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2011 (8) TMI 769 - HC - Income TaxPermanent Establishment(PE) - Dependent agent - Whether in the facts and circumstances of the case, the ITAT grossly erred in holding that ANR should be regarded as a Dependent Agent Permanent Establishment of the Appellant under the Article 5(8) of the DTAA between India and Singapore on the premise that ANR habitually secures orders wholly and mainly on behalf of the appellant? - held that - The question whether ANR has income from other clients as well and the extent of such income is very relevant to decide as to whether the criteria stipulated in Article 5(9) is satisfied or not. Since the Assessing Officer did not look into the matter from this angle and the ITAT also disposed of the issue deciding against the assessee on wrong premise, we are of the opinion that for this limited issue matter needs to be remanded back to the Assessing Officer. The Assessing Officer shall decide the question of applicability of Article 5(9) as to whether the ANR was providing services to companies other than the assessee as well and had substantial income from those other companies and whether the company stipulated in Article 5(9) namely ANR was wholly or almost wholly working on behalf of the assessee will have to be determined afresh by the Assessing Officer. Whether in the facts and circumstances of the case, the ITAT grossly erred in concluding that ANR has not been compensated at arm s length price, without adequate basis to arrive at such a conclusion? - held that - the assessee could dictate the terms of the payment by altering the same and reducing it to the US 40,000 per annum from 5% of invoice value when assessee found that on the basis of 5% total commission payable could be much higher. This clearly leads to the inference that the assessee was in a position to dictate the terms and in the absence of any Transfer Pricing Analysis by the Transfer Pricing Officer in the instant case, it cannot be said that such commission could fit the description of reasonable profits within the meaning of Article 7(2) of DTAA. - it also needs to be highlighted that no plausible or justifiable reason is coming forthwith for changing the commission from 5% of the invoice value to US 40,000 per annum. - Decided in favor of revenue.
Issues Involved:
1. Taxability of Fees for Technical Services (FTS) on accrual basis or cash basis. 2. Validity of initiating proceedings under section 147 of the Income-tax Act. 3. Existence of Permanent Establishment (PE) in India. 4. Attribution of profits to the PE in India. 5. Arm's Length Price (ALP) of the remuneration paid to ANR. Detailed Analysis: 1. Taxability of Fees for Technical Services (FTS) on accrual basis or cash basis: The Singapore Company offered its service fee income on a cash basis as "Fees for Technical Services" under section 9(1)(vii) read with section 115A of the Income-tax Act. The Assessing Officer (AO) did not accept this and held that the income should be taxed on an accrual basis. This view was upheld by the CIT(A) and the ITAT. The Singapore Company accepted this decision, and this issue does not arise in the present appeals. 2. Validity of initiating proceedings under section 147 of the Income-tax Act: The AO initiated proceedings under section 147 for assessment years 1998-99 to 2001-02 as the Singapore Company had not filed returns for these years. The CIT(A) and ITAT upheld the validity of these proceedings. This issue is also not the subject matter of the present appeals. 3. Existence of Permanent Establishment (PE) in India: The AO held that the Singapore Company had a PE in India through ANR Associates Pvt. Ltd. (ANR), which was acting as a dependent agent. The CIT(A) and ITAT upheld this view. The ITAT concluded that ANR was not an independent agent and was acting under the control and instructions of the Singapore Company. The Tribunal noted that ANR's activities were exclusively or almost wholly for the Singapore Company, and it was subject to extensive control by the Singapore Company. The ITAT's findings were based on the nature of the agreement between the Singapore Company and ANR, which imposed significant restrictions and control over ANR's activities. 4. Attribution of profits to the PE in India: The CIT(A) attributed 10% of the net profits to the PE in India for assessment years 2000-01 and 2001-02 and 25% for assessment years 2002-03 to 2004-05. The ITAT upheld the attribution of 10% of the profits to the PE for all the assessment years under consideration. The ITAT's decision was based on the Supreme Court's judgment in Annamalai Timber Trust & Co. v. CIT, which justified the apportionment of profits based on the extent of business operations carried out in India. 5. Arm's Length Price (ALP) of the remuneration paid to ANR: The ITAT concluded that the remuneration of US$ 40,000 per annum paid by the Singapore Company to ANR was not at arm's length. The ITAT noted that prior to the written agreement dated 1-1-2002, the Singapore Company paid a commission of 5% of the invoice value to ANR, which was later changed to a lump sum amount of US$ 40,000 per annum. The Tribunal held that this change indicated that the remuneration was controlled by the Singapore Company and was not at arm's length. The ITAT's conclusion was based on the lack of a Transfer Pricing Analysis and the absence of any material on record to justify the reasonableness of the remuneration. Conclusion: - The appeals of the Singapore Company are partly allowed to the extent indicated while answering Question No. 'e', referring the matters back to the Assessing Officer for the limited purpose of determining whether ANR was providing services to other companies and had substantial income from those other companies. - The appeals of the Revenue are dismissed, and the order of the ITAT fixing 10% of the profits attributable to the PE is upheld.
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