2017 (3) TMI 1670 - AT - Income Tax

Business connection in India - permanent establishment in India - Held that - Appellant s themselves admitted to the activities of the LO are taxable in India by showing income at cost 6% basis - thus assessee s own admission by showing income attributable to the Indian operations, it has indirectly accepted the fact that they had business connection in India and also the Indian LO as the PE of Arrow Singapore - hence assessee s arguments deserve no consideration. Quantification of profits attributable to the LO and the HO - Held that - AO was reasonable in considering sectoral weightage at 50 25 25 for functions performed, assets employed and risks involved - further AO was correct in taking only 10% towards assets and risks in the intra sectoral ratio pertaining to LO and the balance 90% to the HO - hence the final quantification of 565 to LO and 235 to HO on a scale of 800 is held to be perfectly justified and accordingly quantification of 70 30 between the LO and the HO is upheld - The final quantification of profits attributable to the LO and the HO as per the table 1 , above , as per para 5 at 40 60 is also upheld Levy of interest u/s.234B - Applying the ratio laid by the Supreme Court in the case of COMMISSIONER OF INCOME TAX VERSUS ANJUM MH GHASWALA AND OTHERS 2001 (10) TMI 4 - SUPREME COURT , has held that the levy of interest u/s.234B is mandatory - all the appeals of assessee is dismissed. Transfer Pricing adjustment u/s 92CA - protective assessment - working capital adjustment - Held that - CIT(A) confirmed AO s protective assessment wherein he has taken 40 60 to the LO HO, held that the percentage of ALP as determined by the TPO should have been applied only on 40% of the total sales and the ALP should have been determined accordingly - also the working capital adjustment of 0.906% and 1.459% could be given in AY s 02-03 & 03-04, respectively - hence the orders of the CIT (A) do not require any interference and appeal of revenue is dismissed.

Summary

Issues Involved:
1. Business Connection in India and Permanent Establishment (PE) of Singapore Company.
2. Attribution of Profits to Indian Liaison Office (LO).
3. Validity of Assessment Orders Based on Statements Recorded u/s 133A.
4. Transfer Pricing Adjustments and Arm's Length Price (ALP) Determination.
5. Levy of Interest u/s 234B.

Detailed Analysis:

1. Business Connection in India and Permanent Establishment (PE) of Singapore Company:
The Assessing Officer (AO) determined that the Singapore-based company had a business connection in India and a Permanent Establishment (PE) through its Indian Liaison Office (LO). This was based on the findings from a survey conducted on 28.08.2006, which revealed that the LO was involved in income-earning activities contrary to its RBI approval. The AO concluded that the LO was virtually conducting business operations, such as marketing, sales, price negotiations, and concluding contracts, which led to the determination of a PE in India. The CIT(A) upheld this finding, noting that the assessee had admitted to earning income in India by filing returns on a cost + 6% basis, thereby indirectly accepting the existence of a business connection and PE in India.

2. Attribution of Profits to Indian Liaison Office (LO):
The AO attributed 40% of the total profits to the Indian LO based on a functional analysis that assigned weightage of 50:25:25 to Functions, Assets, and Risks. The AO's detailed analysis included identifying new customers, price negotiations, and concluding contracts, among other functions. The CIT(A) upheld this attribution, agreeing with the AO's sectoral weightage and the final quantification of profits between the LO and the Head Office (HO) at a 40:60 ratio. The Tribunal also upheld this finding, noting that the assessee could not dislodge the findings with any material evidence.

3. Validity of Assessment Orders Based on Statements Recorded u/s 133A:
The assessee argued that the assessment orders were invalid as they were based entirely on statements recorded u/s 133A. However, the Tribunal found that the AO had relied on various relevant materials and not solely on the statements recorded during the survey. The CIT(A) also noted that the AO had given due opportunity to the assessee to respond to the findings. Consequently, this plea of the assessee was held untenable.

4. Transfer Pricing Adjustments and Arm's Length Price (ALP) Determination:
For assessment years 2002-03 to 2004-05, the Transfer Pricing Officer (TPO) determined adjustments u/s 92CA based on the Transactional Net Margin Method (TNMM). The TPO's adjustments were significantly higher than the AO's initial determination. The CIT(A) provided partial relief by directing that the ALP should be applied only to 40% of the total sales, consistent with the attribution of profits to the Indian LO. The CIT(A) also allowed a working capital adjustment, albeit at a lower rate than requested by the assessee. The Tribunal upheld the CIT(A)'s findings, noting that they were consistent with the earlier assessment years and appeared reasonable.

5. Levy of Interest u/s 234B:
The assessee contended that no interest was chargeable u/s 234B. However, the CIT(A), applying the Supreme Court's ratio in CIT v. Anjum M.H. Ghaswala, held that the levy of interest u/s 234B is mandatory. The Tribunal agreed with this finding and dismissed the assessee's plea.

Conclusion:
The Tribunal upheld the CIT(A)'s orders for all the assessment years under consideration. The assessee's appeals were dismissed, and the Revenue's appeals and the assessee's cross-objections were also dismissed. The Tribunal found that the AO and CIT(A) had taken a reasonable and consistent approach in attributing profits to the Indian LO, determining the ALP, and levying interest u/s 234B. The assessment orders were validated as they were based on substantial evidence and not solely on statements recorded u/s 133A.