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2019 (9) TMI 810 - AT - Income TaxPermanent Establishment ( PE ) in India - income accrued in India - AO alleged that LO was engaged in executing/negotiating contracts for the appellant in India and was not merely undertaking preparatory and auxiliary activities and, therefore, the LO was Permanent Establishment ( PE ) of the appellant in India in terms of Article 5 of the India Singapore Double Taxation Avoidance Agreement ( DTAA ) - whether DRP exceeded direction issued by tribunal - HELD THAT - As considered the relevant documentary evidences brought on record. We have also perused the judicial decisions relied upon by both the rival representatives. In our considered opinion, the DRP has simply followed the directions of the Tribunal in readjudication proceedings to assist the Assessing Officer in determining the issues raised before the Tribunal in the first round of litigation. We find that in doing so, the DRP has not done any enhancement. The provisions of section 251(2) of the Act are different from the provisions of section 144C(8) (11) of the Act. The ld. CIT(A) is an appellate authority, whereas the DRP is a continuation of the assessment proceedings where the DRP acts as a corrective mechanism to guide the Assessing Officer for making error free assessments. The role of a DRP, in our humble understanding, is to assist the Assessing Officer in determining the correct income so that correct tax may be levied. Whether the appellant can be put to worse off positions as a result of filing the appeal before the Tribunal ? - HELD THAT - We agree with the ld. DR that there was no enhancement of income by the DRP, but, at the same time, the assessed income of the year under consideration, having been exhibited elsewhere, clearly puts the assessee in a worse off situation that it was before filing the appeal. If the assessee had not filed any appeal against the total assessed income of all the assessment years under consideration, the income would have been ₹ 7.21 crores only. However, after filing appeal and after readjudication, the total assessed income of all the years under consideration is ₹ 123.16 crores. In all fairness, the entire proceedings should now be restricted to adjudication upon the assessed income of all the years under consideration to the extent of ₹ 7.21 crores. Business connection/ PE in India - India-Singapore DTAA - Facts of the case in hand clearly show that the documents impounded in the survey proceedings were very much confronted to the assessee. Whether the assessee violated the conditions of RBI or FEMA is not relevant in determining the LO as a PE under the I.T. Act. Attribution of profit to PE - even if the orders were placed directly with the Head Office of the assessee, any profit arising from such transactions can be taxed in India to the extent any part is played by the PE of the assessee in India. Article 7(2) of the India Singapore DTAA requires that the PE of non resident enterprise be treated as a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment - PE, though a distinct and a separate enterprise, is to be treated as an associated enterprise under Article 9 of the DTAA read with sections 92B and 92F of the Act. Therefore, the PE is subject to the provisions of section 92, which require that any international transaction be carried out at Arm s Length. Determine the Arm s Length profit that the appellant s PE would have earned if it had been operating as an independent enterprise in India - MAM selection - HELD THAT - The undisputed fact is that to boost sales for Advance and Analytical Systems AAS business division, the appellant entered into arrangements with agents in India for specific marketing and promotion and one of such agent was ForeVision. We find force in the contention of the ld. counsel for the assessee that the LO is performing routine and limited functions and is operating in a risk immune environment and considering the intensity of functions, attribution made by the Revenue which ranges from 163% to 2357% is not only excessive but absurd and abnormal. When a PE is treated as if it is an independent enterprise, its profits should be determined on the basis as if it is an independent enterprise. Meaning thereby, the profits of the PE should be determined on the basis of what an independent enterprise under similar circumstances might be expected to derive on its own Looking to the business profile of ForeVision and in the absence of complete details, the same is not a good comparable. In our understanding of the facts and considering that the LO is performing routine and limited functions and is operating in a risk immune environment, the allocation of profit should be done by applying TNMM as most appropriate method. The assessee is directed to furnish necessary details and the Assessing Officer is directed to recompute the attribution of profit to LO PE by applying TNMM as most appropriate method. It is made clear that sales through ForeVision and sales to Videocon should not be considered for the purposes of attribution of profits. To sum up i) The DRP has done no enhancement and has simply adjudicated upon following directions of the Tribunal which directed the DRP to adjudicate the objections raised by the assessee by a speaking order. ii) Yes, the assessee has been put in a more worse situation than what it was before filing appeal in the first round of litigation. Therefore, we have held, as mentioned elsewhere that the additions made in the first round of litigation will only be considered which is ₹ 7.21 crores. iii) Yes. There is a PE in India. iv) Attribution has to be done by applying TNMM as most appropriate method on the profits attributable to the sales excluding ForeVision and Videocon. Charging of interest u/s 234B - HELD THAT - An assessee must first be liable to pay advance tax under the provisions of section 208 of the Act. As per the provisions of section 208 read with section 209(1)(d) of the Act, advance tax payable has to be computed after reducing from the estimated tax liability the amount of tax deductible/ collectible at source on income which is included in computing the estimated tax liability. Under section 195 of the Act, tax is deductible at source from payments made to non-residents. Appellant is a non-resident and thus, tax is deductible at source from the payments made to it under section 195 of the Act. Since tax was deductible at source on all the payments made to Appellant, no advance tax was payable as per the provisions of the Act. Amendment to the provisions have been brought by the Finance Act, 2012, w.e.f. 1.4.2012 by which a proviso below section 209(1)(d) of the Act has been added but applicable from A.Y 2013-14. Considering the law on this issue, we direct the Assessing Officer not to charge interest u/s 234B of the Act. In A.Y 2004-05, interest has also been levied u/s 234A of the Act. Such levy is consequential and we direct the Assessing Officer to charge interest after giving appeal effect as per the provisions of the Act
Issues Involved:
1. Whether the Dispute Resolution Panel (DRP) exceeded the directions issued by the Tribunal. 2. Whether the final assessment order put the assessee in a worse position than before filing the appeal. 3. Determination of whether the appellant had a Permanent Establishment (PE) in India. 4. Attribution of profit to the PE. 5. Charging of interest under section 234B of the Income-tax Act. Issue-wise Detailed Analysis: I. Whether the DRP Exceeded the Directions Issued by the Tribunal: The Tribunal's directions were to address the non-adjudication of the application for permission to lead additional evidence and to dispose of objections by a speaking order. The DRP followed these directions and issued a well-reasoned order. The appellant argued that the DRP enhanced the assessment without a show cause notice and that the DRP did not deal with additional evidence as directed by the Tribunal. The DRP, however, did not change the basis of determining the profits attributable to the PE but merely followed the Tribunal's directions to issue a speaking order. Hence, the DRP did not exceed the Tribunal's directions. II. Whether the Final Assessment Order Put the Assessee in a Worse Position: The Tribunal noted that the assessed income after the DRP's readjudication was significantly higher than the original assessment, putting the assessee in a worse position. The Tribunal referenced the Supreme Court's decision in State of Kerala Vs. Vijaya Stores, which held that an assessee cannot be put in a worse position as a result of filing an appeal. The Tribunal concluded that the entire proceedings should be restricted to the original assessed income of ?7.21 crores. III. Determination of Whether the Appellant Had a PE in India: The appellant's Liaison Office (LO) in India was initially set up for preparatory and auxiliary services. However, post-survey operations and based on employee statements and email exchanges, the Revenue determined that the LO was involved in core business activities such as marketing, sales promotion, and market research. The Tribunal found that these activities were not merely preparatory or auxiliary but were core to the appellant's trading business. Therefore, the LO constituted a PE in India under Article 5 of the India-Singapore DTAA. IV. Attribution of Profit to the PE: Article 7 of the India-Singapore DTAA requires that the profits attributable to the PE be determined as if it were an independent enterprise. The DRP used the margin percentage of an independent agent, ForeVision, as an internal comparable to determine the profits attributable to the PE. The Tribunal, however, found this approach to be excessive and directed the use of the Transactional Net Margin Method (TNMM) as the most appropriate method for attribution of profits, excluding sales through ForeVision and Videocon. V. Charging of Interest Under Section 234B: The appellant argued that since its revenues were subject to tax deduction at source, it was not liable for advance tax, and hence, interest under section 234B should not be charged. The Tribunal agreed, referencing the Delhi High Court's decision in DIT v. GE Packaged Power Inc., which held that no interest under section 234B can be levied when the payer is obligated to deduct tax at source. Consequently, the Tribunal directed the Assessing Officer not to charge interest under section 234B. Conclusion: The Tribunal concluded that the DRP did not exceed its directions, but the final assessment put the assessee in a worse position. The LO was determined to be a PE in India, and the profit attribution should be done using TNMM. Interest under section 234B should not be charged, and the appeals were partly allowed.
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