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2022 (10) TMI 151 - AT - Income TaxRevision u/s 263 by CIT - profit attribution of a fixed place PE and the DAPE - Erroneous but not prejudicial to revenue order - AO accepted the computation of profits attributable to the dependent agent permanent establishment, and, accordingly, proceeded to finalize the assessment - HELD THAT - In the present case, there does not appear to be any dispute with respect to the ascertainment of the arm s length price of the services rendered by the dependent agent to the assessee, as no ALP adjustment is made in the remuneration paid by the assessee to the MFE-India, i.e. the dependent agent. There are also several indications to suggest that DA and DAPE are being treated as distinct taxpayers, inasmuch as while the arm s length payment to the agent is not being questioned, the FAR analysis for the PE has been called into question. The two taxpayer approach adopted by the assessee has been accepted, and, taking it further, the profit attribution on the basis of the two taxpayer approach is enhanced. Even if that computation of profit attribution, on the basis of the two taxpayer approach, is erroneous, in view of Hon ble jurisdictional High Court decision, it cannot be said to be prejudicial to the interest of the revenue unless there is a categorical finding that the payment to the dependent agent is not an arm s length price vis- -vis functions performed, assets employed and risks assumed by the dependent agent. While doing so, one also has to bear in mind that DAPE is not anything distinct from the DA, in the light of the binding judicial precedents holding the field as of now, and the taxability of the dependent agent s remuneration in the hands of the DA brings an end to the taxability of the DAPE also. There is no such finding about the payment to the dependent agent being less than the arm s length price of services rendered by the dependent agent, in the present case, even though there is a finding about questioning the DAPE s FAR analysis. The Commissioner ought to have examined the arm s length price determination in respect of the services rendered by the dependent agent, in this context. That exercise has also not been done. We are of the considered view that unless the order sought to be revised cannot be said to be prejudicial to the interest of the revenue, its being erroneous, even if that be so, cannot be said to reason enough to invoke section 263 of the Act, and the order cannot be said to be prejudicial to the interests of the revenue unless there is a categorical finding that the dependent agent has not been paid arm s length remuneration for the functions performed, assets employed and risks assumed by the dependent agent. The order being prejudicial to the interest of the revenue, inasmuch as the payment to the dependent agent not being at an arm s length, is a sine qua non for holding that the order is prejudicial to the interest of the revenue. This exercise has clearly not been done on the facts of this case. For this short reason alone, we must set aside the impugned revision order. Assessee appeal allowed.
Issues Involved:
1. Jurisdiction and validity of the order passed under section 263 of the Income Tax Act. 2. Attribution of profits to the dependent agent permanent establishment (DAPE). 3. Application of the arm's length principle in determining the taxable profits of the DAPE. 4. Examination of the Function Asset Risk (FAR) analysis. 5. Role of the Double Taxation Avoidance Agreement (DTAA) between India and Malaysia. 6. Legal precedents and their applicability to the case. Issue-Wise Detailed Analysis: 1. Jurisdiction and Validity of the Order Passed Under Section 263 of the Income Tax Act: The assessee challenged the order dated 25th March 2022, passed by the Commissioner of Income Tax (CIT) under section 263, which modified the assessment framed under section 143(3) for the assessment year 2017-18. The primary contention was that the order was "without jurisdiction, bad in law and void ab initio." Section 263 allows the CIT to revise an order if it is "erroneous in so far as it is prejudicial to the interests of the revenue." The Tribunal emphasized that both conditions must be satisfied for the CIT to invoke revisionary powers. In this case, since the dependent agent was remunerated at arm's length, the order could not be considered prejudicial to the revenue. 2. Attribution of Profits to the Dependent Agent Permanent Establishment (DAPE): The assessee, a Malaysian tax resident, had a wholly-owned subsidiary in India, MFE Formwork Technology India Pvt Ltd (MFE-India), which constituted its DAPE. The assessee attributed 24% of gross profits to the Indian operations based on a FAR analysis. The CIT, however, revised this attribution to 35%, referencing the Rolls Royce PLC case. The Tribunal noted that the CIT's approach conflated the FAR analysis of a fixed place PE with that of a DAPE, which was inappropriate. 3. Application of the Arm's Length Principle in Determining the Taxable Profits of the DAPE: The Tribunal highlighted that as long as the dependent agent (MFE-India) was paid an arm's length remuneration, no further profits could be attributed to the DAPE. This position was supported by the jurisdictional High Court's judgment in the Set Satellite Singapore Pte Ltd case. The Tribunal emphasized that the taxability of the dependent agent's remuneration exhausts the tax liability of the DAPE. 4. Examination of the Function Asset Risk (FAR) Analysis: The FAR analysis conducted by the assessee was initially accepted by the Assessing Officer but was later rejected by the CIT, who argued that the analysis did not justify the 24% profit attribution. The Tribunal found that the CIT's rejection was based on a misunderstanding of the distinction between the FAR analysis for a dependent agent and a DAPE. The Tribunal reiterated that the correct approach was to ensure that the dependent agent was remunerated at arm's length for its services. 5. Role of the Double Taxation Avoidance Agreement (DTAA) Between India and Malaysia: The DTAA between India and Malaysia played a crucial role in determining the taxability of the assessee's income. The Tribunal noted that the assessee was entitled to the benefits of the DTAA, and the existence of a DAPE under the DTAA was tax-neutral as long as the dependent agent was paid an arm's length remuneration. 6. Legal Precedents and Their Applicability to the Case: The Tribunal referred to several legal precedents, including the Set Satellite Singapore Pte Ltd case and the Rolls Royce PLC case. It emphasized that the CIT's reliance on the Rolls Royce case was misplaced as it dealt with a fixed place PE, not a DAPE. The Tribunal concluded that the CIT's order was erroneous and not prejudicial to the revenue, given the arm's length remuneration paid to the dependent agent. Conclusion: The Tribunal allowed the appeal, setting aside the CIT's revision order. It held that the non-levy of taxes on the hypothetical profits of the DAPE, independent of the taxability of the dependent agent, could not be considered prejudicial to the revenue. The Tribunal emphasized that the arm's length remuneration paid to the dependent agent exhausted the tax liability of the DAPE, and any further profit attribution was unnecessary. The Tribunal also noted that any errors in the FAR analysis were academic and did not impact the overall tax liability.
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