TaxTMI 
TaxTMI 
2026 (8) TMI 257
X X X X Extracts X X X X
X X X X Extracts X X X X
....ejudicial to interest of revenue, when the assessee itself has adopted a dual taxpayer approach and attributed profits to its PE in India?" 2. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that once assessee has adopted dual taxpayer approach and has PE in India, the profits attributable to it have to be calculated on ALP basis as per the Article 7 of DTAA irrespective of the ALP compensation made to AE in India?" 3. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that once dual taxpayer approach is adopted, even if either one of AE or PE are not compensated at ALP, the assessment is not only erroneous but also prejudicial to the interest of revenue?" 4. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that profit attribution by DAPE by FAR analysis was carried out because the Indian AE was not remunerated at arm's length?" 5. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that there is no finding on the AE not having ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ternational Tax), Mumbai. Here, it would be relevant to reproduce the relevant parts of appellate order passed by the ld.CIT(A) which is self-speaking as under: "6.2 For AY 2017-18, the Assessing Officer ("AO") completed the assessment under section 143(3) accepting the assessee's computation of profits attributable to the DAPE. In that year, the assessee adopted the so-called dual taxpayer / Authorised OECD Approach (AOA) for profit attribution, by treating the non-resident enterprise and the DAPE as distinct for attribution purposes. It attributed a share of global profits to Indian operations based on a detailed FAR (functions, assets, risks) analysis and deducted the arm's length remuneration paid to MFE-India (cost plus 15%) to arrive at the residual taxable profits of the DAPE in India. 6.3 The AO noted that the 24% attribution ratio was consistent with earlier years, examined the FAR analysis and accepted it. Importantly, the AO made no transfer pricing adjustment to the marketing fee, thereby implicitly accepting the cost-plus 15% remuneration to MFE-India as at arm's length. 6.4 The CIT (International Tax), Mumbai-3 invoked section 263 mainly on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R 205), can any further profits be attributed to a DAPE in India once the dependent agent has been remunerated at arm's length for all its functions, assets and risks. 7.4 The assessee contended that, following Set Satellite (supra) and the Supreme Court's ruling in Morgan Stanley & Co. Inc.[292 ITR 416 (SC)], once the dependent agent's remuneration is at ALP, the taxing rights of the source State in respect of that DAPE are fully exhausted; any DAPE-level attribution thereafter is purely academic. The Departmental Representative did not dispute that MFE-India was at ALP; rather, he argued that since the assessee itself had adopted the dual-taxpayer approach, the Commissioner was justified in correcting the FAR and attribution percentage within that framework. 7.5 The Tribunal reiterated the settled law that section 263 can be invoked only where both of the following conditions are fulfilled (Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83): (i) the order of the AO is erroneous; and (ii) it is prejudicial to the interests of the revenue. If either limb fails, the assumption of section 263 jurisdiction is bad. 7.6 On the profit-at....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wise attained finality. 7.11 Thus, while the section 263 order was set aside, the original assessment including the assessee's own DAPE profit offering remained intact. 7.12 The relevant part of the ITAT's order is reproduced below: "6. We have heard the rival contentions, perused the material on record and duly considered the facts of the case and in the light of the applicable legal position. 7. We find that section 263 of the Income Tax Act, 1961 provides that "The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment" (Emphasis, by underlining, supplied by us). It is,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case of the Assessing Officer at any stage that the dependent agent has not been paid arm's length remuneration, even though there is repeated reference to the FAR analysis of the DAPE. Learned Commissioner has made reference to the Rolls Royce decision (supra) in this context of profit attribution to the PE, but then this is a decision in the context of a fixed place PE as evident from question number 2 before Hon'ble Delhi High Court, i.e. whether the office of Rolls Royce India Limited at New Delhi constituted a permanent establishment of the assessee under Article 5 of the Double Taxation Avoidance Agreement between India and the United Kingdom. The profit attribution to the DAPE and fixed place PE are, in the light of Hon'ble jurisdictional High Court judgment in the case of the Set Satellite (supra), on a materially different basis. On a conceptual note, PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, other than agent's remuneration in the source country - which is taxable in the source state anyway dehors the existence of PE, become ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....short, "MSCo.") and one of the group companies of Morgan Stanley, Morgan Stanley Advantages Services Pvt. Ltd. (for short "MSAS"). An agreement was entered into for providing certain support services to MSCo. MSCo. outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operations, data processing and support centre to MSCo. On 5-5-2005 MSCo. filed its advance ruling application. The basic question related to the transaction between the MSCo. and MSAS. The advance ruling was sought on two counts (i) whether the applicant was having PE in India under Article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated 14-4-2005 and if so (ii) the amount of income attributable to such PE. It was ruled that MSAS should be regarded as constituting a service PE under Article 5(2)(1). On the second question the AAR ruled that the transactional net margin method (TNMM) was the most appropriate method for the determination of the Arm's Length Price (ALP) in respect of the service agreement dated 14-4 200....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... civil appeals." After discussing the various issues the Court in its conclusion held as under :- "As regards attribution of further profits to the PE of MSCo. where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer of pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. In this connection, the Department has also to examine whether the PE has obtained services from the multinational enterprise at lower than the arm's length ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....invoke section 263 of the Act, and the order cannot be said to be prejudicial to the interests of the revenue unless there is a categorical finding that the dependent agent has not been paid arm's length remuneration for the functions performed, assets employed and risks assumed by the dependent agent. The order being prejudicial to the interest of the revenue, inasmuch as the payment to the dependent agent not being at an arm's length, is a sine qua non for holding that the order is prejudicial to the interest of the revenue. This exercise has clearly not been done on the facts of this case. For this short reason alone, we must set aside the impugned revision order. 10. As we part with the matter, we may add that once the assessee has accepted the dual taxpayer approach in its computation of income, it cannot be open to the assessee to deny the tax liability that it has already accepted under the said computation. We may, in this regard, refer to a materially similar situation dealt with by the Hon'ble Supreme Court in the case of Carborundum Co Vs CIT [(1977) 108 ITR 335 (SC)], wherein, even while Their Lordships held that the assessee had no tax withholding obligation i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aken up for simultaneous adjudication. 8.2 Appellant's Submission: The appellant vide its letter dated 06.10.2025 filed ground wise written submissions which are perused and it is observed that the same are in some way or the other already discussed in the earlier parts of the order either by way of the submissions made during the revisionary proceedings or by way of reliance made on the ITAT's decision for AY 2017-18, the operative parts of which are already reproduced above. 8.3 It is also observed that out of the 8 grounds raised by the appellant Ground no. 1-5 are on the quantum addition on account of higher percentage of profit attribution and Grounds 2-5 are raised on a without prejudice to the 1st Ground. 8.4 Vide Ground No. 1, the Appellant has contended that the AO erred in relying on the CIT's order for AY 2019-20 passed under section 263 order, which had been quashed by ITAT; therefore assessment order is bad in law. The submissions made by the appellant can be summarised as to state that the AO has lifted and reproduced verbatim the entire 263 order for AY 2019-20 in the assessment order and has based the 35% attribution solely on that order. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dependent agent. 9.4 If the dependent agent's remuneration is at arm's length, then the foreign enterprise's Indian profits are fully exhausted by the DA's taxable income, and nothing further remains to be attributed to the DAPE. Thus, DAPE is tax-neutral, unless the DA has been under-remunerated. No Further Attribution is legally sustainable without Showing That ALP Is Incorrect. In view of the above discussion and findings, the profit attribution of 35% made by the AO for the AY 2022-23 in the absence of any finding that the payment to the Dependent Agent, MFE India, is not at arm's length, is held to be incorrect. 9.5 But the Tribunal also added an important caveat that even though the revision order is quashed, the assessee cannot now negate the tax liability it has already accepted and been assessed on. For this proposition, the Tribunal relied on Carborundum Co v. CIT (108 ITR 335, SC). In Carborundum, the Supreme Court quashed a section 263 order on the ground that no tax withholding was legally required on certain technical know-how fees, but it still held that the 5% withholding voluntarily undertaken by the assessee could not be undone merely because the....