2010 (11) TMI 625 - AT - Income Tax

DTAA between U.S.A. and India - Application of stay - Demand - Arm length price - there are no hard and fast rules regarding grant of stay, but prudence, discretion and circumspection are called for and that stay should not be granted as a matter of course - since the assessee has prima-facie arguable case, it would be in the interest of justice to stay the demand raised by the Revenue subject to condition specified in this order and deposit of 25% of the total outstanding - Decided in favour of the assessee

Summary

Issues Involved:
1. Permanent Establishment (P.E.) of the assessee in India.
2. Attribution of profits to P.E.
3. Levy of interest under section 234B.
4. Stay of outstanding demand.

Issue-wise Detailed Analysis:

1. Permanent Establishment (P.E.) of the Assessee in India:
The assessee, a foreign company incorporated in the U.S.A. and engaged in manufacturing high-performance chemicals, has a joint venture with IOCL in India, named Lubrizol India Pvt. Ltd. (LIPL). The Assessing Officer (AO) concluded that LIPL constitutes a P.E. of the assessee in India under Article 5(1), 5(2), and 5(4) of the DTAA between the U.S.A. and India. The AO based this conclusion on the exclusive sales representation agreement and the sales and marketing agreement between the assessee and LIPL.

2. Attribution of Profits to P.E.:
The AO determined that the profits made by the assessee from sales in India were taxable in India because LIPL, acting as the P.E., facilitated these sales. The AO rejected the assessee's contention that it had been fully compensated through commissions and thus no further profits should be taxable in India. The AO applied the Force of Attraction Rule under Article 7(1) of the DTAA, attributing profits from direct sales in India to the P.E. The AO estimated the profits at 5% of the total sales in India, amounting to USD 498,395.

3. Levy of Interest under Section 234B:
The assessee contested the levy of interest under section 234B, arguing that the issue was covered by the Supreme Court's decision in Director of Income Tax (International Taxation) v/s Morgan Stanley and Co. INC., which held that no further profits need to be attributed to a P.E. remunerated on an arm's length basis. The assessee also cited the Jurisdictional Tribunal's decision in Dy. Director of Income Tax (International Taxation)-I(2) v/s Daimler Chrysler A.G., arguing that LIPL, acting merely as a representative office, does not qualify as a P.E. for profit attribution purposes.

4. Stay of Outstanding Demand:
The assessee filed a stay petition under Rule-35A of the Income Tax (Appellate Tribunal) Rules, 1963, seeking a stay on the total outstanding demand of Rs.1,48,60,961, comprising tax and interest. The Tribunal considered the assessee's prima facie arguable case and the guidelines framed by the Tribunal, which do not necessitate a rejection letter from the AO or CIT(A) for granting a stay. The Tribunal referred to the decision in M/s. KEC International Limited V/s ACIT, emphasizing that prudence, discretion, and circumspection are required in granting stays, and financial constraints are an important consideration.

Conclusion:
The Tribunal, after hearing both parties and considering the facts and circumstances, decided to stay the demand raised by the Revenue subject to the following conditions:
1. The assessee must deposit 25% of the total outstanding demand by 23rd December 2010.
2. For the balance amount, the assessee must furnish security to the satisfaction of the AO.
3. The assessee must not seek adjournment on the date fixed for hearing, else the stay order will be vacated.

The Tribunal directed the Registry to fix the appeal for final disposal on 17th January 2011 and pronounced the order in the open Court on 24/11/2010. The assessee's stay application was allowed subject to the stated conditions.