2013 (11) TMI 195 - AT - Income Tax

Expenses on Dealer s Commission - Held that -The argument of the Authorized Representative that such dealer commission was allowed in the past therefore for the sake of continuity it may be allowed during the current year was devoid of any logic - Assessment proceedings for each Assessment Year were different and independent it does not mean that if by mistake a wrong claim allowed by the Assessing Officer in the earlier year the same mistake will be repeated year after year There was no ifirmity in the order of the Assessing Officer wherein he has disallowed a sum of Rs. 9, 81, 966/- out of the dealer commission which actually pertained to earlier years but was claimed as expenditure by the appellant company during the year - However the prior period expenses cannot be allowed in the Assessment Year 2002-03. Addition to P.E. - accrual of income - Held that - In order to treat any agent as P.E. within the meaning of Paras-4 and 5 of Article-5 it was very vital that such agent should fit into the description of Dependent Agent and had to perform either of the activities as mentioned in Articles-5(4) and 5(5) otherwise it cannot be held that agent constitutes a P.E. of the foreign enterprise - VGCs were exercising comprehensive control over the branch of Varian India and that also bears entrepreneur risk in terms of collection of debtors and bad debt and sales return etc. - in the case of indent sales the sales made to the Indian customers are in pursuance of orders introduced and liaised by the assessee for which the assessee receives commission income from the VGCs - These indent sale orders produced by the assessee were not binding on the VGCs. They may accept or reject the orders completely at their own discretion and the assessee had no authority to negotiate or conclude contract on behalf of the VGCs - Further the goods were delivered by the VGCs directly to the customers and all the risk associated with the sale of products lies with the VGCs and not with the assessee - Thus the entrepreneur risk was not undertaken by the assessee - This also inter-alia means that the VGCs does not have any comprehensive control over the assessee A lot of emphasis had been given by the Commissioner (Appeals) and the Assessing Officer on certain terms of obligation as per the D.R. Agreement - All those obligations which were undertaken by the assessee were only pre-sale and post-sale facilities provided to the customers by the assessee for which it was amply remunerated in the form of commission - There was nothing such obligation which binds the VGCs - In any case these were mere administrative support functions and not the functions as were envisaged under Article 5(4). Whether the Force of Attraction Rule as given in Articles 7(1)(b) and (c) of Indo U.S. DTAA Article 7(1)(b) Indo Australia DTAA Article 7(1)(b) and (c) of India Italy DTAA will apply in case of assessee so as to tax the profits of foreign enterprise i.e. VGCs in the hands of the assessee in India Held that - The assessee i.e. Varian Indian Branch of VIPL was not a dependent agent of VGCs and therefore it does not constitute a P.E. for various VGCs in India - once the assessee was not a P.E. of VGCs then Force of Attraction Rule will not apply in terms of Article 7(1) of various DTAA. The attribution of 10% profit margin on the basis of global accounts of VGCs as applied by the Assessing Officer also had no legs to stand in view of the above conclusion and therefore the addition made by the Assessing Officer on this score and as confirmed by the Commissioner (Appeals) was deleted.

Summary

Issues Involved:
1. Disallowance on account of dealer's commission.
2. Addition on account of attribution of profits to Permanent Establishment (PE).

Issue-wise Detailed Analysis:

1. Disallowance on Account of Dealer's Commission:

The assessee, an Indian branch of a U.S.-based company, claimed expenses for dealer's commission in the assessment year 2002-03, which the Assessing Officer (AO) disallowed, arguing that these expenses pertained to earlier years. The assessee contended that the commission liability crystallized only after the completion of all related activities, including installation and final payment follow-up, and this accounting method had been consistently followed.

The AO rejected this explanation, stating that the assessee followed a mercantile system of accounting and could not claim expenses on a cash basis. The Commissioner (Appeals) upheld this view, emphasizing that expenses related to earlier years could not be deducted in the current year, and the commission accrual was dependent on sales execution.

The Tribunal affirmed the findings of the Commissioner (Appeals), stating that the liability for payment of commission must be matched with the sales in the same year unless there is a specific agreement stating otherwise. The Tribunal dismissed the assessee's ground, holding that the mixed system of accounting could not be allowed.

2. Addition on Account of Attribution of Profits to PE:

The assessee, engaged in direct and indent sales of products from various Varian Group Companies (VGCs), earned commission from these sales. The AO considered the assessee a dependent agent of three VGCs (Varian Inc. U.S.A., Varian Australia, and Varian Italy) and applied the "Force of Attraction Rule" under the DTAA, attributing profits from these companies' sales in India to the assessee.

The assessee argued that it only performed liaisoning and marketing activities for VGCs, with no authority to conclude contracts or assume risks associated with sales. The Transfer Pricing Officer (TPO) found the transactions to be at arm's length, and the assessee contended that it had offered all its income for taxation in India.

The AO rejected these arguments, attributing 10% of the operating profit from the business done by the three VGCs to the assessee, based on Rule-10 of the Income-tax Rules. The Commissioner (Appeals) upheld this addition, stating that the assessee's activities met the criteria for a dependent agent under the DTAA, and the profit attribution was reasonable.

The Tribunal, however, held that the assessee did not constitute a dependent agent PE under Article 5(4) or 5(5) of the DTAA, as it did not have the authority to conclude contracts, did not maintain stock for VGCs, and did not habitually secure orders for them. The Tribunal also noted that the assessee's transactions were at arm's length, as confirmed by the TPO.

Consequently, the Tribunal concluded that the "Force of Attraction Rule" did not apply, and the attribution of profits based on global accounts of VGCs was not justified. The Tribunal deleted the addition made by the AO and confirmed by the Commissioner (Appeals).

Conclusion:

The Tribunal allowed the assessee's appeals for the assessment years 2003-04 to 2006-07, applying the same findings as in the appeal for the assessment year 2002-03. The appeals were allowed, and the disallowance of dealer's commission and the addition on account of attribution of profits to PE were deleted.