2021 (2) TMI 945 - AT - Income Tax

Income accrued in India - taxable income left in the hands of the PE - commission paid to Indian agent - Whether foreign entity having a permanent establishment in India shall be liable to income tax only to the extent as is reasonably attributable to the operations carried out in India? - commission/remuneration paid to RIPL from the profits attributed to the PE - India and UK DTAA - HELD THAT - When we deduct commission/remuneration from the RIPL from the profits attributed to the PE, no taxable income left in the hands of PE. Consequently, addition made by the AO/CIT (A) is not sustainable in the eyes of law. Decision rendered by the coordinate Bench of the Tribunal in case of Amadeus Global Travel Distribution S.A 2007 (11) TMI 330 - ITAT DELHI-B affirmed by the Hon ble Delhi High Court 2011 (4) TMI 1520 - DELHI HIGH COURT and 2011 (5) TMI 1114 - DELHI HIGH COURT by relying upon the decision in case of DIT vs. Galileo International Inc 2009 (2) TMI 497 - DELHI HIGH COURT has been further followed by the coordinate Bench of the Tribunal in assessee s own case 2020 (11) TMI 206 - ITAT DELHI We are of the considered view that when RIPL, a domestic subsidiary company, has already been remunerated at arm s length, no further attribution of profit to PE would be warranted. Even otherwise, by following the order passed by the coordinate Bench of the Tribunal in assessee s own case for AY 2007-08 2020 (11) TMI 206 - ITAT DELHI , when we deduct the remuneration/commission paid to RIPL from the amounts of profit attributed to the PE no taxable income left in the hands of the PE. Consequently, additions made by the AO and confirmed by ld. CIT (A) are ordered to be deleted being not sustainable in the eyes of law. Consequently, all the appeals filed by the assessee are hereby allowed.

Issues Involved:
1. Legality of the order passed by the Commissioner of Income Tax (Appeals)-43, New Delhi.
2. Assessment of total income at INR 14,624,822 against the returned income of Nil.
3. Application of Section 9(1)(i) of the Income-tax Act concerning the foreign entity's permanent establishment (PE) in India.
4. Attribution of 50% of India-centric profits to the Indian PE.
5. Application of principles from the Morgan Stanley and Set Satellite cases regarding arm's length remuneration.
6. Reliance on previous decisions and principles laid down by the Delhi High Court in the Rolls Royce Singapore case.
7. Conclusion on whether the Indian subsidiary was remunerated at arm's length.

Detailed Analysis:

1. Legality of the Order:
The assessee challenged the orders passed by the Commissioner of Income Tax (Appeals)-43, New Delhi, as bad in law. The Tribunal examined the facts and circumstances, noting that the Assessing Officer (AO) had attributed 50% of the business profits to the Indian PE and taxed the same at 40% plus applicable surcharge and education cess.

2. Assessment of Total Income:
The AO assessed the total income of the appellant at INR 14,624,822 against the returned income of Nil. The assessee contended that the income earned was not taxable in India, arguing that the Indian subsidiary, Ricardo India Pvt. Ltd. (RIPL), was adequately remunerated on an arm's length basis.

3. Application of Section 9(1)(i):
The assessee argued that the CIT(A) disregarded the provisions of Section 9(1)(i) of the Income-tax Act, which states that a foreign entity with a PE in India is liable to tax only on the income reasonably attributable to operations carried out in India. The Tribunal noted that the assessee had accepted the existence of a PE in India and that the transfer pricing report showed the profits attributed to the PE were at arm's length.

4. Attribution of 50% of India-centric Profits:
The CIT(A) upheld the AO's decision to attribute 50% of India-centric profits to the Indian PE, which the assessee argued was highly unreasonable and excessive. The Tribunal examined the functional profile of the appellant and its Indian PE, noting that the Indian subsidiary had minimal operations and was adequately remunerated for its marketing services.

5. Application of Morgan Stanley and Set Satellite Principles:
The assessee contended that, as per the principles laid down in the Morgan Stanley and Set Satellite cases, no further profits should be attributed to the Indian agent if the commission paid is at arm's length. The Tribunal agreed, citing the Supreme Court's ruling in Morgan Stanley that if a PE is remunerated on an arm's length basis, taking into account all risk-taking functions, nothing further should be attributed to the PE.

6. Reliance on Previous Decisions:
The Tribunal noted that the CIT(A) had relied on previous decisions, including the Rolls Royce Singapore case, to justify the attribution of 50% of profits to the Indian PE. However, the Tribunal found that the commission/remuneration paid to RIPL was more than the profits attributed to the PE, making further attribution unnecessary.

7. Conclusion on Arm's Length Remuneration:
The Tribunal concluded that since RIPL was remunerated at arm's length, no further attribution of profit to the PE was warranted. The Tribunal cited several cases, including Amadeus IT Group SA and Galileo International Inc., to support this conclusion. The Tribunal ordered the deletion of the additions made by the AO and confirmed by the CIT(A), allowing all appeals filed by the assessee.

Final Judgment:
The Tribunal allowed the appeals filed by the assessee, concluding that no taxable income was left in the hands of the PE after deducting the arm's length remuneration paid to RIPL. The order pronounced on February 17, 2021, emphasized that the CIT(A)'s decision was not sustainable in the eyes of the law.

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