2019 (4) TMI 2073 - AT - Income Tax

Income accrued in India - Attribution of the income - Addition holding that the assessee has permanent establishment in India - addition on account attribution of income being recipient of such commission income - HELD THAT - Assessee earned sales revenue from India arising from above business activity. The rights and responsibilities under the agency agreements between the Assessee and Hempel India created Agency Permanent Establishment (PE) of the assessee in India as per Article 5(4) of the India - Singapore Tax Treaty. In consideration of the services rendered by the Hempel India to the assessee, the former charges commission based on percentage of sales to the later under the arm's length principle. In view of the above, the learned Counsel for the assessee took us through the Tribunals order in assessee's own case for AY 2014-15 2019 (2) TMI 2044 - ITAT MUMBAI wherein Tribunal has considered this issue and held that there is no dispute about the existence of assessee's agency PE in India but held that a foreign company is liable to be taxed in India on so much of its business profit as is attributable to its PE in India. The Tribunal accepted the assessee's cost plus 8.17% markup as commission on sales and deleted the addition made by AO / DRP, who estimated the profit of assessee PE at an adhoc rate of 25% of the sales. Respectfully following the Tribunal's decision in assessee's own case as the facts and circumstances are exactly identical in this year also, we delete the addition made by AO and affirm by DRP. This issue of assessee's appeal is allowed. Since we have already held that no further income could be attributed to its agency PE again, once transfer pricing analysis of the transaction between assessee and its agent in India has been undertaken. Appeal of assessee allowed.

Summary

Issues:
1. Attribution of income of the assessee's permanent establishment in India.

Analysis:

Issue 1: Attribution of income of the assessee's permanent establishment in India

The appeal arose from the order of the Dispute Resolution Panel (DRP) and the Assessment framed by the Dy. Commissioner of Income Tax for the assessment year 2015-16. The primary issue was the attribution of income of the assessee's permanent establishment in India, leading to additions based on commission income. The appellant raised six grounds challenging the attribution of Rs. 6,23,87,957 as income of the Permanent Establishment (PE) taxable in India. The appellant argued that the appropriate profits were attributed in compliance with section 9 of the Income-tax Act, 1961, and the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. The appellant contended that the additional profits attributed to the PE were unwarranted, considering the arm's length commission paid to the agent. The DRP and AO were criticized for various errors, including rejecting the transfer pricing study report without basis and determining profits ad-hoc without proper substantiation or comparative study.

The Tribunal considered the facts where the assessee, a Singapore-based company, had a subsidiary in India acting as a sales agent. The commission payment to the Indian subsidiary was deemed adequate and justified based on transfer pricing analysis. The Tribunal referenced previous judgments to support the assessee's position that once the arm's length price had been determined and paid, no further income should be attributed to the agency PE. The Tribunal relied on the Supreme Court and High Court judgments to establish that if the arm's length price was applied and paid, no additional income should be taxable in India. The Tribunal also noted that the factual circumstances were identical to a previous case, leading to the deletion of the addition made by the AO and affirmed by the DRP. Consequently, the Tribunal allowed the appeal of the assessee, emphasizing that no further income should be attributed to the agency PE once the transfer pricing analysis had been conducted.

In conclusion, the Tribunal upheld the assessee's position regarding the attribution of income to its permanent establishment in India, emphasizing the importance of the arm's length principle and transfer pricing analysis in determining taxable income. The Tribunal's decision was based on established legal principles and previous judgments, leading to the allowance of the assessee's appeal and the deletion of the addition made by the tax authorities.