2017 (8) TMI 1638 - HC - Income Tax

Permanent Establishment ( PE ) in India - income be attributed to such PE on account of offshore supplies - If the answer to the question (i) above is in the affirmative what should be the rate of attribution? - Is the Assessee entitled to adjustment of the expenses already incurred by it by way of payment to the Indian entity for marketing services? - Was the AO justified in adopting a different rate of attribution contrary to Article 7 of the Indo-China DTAA? - HELD THAT - The learned counsel for the parties are permitted to file additional documents/papers which are part of the assessment record or were filed before the ITAT within eight weeks. List in due course.

Summary

Issues:
1. Attribution of income to Permanent Establishment (PE) in India for offshore supplies.
2. Determination of the rate of attribution.
3. Adjustment of expenses incurred for marketing services.
4. Justification of adopting a different rate of attribution for a specific assessment year.

Analysis:

1. The judgment pertains to the Assessee's appeals against the ITAT's order for multiple Assessment Years (AY) from 2004-05 to 2009-10. The primary issue raised is whether income can be attributed to a Permanent Establishment (PE) in India due to offshore supplies. The court framed questions to address this concern, emphasizing the significance of PE in the context of taxation on offshore transactions.

2. The second question posed in the judgment pertains to determining the rate of attribution if income is indeed attributable to the PE in India. This question highlights the complexity involved in calculating the portion of income that can be linked to the PE, indicating the need for a clear methodology or formula to establish the attribution rate.

3. Another issue addressed in the judgment is whether the Assessee is entitled to adjust expenses incurred for marketing services provided by an Indian entity. This question delves into the aspect of expense allocation and the eligibility of the Assessee to offset these expenses against the attributed income, showcasing the intricacies of expense management in cross-border transactions.

4. For the AY 2009-10, an additional question was framed regarding the justification of the Assessing Officer (AO) adopting a different rate of attribution, deviating from the provisions of the Indo-China Double Taxation Avoidance Agreement (DTAA) under Article 7. This specific issue highlights the adherence to international tax treaties and the need for consistency in applying attribution rates as per the agreed-upon frameworks.

In conclusion, the judgment addresses crucial aspects of international taxation, including the attribution of income to PEs, determination of attribution rates, adjustment of expenses, and compliance with bilateral tax agreements. The framing of specific questions reflects the court's intent to provide clarity on these intricate tax matters, ensuring a fair and just resolution in line with legal principles and international tax norms.