2020 (11) TMI 1032 - AT - Income Tax

Income attributed to the PE - Dependent Agency Permanent Establishment of the assessee company in India - Whether the transaction between the assessee and Mitsui India Pvt. Ltd. being at arm s length only, no further profit could be attributable to the assessee? - HELD THAT - Issue covered by the order of the ITAT in assessee s own case right from the Assessment Years 2005-06 to 2008-09 and 2010-11, wherein ITAT has consistently held that MIPL is not a DAPE of assessee company. The Assessing Officer has followed the earlier year order wherein Mitsui India Pvt. Ltd. has been held to DAPE of the assessee-company and has attributed 50% of the gross trading profits of MIPL as income of the assessee-company and the commission paid by the assessee to MIPL was registered @ 0.8905556% of the total sale. CIT (A) has though uphold the action of the Assessing Officer that the MIPL is a DAPE but has attributed only 20% of the gross trading profit of MIPL - commission paid by the assessee-company to MIPL have been accepted at Arm s Length Price to the TPO that no discount of commission has to be made that since the commission paid was more than 20% attributed to DAPE, the entire addition made by the Assessing Officer was deleted. The Revenue is in appeal against the order of Ld. CIT (A) questioning the order of gross profit of sales and deleting the disallowance of commission. Now that the issues are covered in favour of the assessee by the order of the ITAT for the Assessment Year 2005-06 wherein it has been held that MIPL is not DAPE of the assessee-company. The said order has been followed from Assessment Years 2006-07 to 2008-09 and 2010-11. Once MIPL is not held to be DAPE of assessee-company, then ostensibly no income can be attributed to the assessee company under Article 7 of DTAA, and therefore, there cannot be any question of computing income of PE or any disallowance of commission which is otherwise at Arms Length Price as accepted by the TPO. Similar grounds raised by the Revenue dismissed.

Summary

Issues:
1. Attribution of profit to Permanent Establishment (PE) in India.
2. Deduction of commission to the PE.

Issue 1: Attribution of profit to Permanent Establishment (PE) in India

The appeal was filed against the order passed by the Ld. CIT(A) for the Assessment Year 2013-14. The Assessing Officer attributed 50% of the gross trading profit in India to the Permanent Establishment of the company, whereas the Ld. CIT(A) restricted it to 20%. The Ld. CIT(A) based the profit attribution on the non-consolidated balance sheet of the company in Japan and calculated the profit on Indian operations accordingly. The Ld. CIT(A) also allowed the commission paid to the PE at the Arm's Length Price, as accepted by the Transfer Pricing Officer (TPO). The Tribunal found that the issue of whether the PE existed had been consistently decided in favor of the assessee in previous years, and therefore, no income could be attributed to the assessee under the Double Taxation Avoidance Agreement (DTAA). The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross objection, holding that no income could be attributed to the company due to the absence of a PE.

Issue 2: Deduction of commission to the Permanent Establishment (PE)

The Assessing Officer had restricted the deduction of commission to the PE, whereas the TPO accepted the commission payment at Arm's Length Price. The Ld. CIT(A) held that since the commission paid was more than the 20% attributed to the PE, the entire addition made by the Assessing Officer was deleted. The Tribunal upheld the decision of the Ld. CIT(A) based on the consistent findings regarding the existence of the PE in previous years. The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross objection, emphasizing that no income could be attributed to the company under the DTAA due to the absence of a PE.

In conclusion, the Tribunal dismissed the Revenue's appeal and partially allowed the assessee's cross objection, as the issues regarding the attribution of profit to the PE and the deduction of commission were decided in favor of the assessee based on the consistent findings from previous years. The Tribunal held that no income could be attributed to the company under the DTAA in the absence of a PE.