2011 (8) TMI 313 - HC - Income Tax

Double Taxation Avoidance Agreement between India and the United Kingdom - Computation of profit - Research and development expenses - The Assessing Officer had adopted the global profits being trading profit which represents gross profit less commercial marketing product support cost and general administration cost, but before net of the research and development expenses and exceptional items - Held that - 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 outside 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 research and development 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 - Decided against the assessee. Tax liability - Prima facie papers itself show the extent of work being handled by RRIL for appellant in India - RRIL is not only 100% subsidiary of the appellant but also maintains a permanent office in India to undertake all such activities - Thus, it can be concluded that the appellant has a business connection in India within the meaning of Section 9(1) (i) of the Act and under the Income-Tax Act, its income is chargeable to tax in India arising out of such business connections - Decided against the assessee.

Issues Involved:
1. Validity of reassessment proceedings under Section 147/148 of the Income-Tax Act, 1961.
2. Whether the office of Rolls Royce India Limited (RRIL) constituted a permanent establishment (PE) under Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom.
3. Appropriate amount of profits attributable to the PE in India.
4. Whether the findings of the Income Tax Appellate Tribunal (ITAT) regarding the existence of the PE were perverse.
5. Whether a coordinate bench of the tribunal can take a contrary view from an earlier coordinate bench in respect of the same assessee where similar issues are involved or should the bench refer it to a larger bench.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The learned counsel for the assessee did not press the question regarding the validity of reopening of assessment under Section 147 of the Income-Tax Act. Consequently, the court decided this issue against the assessee as not pressed.

2. Permanent Establishment (PE) under DTAA:
The court noted that there was no serious contest regarding the existence of a PE. The main focus was on the profits attributable to the PE. The court acknowledged that RRIL, a 100% subsidiary set up in India, was held to be the PE of the assessee. The Tribunal's findings were based on various facets of the business relationship between RRIL and the assessee, including the extent and scope of services rendered by RRIL.

3. Profits Attributable to the PE:
The primary argument was whether the payment made by the assessee to RRIL constituted an arm's length price (ALP) and if so, whether nothing more should be taxed at the hands of the assessee. The Assessing Officer had attributed 100% of the profits earned from the sale of goods to Indian customers for certain assessment years and 75% for others. The CIT (A) modified this to 75% for all years, and the ITAT further reduced it to 35%.

The Tribunal clarified that 50% of the global profits were attributed to manufacturing activity, 15% to research and development, and the balance to marketing activities. Since marketing activities were carried out in India, 35% of the global profits were attributed to Indian operations. The court agreed with the Tribunal's view that research and development expenses, which were not incurred in India, should not be set off against the profits attributable to Indian operations.

4. Findings of ITAT Regarding PE:
The court found that the Tribunal had conducted a detailed analysis of the material on record, including the objections and documents submitted by the assessee. The Tribunal concluded that RRIL constituted a PE under Article 5 of the DTAA, based on several factors such as the fixed place of business, core activities of marketing and sales, and the dependent agent status of RRIL. The Tribunal's findings were upheld, and the court did not find any need to remand the case back to the Tribunal.

5. Coordinate Bench Taking a Contrary View:
The additional question regarding whether a coordinate bench of the tribunal can take a contrary view from an earlier coordinate bench was not argued by the learned counsel for the assessee. Therefore, this question was also decided against the assessee as not pressed.

Conclusion:
The court dismissed the appeals of the assessee, agreeing with the ITAT's findings on all the relevant issues. The court also dismissed the appeals of the Revenue, which had questioned the extent of income attributable to the PE, thereby upholding the ITAT's order in its entirety.

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