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2023 (8) TMI 719 - AT - Income TaxDependent agency PE of the assessee in India - profit attribution to the said DAPE - TP adjustments - Arm s length price - international transaction between assessee and the Indian AE -HELD THAT - It has been brought on record that assessee has been subjected to TP adjustment and in the case of the assessee also the transactions have been found to be at arm s length and additionally one of the two Indian AEs have also been subjected to TP adjustment and its transaction with assessee also to be at arm s length and new adjustments have been made. Before us ld. Counsel had also brought on record and also showed from TP documentation for A.Y.2018-19 of the assessee and both the Indian AEs and also from the TP order of the assessee and TNT India for the same year that the international transactions of the Indian AEs with the assessee are at arm s length price wherein the mean margin determined based on five comparable companies in the case of both Indian AEs was 2.85% of income while the assessee has remunerated at a higher margin of 4% on their gross income. Apart from that the ld. TPO has not recorded any finding that suggests that all the FAR undertaken by each of the parties were not adequately captured which negates any requirement for further attribution of profits in the absence of any left-out functions and risk taking activities. Accordingly we agree with the contention of the ld. Counsel that once the transactions have been found to be at arm s length no further profit attribution can be made. In any case it has been brought on record that assessee had incurred losses in the fiscal year 2018 2019 and 2020 and ld. AO without analyzing the transactions had made the losses of the assessee into profit just merely rely on the draft report of the CBDT and a recommendary course of action for the profit attribution to the PE. Before us ld. Counsel has also demonstrated as to how no income can be taxable in the hands of the assessee looking to the fact that already in relation to the operations carried out by the assessee for its Indian AE already income has been subjected to tax in India in the hands of the AE DRP somewhere had stated that remuneration paid to Indian AE does not capture the functions/risks and return on the use of intangibles and therefore it has upheld the profit attribution. Such a finding is not based on any proper analysis of the facts and documents and it is merely a hypothesis. Accordingly such an observation of the ld. DRP cannot be sustained for the reason that already international transaction between assessee and the Indian AE have been subject matter of TP analysis and which had been concluded at arm s length price. Even if no reference to the TPO has been made in A.Y. 2019-20 since the facts and circumstances and the margins on same transactions are the same and ld. AO was also not alleged that the transaction between the assessee and its AE are not at arm s length then in such case also we do not find any reason to deviate from the decision as applicable for A.Y.2018-19 also. Accordingly this issue is decided in favour of the assessee.
Issues Involved:
1. Validity of assessment proceedings. 2. Attribution of profits under Section 9(1)(i) of the Act and Article 7 of the India-Netherlands DTAA. 3. Arbitrary assignment of ad hoc ratios for computing taxable revenue. 4. Deemed profitability rate despite actual losses. 5. Deduction of profits already taxed in the hands of Indian AEs. 6. Opportunity of being heard. 7. Interest under Section 244A of the Act. Summary: 1. Validity of Assessment Proceedings: The ground regarding the validity of assessment proceedings was not pressed by the assessee and thus dismissed as not pressed. 2. Attribution of Profits: The main issue was the attribution of profits in respect of outbound and inbound shipments under Section 9(1)(i) of the Act and Article 7 of the India-Netherlands DTAA. The assessee, a tax resident of the Netherlands, argued that as per Article 7, such income should only be taxable in India if there is a PE in India. The AO alleged that the Indian AEs were acting as agents of the assessee, constituting a PE, and attributed profits to the Indian business using an ad hoc ratio. 3. Arbitrary Assignment of Ad Hoc Ratios: The AO assigned arbitrary ratios of 55% for the country of origin, 22.5% for the country of trans-shipment, and 22.5% for the country of destination to compute taxable revenue. The Tribunal found this method inappropriate since the transactions were already at arm's length. 4. Deemed Profitability Rate: The AO applied a deemed profitability rate of 2% based on a committee recommendation, despite the assessee incurring global losses. The Tribunal held that no further profit attribution is necessary if transactions are at arm's length. 5. Deduction of Profits Already Taxed: The assessee argued that profits already taxed in the hands of Indian AEs should be deducted while computing income taxable in the hands of the assessee. The Tribunal agreed, noting that the transactions were at arm's length and thus no further profits should be attributed. 6. Opportunity of Being Heard: This ground was not pressed by the assessee and thus dismissed as not pressed. 7. Interest under Section 244A: The Tribunal found this issue to be consequential. Conclusion: The Tribunal concluded that once transactions are found to be at arm's length, no further profit attribution is necessary. The appeals by the assessee were allowed, and the orders of the AO were set aside. The Tribunal emphasized that proper TP analysis negates the need for additional profit attribution. The appeals were allowed in favor of the assessee.
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