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2014 (11) TMI 102 - AT - Income TaxJurisdiction of AO to issue notice for reopening of assessment u/s 147/148 - Held that - The AO made similar kind of addition in both the years by holding that the total expenditure incurred as per audited expenditure and income account requires to be computed by adding mark up of 8.5% in AY 2003-04 and the mark up of 10% for AY 2004-05 - the CIT(A) upheld the findings of the AO that the assessee has PE in India in the form of branch office - CIT(A) partly allowed ground of the assessee on the issue of attribution of profit to the branch office, PE of the assessee in India and directed the AO to calculate attributable profit at 50% of the figure arrived at after applying the profit rate of 8.5% for AY 2003-04 and 10.6% for AY 2004-05 which represents the global profit ratio of the assessee company in the relevant financial years. The action of the AO was not prompted by any whim, surmise or conjecture but the assessment for AY 2003-04 was processed u/s 143(1) of the Act and during the course of assessment proceedings for 2004-05, the AO noticed that Indian entity provides engineering design and consultancy services to the Head Office - in Raymond Woollen Mills Limited Versus Income-Tax Officer And Others 1997 (12) TMI 12 - SUPREME Court it has been held that where there is a prima facie material, the sufficiency and correctness of the belief cannot be questioned at this primary stage - the action of the AO was proper and in conformity with the provisions of the Act Decided against assessee. Business profit to be taxable in India or not Permanent Establishment in India or not - Held that - As per list submitted by the assessee before the authorities for the period 2003-04, there were 95 employees of high qualification working for the associated enterprises of US - In terms of Article 5(2) (b) of Indo US DTAA, the assessee entity represents a fixed place of business of the enterprise through which substantial work was carried out by the assessee which constitutes PE of the assessee in terms of Article 5(2)(b) and (c) of Indo-DTAA - the income attributable to the operation carried out by the PE shall be taxable in India. In this context, we may refer letter of the assessee dated 29.4.2008 wherein the assessee submitted before the CIT(A) the details of role and distribution of work profile between US office and the Indian office - Indian branch office during the relevant period carried out engineering, calculations as well as drawing of various architectural designs for the US office. The important work assigned to Indian branch office was preparation of drawing, designs and doing structural calculations which require high technical and managerial skill, therefore, this important facet of the Indian Brach cannot be said to be a preparatory and auxiliary work of a back office but at the same time, the US office minimise their cost of services and other expenses by assigning and appointing highly technical and materially skilled professional to discharge main function of US Head office in India at low cost - in the case of Dit (International Taxation) Versus Morgan Stanley And Company Inc. 2007 (7) TMI 201 - SUPREME Court it has been held that even employees which are highly experienced in their specialised fields lends their expertise to Indian entity in that that sense there is a service PE under Article 5(2)(1) of Indo-US DTAA thus, the assessee is a PE in India as per provisions of Article 5(2)(b) and (c) of Indo-US DTAA, the contentions of the assessee are dismissed Decided against assessee. Calculation of profits attributable @ 50% - Determination of attributable profits - adoption of global profit rate - Held that - The assessee has PE in India as per provisions of Article 5 (2)(b)(c) of Indo US DTAA - the assessee has not submitted record of uncontrolled transactions and the record of analysis, how the uncontrolled transactions are comparable to the case of the assessee as per requirement of Rule 10B(2) of the Income Tax Rules, 1962 - the AO was right in adopting the profit of 8.5% for AY 2003-04 and 10.6% for AY 2004-05 to calculate attributable profit - the AO adopted the wrong calendar year for adoption of global profit rate but we are unable to accept this contention as financial year for respective assessment years is spread over upto 31st March and in the light of this fact that the percentage of global profit was higher in calendar year 2003, the adjustment would be neutral and academic, therefore, this contention of the ld. Counsel of the assessee is not found to be acceptable - the action of the CIT(A) is upheld that he directed the AO to calculate attributable profit @50% of the figure arrived after applying profit rate of 8.5% for AY 2003-04 and 10.6% for AY 2004-05 - the contentions of the assessee for wrong adoption of global profit of the US Head office are not sustainable - the CIT(A) was reasonable and justified in directing the AO to calculate the attributable profit at 50% of the figure arrived by the AO after applying global profit rate of US Head office for the respective assessment years Decided against assessee. Status of assessee to be treated as individual or Foreign Company Held that - The assessee has mentioned that US Head office is a firm and not a company even in the US tax status, therefore, the assessee should be given the status of individual instead of foreign company - the CIT(A) has rightly concluded that while applying or determining the status of the appellant, the provisions of Income-tax Act have to be applied - As per provisions of Income- Tax Act, anybody corporate incorporated by or under the laws of any country outside India has to be treated as a company - the assessee was rightly treated as a foreign company for the purpose of tax status and the AO correctly applied and determined the status of the assessee as a foreign company for the purpose of tax payer status of the assessee Decided against assessee.
Issues Involved:
1. Validity of jurisdiction under Section 148 of the Income Tax Act, 1961. 2. Assumption of jurisdiction under Section 147 of the Income Tax Act, 1961. 3. Existence of Permanent Establishment (PE) in India under DTAA. 4. Attribution of profits to the Indian PE. 5. Status of the appellant as an individual or a foreign company. Detailed Analysis: 1. Validity of Jurisdiction under Section 148: The assessee challenged the reopening of assessment under Section 147/148, arguing that the Assessing Officer (AO) had no valid material to assume jurisdiction and the reasons framed were based on suspicion. The AO justified the reopening based on the prima facie belief of income escapement, relying on Supreme Court decisions in Raymond Woollen Mills and ITO vs Selected Co. Ltd., which state that sufficiency and correctness of belief cannot be questioned at the initiation stage. The CIT(A) upheld the AO's action, noting that the AO's belief was based on findings from the assessment proceedings for AY 2004-05. The Tribunal agreed with the CIT(A), dismissing the assessee's grounds as devoid of merit. 2. Assumption of Jurisdiction under Section 147: The AO assumed jurisdiction under Section 147 based on the observation that the Indian branch provided services to the Head Office at cost plus 1.83%, which did not represent arm's length remuneration. The AO's action was justified by the Tribunal, which held that the AO's belief was not based on whim or conjecture but on prima facie material indicating income escapement, consistent with the Supreme Court's rulings. 3. Existence of Permanent Establishment (PE) in India under DTAA: The assessee contended that its Indian branch did not constitute a PE under the DTAA as its activities were preparatory and auxiliary. The CIT(A) and AO concluded that the Indian branch constituted a PE, performing core business activities like preparing drawings and designs. The Tribunal upheld this conclusion, noting the significant presence and activities of the Indian branch, including 95 highly qualified employees. The Tribunal distinguished the case from Morgan Stanley, emphasizing that the Indian branch's activities were not merely auxiliary but integral to the business. 4. Attribution of Profits to the Indian PE: The AO attributed profits to the Indian PE based on a global profit rate of 8.5% for AY 2003-04 and 10.6% for AY 2004-05. The CIT(A) directed the AO to attribute 50% of these profits to the Indian PE, considering the risks and activities performed by both the Head Office and the Indian branch. The Tribunal upheld the CIT(A)'s decision, recognizing the contributions and risks assumed by both entities and finding the 50% attribution reasonable. 5. Status of the Appellant as an Individual or a Foreign Company: The assessee argued that it should be treated as an individual, not a foreign company, as it was a firm owned by a single individual. The CIT(A) and AO treated the assessee as a foreign company under the Income Tax Act, which defines any body corporate incorporated outside India as a company. The Tribunal upheld this classification, noting that the provisions of the Income Tax Act must be applied when determining the status of the appellant. Conclusion: The Tribunal dismissed the appeals of both the assessee and the revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal found the AO's actions in reopening the assessment and attributing profits to the Indian PE justified and consistent with legal precedents and the provisions of the Income Tax Act and DTAA. The status of the appellant as a foreign company was also upheld. The order was pronounced in open court on 31.10.2014.
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