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2009 (1) TMI 305 - AT - Income TaxMistake in the order of Tribunal which can be rectified u/s. 254 - Attribution of profits of the PE in India - Income - Deemed to accrue or arise in India - assessee carried on marketing activities in India and for which purpose its own employees as well as the employees of RRIL were employed - HELD THAT - Since it is found that the appellant s business activities in India are not wholly channelled through his agent in India but because of the activities of the assessee itself as well as its agent and in respect of such services of agent the agent has not been remunerated for the reason that such services are not part of agreement with the agent for which remuneration is actually paid. Therefore it can be held that income is attributable to the PE in India. Much reliance has been placed on the decision of the Hon ble Supreme Court in the case of Morgan Stanley Co. Inc. 2007 (7) TMI 201 - SUPREME COURT as relied upon by the Hon ble Bombay High Court in the case of SET Satellite (Singapore) Pte Ltd 2008 (8) TMI 96 - BOMBAY HIGH COURT However the conclusion as arrived at by the Hon ble Supreme Court itself revealed that whether the assessment will extinguish or not is a factual matter. From the above cases it can be held that the assessment of non-resident will extinguish only where profit attributable to the PE is equal to the remuneration payable to the agent in India. However the agent in India is remunerated only on the basis of cost plus 6 per cent for the services that were to be rendered in terms of the agreement. But in the present case the remuneration to the agent does not take into account all the risk taking functions of the non-resident enterprise. For the functions performed by the assessee directly and also the risk assumed by the non-resident in India no remuneration is payable to the agent in India. The services rendered by agent in India is much more than expected of it in terms of the agreement and obviously for which the agent is not remunerated. Therefore even in terms of Hon ble Supreme Court s decision in such a case there would be need to attribute profits to the PE for those functions/risks that have not been considered. In the order the Tribunal have also considered that the PE in India is not only because of the dependent agent s presence in India but also because of fixed place as per art. 5(1) and also in terms of art. 5(4)(c) of the treaty. The extinguishment as propounded as per Circular No. 23 of 1969 or as held by the Hon ble Supreme Court in Morgan Stanley Co. Inc. will apply only where the profit attributable to the non-resident is only to the extent of remuneration payable by the non-resident to the agent. Therefore the assessment in the present case will not extinguish and the income will be computed on the basis of finding given in the order. Computing global profits to be attributed to Indian operations - The contention of the ld counsel for the assessee is that net R D expenses should also be reduced while computing operating profit. We are unable to accept such contention. It is an admitted fact that no part of the R D activities are carried out in India. The R D do contribute to the profit and in respect of which Tribunal have apportioned 15 per cent thereof and directed to exclude the same while computing global profits. While computing the profit which is to be attributed to the activities in India only those factors affecting such profit are to be considered. Thus if some activities are carried out by the assessee wholly outside India in respect of which no profit can be attributable to the activities in India then such profit cannot be taxed in India. In the same fashion if some activities are carried out side India resulting into loss to the assessee such loss is also to be ignored while computing the profit which is composite to the proportionate of activities in India. The activities in India are in the form of marketing and sales. Therefore all the expenses incurred till the marketing are to be reduced. The R D activities which result into loss to the assessee and admittedly not being carried out in India is to be ignored while computing global profits to be attributed to Indian operations. Therefore the computation of profit as done by the AO is to be upheld subject to our observations of the order of Tribunal. In the result all the miscellaneous applications are disposed of accordingly.
Issues Involved:
1. Business connection/permanent establishment (PE) in India. 2. Attribution of profit to the PE. 3. Consideration of judicial pronouncements and circulars. 4. Clarification on the profit percentage to be adopted for tax purposes. Issue-wise Detailed Analysis: 1. Business Connection/Permanent Establishment (PE) in India: The primary issue was whether the assessee had a business connection or PE in India. It was held that the assessee had a business connection and a PE in India, which included a fixed place of business, premises used as a sales outlet, and a dependent agent. This conclusion was based on Article 5(1), 5(2)(f), and 5(4) of the DTAA between India and the UK. 2. Attribution of Profit to the PE: The Tribunal held that since the assessee had a PE in India, profit was attributable to it. The applicant argued that the remuneration paid to the dependent agent (RRIL) at arm's length should mean no further income is attributable to the PE. However, the Tribunal found that the activities in India were not limited to those performed by RRIL under the agreement. The assessee's own employees and additional activities carried out in India meant that further profits were attributable to the PE. 3. Consideration of Judicial Pronouncements and Circulars: The applicant contended that the Tribunal did not consider the Supreme Court's decision in Morgan Stanley & Co. Inc., Circular No. 23 of 1969, and the Madras High Court decision in Annamalais Timber Trust & Co. The Tribunal clarified that the decision in Morgan Stanley was considered, but the facts differed as the remuneration to RRIL did not cover all risk-taking functions. Circular No. 23 was not applicable because the assessee's activities were not wholly channeled through RRIL. The Annamalais Timber Trust decision was deemed irrelevant as it depended on specific case facts. 4. Clarification on the Profit Percentage to be Adopted for Tax Purposes: The Tribunal had held that 35% of the profit from sales in India was chargeable to tax, but the specific profit to be adopted was not clear. The Tribunal clarified that the global profit should be considered as trading profit, which is gross profit less commercial marketing and general administration costs, but before R&D expenses. Since R&D activities were not conducted in India, these expenses should not reduce the trading profit for attribution purposes. Conclusion: The Tribunal concluded that the non-resident assessee's business activities in India were not wholly channeled through the agent (RRIL), and thus, further profits were attributable to the PE. The Tribunal upheld the computation of profit by the AO, subject to the observations regarding the exclusion of R&D expenses. The Tribunal's order should be read together with this clarification.
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