2013 (6) TMI 333 - AT - Income Tax

Attribution of income - India - German DTTA - Addition being difference of amount remitted by the HO to its Branch in India - amount remitted to the HO for an addition made u/s 40A(2)(b)held to be related party remittance - Held that - It is an undisputed fact that India Branch Offices are under the Korean Registry wherein the India BO undertakes inspection and validation of ocean fairing vessels by physically examining the vessels. After physical examination the reports are sent to HO located in Germany who issues validation certificate regarding the fitness of the vessel. The business model followed by the assessee and its parent in Germany are ships and vessels in order to operate in sea are required to be classified by a classification society approved by an authority. The classification is done at the insistence of the ship owner on behalf of the respective government. In certain instances classification is done as per report coming directly from the ship owner. In either case the post examination approval reports are submitted to the respective government which is then hands it over to the ship whose flag it is carrying. The Indian Operations were started from 06.11.1989 as a branch of its German parent who in turn is a member of International Association of Classification Societies who decides the scope of monitoring activities of its members. The scope of Indian Branch would include Classification and certification of ships Certification of marine related materials and components & Certification relating to International safety management Co. These activities are carried out with the technical assistance and cooperation of its HO in Germany who as submitted are available 24X7. On computation of its classification invoice is raised by the Indian BO or the German HO as the case may be and the receipts are assigned as per the agreed standard module herein followed globally whereby the HO retains 30% and the BO retain 70% as per fee splitting arrangement. Thus as per Article 7 of the India Germany DTAA the business profits of the permanent establishment in India only are offered to tax. Treading strictly on the DTAA route the issue becomes clear that the split of fee which is attributed to its German parent HO become non taxable under the Indian tax regime. This would become applicable on all the three figures that are impugned before us because the share of Rs. 22, 55, 981/- is also of the similar nature & character as that of fee attributed towards HO by the Indian BO at Rs. 58, 13, 506/- and the expenses incurred by the HO on behalf of India BO at Rs. 3, 00, 754/- u/s 40A(2)(b). As in agreement with the decision of Intergrafia Print & Pack GMBH (2007 (10) TMI 415 - ITAT DELHI) following the India German DTAA treaty fee split arrangement has been approved. Also in agreement to the decision of the assessee own case in penalty proceedings wherein the CIT(A) came to a factual finding that following a well defined system the revenue earned from the activities of the HO cannot be taxed in India which ultimately has been attributed to the HO and fully backed by the India German DTAA and Para1(b) of the Protocol as was recited by the AR and reproduced by us earlier. Thus reversing the decision taken by the DRP and direct the AO to delete the three impugned amounts of Rs. 58, 13, 506/- Rs. 22, 55, 981/- and Rs. 3, 00, 754/- from the income of the assessee - appeal filed by the assessee allowed.

Summary

Issues Involved:
1. Attribution of income to the Head Office (HO) and its taxability in India.
2. Fee split mechanism between the Indian Branch Office (BO) and the HO.
3. Applicability of Section 40A(2)(b) regarding related party transactions.

Detailed Analysis:

1. Attribution of Income to the HO and Its Taxability in India:
The primary issue revolves around whether the income attributed to the HO, which is based in Germany, should be taxed in India. The assessee argued that the fee retained by the HO is its income and should not be taxed in India. The DR countered, stating that the HO provides back-office assistance and the actual job performance is conducted in India by the BO. The DR cited the case of Linklaters LLP vs ITO, emphasizing that profits indirectly attributable to a permanent establishment (PE) in India are taxable in India. The DR also referenced the AAR ruling in Worley Parsons Services Pty. Ltd., which held that services performed partly in India justify the taxability of the entire income in India.

The tribunal concluded that as per Article 7 of the India-Germany DTAA, only the business profits of the PE in India are taxable. The tribunal agreed with the assessee's argument that the income attributed to the HO, based on a globally followed fee split mechanism, is not taxable in India. This decision aligns with the ruling in Intergrafia Print & Pack GmbH vs DDIT, where a similar fee split arrangement was accepted under the India-Germany DTAA.

2. Fee Split Mechanism Between the Indian BO and the HO:
The tribunal examined the fee split mechanism, which has been in place since 1980 and is followed globally. The Indian BO retains 70% of the fees, while the HO retains 30%. The tribunal noted that this fee split is based on the GL Classification Rules and a detailed study conducted by the HO. The tribunal found that the consistent application of this fee split mechanism, supported by a study and global policy documents, justifies the attribution of income to the HO.

The tribunal also considered the role of the HO in providing technical support, training, and other services to the BO, which further justifies the fee split. The tribunal concluded that the fee split mechanism is reasonable and should be accepted.

3. Applicability of Section 40A(2)(b) Regarding Related Party Transactions:
The tribunal addressed the additions made under Section 40A(2)(b), which pertains to related party transactions. The DR argued that the expenses incurred by the HO on behalf of the BO should be added to the income of the assessee. The tribunal, however, found that these expenses are part of the fee split arrangement and should not be taxed in India.

The tribunal noted that the fee split mechanism has been consistently followed and accepted in previous years. The tribunal also referred to the penalty proceedings in the assessee's case, where the CIT(A) concluded that the revenue earned by the HO cannot be taxed in India. The tribunal agreed with this finding and directed the AO to delete the additions made under Section 40A(2)(b).

Conclusion:
The tribunal reversed the decision of the DRP and directed the AO to delete the three impugned amounts of Rs. 58,13,506/-, Rs. 22,55,981/-, and Rs. 3,00,754/- from the income of the assessee. The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 05 June, 2013.