO is as under; ▷ Prima facie the appellant was a non-filer for the A.Y 2011-12. ▷ The first return filed by the company was for A.Y 2012-13 on 29.03.2014. ▷ The second return filed for A.Y.2013-14 was on 24.03.2015. ....
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.... formed evidence in support of the contention of the Revenue that REPL had PE in India. Hence the argument that no evidence was found for FY.2010-11 is not acceptable. RDPL had not filed any return of income for the A.Y. 2011-12. 11. What was the evidence for existence of channel partners? i. Though the appellant claimed that business was carried out through channel partners of RDPL, no evidence like party wise ledger account of channel partners, address and assessment particulars of the channel partners, bank account copy of RDPL, reflecting the payment made to * channel partners were given. This was discussed clearly at paragraph 23. ii. At paragraph-50 and 51 in page no.37, the appellant's claim that they engaged channel partners and paid commission and hence their salary expenditure was low was countered by the A.O. AO had reiterated that the 'Dollar Team' sitting in RED IL is doing the business and not channel partners of RDPL as claimed. Commission agents cannot be a decision maker. 12. Replies to the emails by the appellant and counter argument by AO: i. Between paragraph-52 to 56 in page no.38 to 42, the mail relied upon by the appellant and the AO's c....
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....n 31-3-2010 was NIL for the company and group. ▷ The intangible as on 31-3-2011 for the group was just 2,919 US$ that was equivalent to Rs.98,595/. The intangible for the company was NIL for the FY 2010 11 4. Inventory was 11,544,461 US$ (i.e. Rs.51,95,00,000/) whereas there is no office or go down to store the goods. No building was shown as asset in balance sheet filed by RDPL, Singapore to handle those inventory. 5. Trade receivable as on 31-3-2011 for the group was 35,674,253 US$ and for the company it was 36,679,325 USS. Out of this receivable, 73% of the receivables are from India. It was disclosed at page number 35 of the Financials. 14. Whether the case lay compiled given by appellant were relevant? 12. It is submitted that none of the case laws submitted by the appellant were relevant to the facts and circumstances of the present case in hand. Ample material evidences were brought on record to demonstrate that RDPL Singapore had PE in India. In other words, it is just functioned as branch office of Indian company REDIL to book the invoices in US$. Hence those case laws relied upon by the appellant were not relevant to the facts and circumstances discus....
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....of the assessee company in India are Cognizant Technology, Sify Technology, Zoho Corporation, etc. In respect to business in India, the profile of the customers who have business contracts with the assessee includes major Software Development companies and Information Technology companies which have had their units in SEZ/STPIs and also non-SEZ Units and non-STPI Units. Further, the assessee had obtained the support from its holding company M/s.REDIL, referred to as 'Dollar Team' for rendering services to its customers in India. 15. A survey operation u/s.133A of the Act, was carried out in the business premise of M/s.REDIL and during the course of survey, a group of employees of Indian company (holding company) called as 'Dollar Team' was working and looked after the business activities of the assessee i.e. M/s.RDPL, Singapore. The AO has discussed the modus operandi of business model of the assessee and its holding company on the basis of findings of survey operations and as per said findings, the customers of Assessee Company and its Indian holding company, are one and the same. The assessee Indian holding company M/s.REDIL, supplies various products to companies like Cognizant....
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....rders in the first-mentioned state, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise". If you go by the simple term PE as defined under Article 5(1), which includes a fixed place of business. In this case, the facts brought out by the AO in light of information gathered during survey clearly indicate the existence of fixed place of business for the assessee, because, the 'Dollar Team' of Indian holding company carried out business operations of the assessee in India, which is evident from various facts including statement of Mr. Prabakaran who had explained step by step the whole process starting from approach to customer place, understanding their future and current requirement contract of respective OEM, preparation of bill of materials, negotiating the deal, finalizing the price, confirmation of shipment plan with the support of Mr.Muthu stationed at Singapore, follow-up of the payment, etc. If you go through the nature of activities carried out by the 'Dollar Team' for the assessee, except shipment all other activities had been carried out from Indi....
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.... only to SEZ Units of Indian customers. 17. In so far as various case laws relied upon by the assessee, including the decision of the Hon'ble Supreme Court in the case of E-funds IT Solution Inc. (supra), there is no dispute with regard to the ratio laid down by the Hon'ble Supreme Court on the issue of fixed place PE in India and as per said judgment, in order to constitute a fixed place of PE, it is essential that the premise of the Indian subsidiary must be at the disposal of the foreign holding company and the business of the foreign company must be carried on through that place. In this case, there is no dispute with regard to the fact that the premise of the Indian holding company is at the disposal of the assessee, because, the 'Dollar Team' carried out their functions from the premise of Indian holding company and thus, said activities constitutes a fixed place PE in India. As regards the decision of the Hon'ble Supreme Court in the case of UAE Exchange Centre Ltd. (supra), no doubt, if the services rendered by subsidiary or holding company are in the nature of preparatory or auxiliary, then no PE could be established. In this case, services rendered by 'Dollar Team' of In....
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....ey had authority to conclude contracts and such authority has been habitually exercised to conclude contract on behalf of the assessee company. Further, the evidences gathered during the course of survey and during the course of assessment proceedings clearly indicate that right from sourcing of customers, supply of equipments and follow-up payments, all activities have been carried out by 'Dollar Team', except preparation of shipping and export documents from Singapore Office. Therefore, we are of the considered view that the activities undertaken by the 'Dollar Team' of Indian holding company constitutes a dependent agent PE and thus, on this count also the argument of the assessee fails. Further, to constitute agent PE, what is required to be seen is activities carried out by the agent but not economic conditions. The Ld. Counsel for the assessee has relied upon the decision of ITAT Mumbai Benches in the case of Varian India (P) Ltd. (supra) and argued that the independent agent cannot constitute a PE. We find that the facts brought on record and also evidences gathered during the course of assessment proceedings clearly indicate existence of dependent agent PE and thus, we are ....