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2018 (6) TMI 210 - AT - Income TaxExistence PE - dependent agent Permanent Establishment (PE) of the assessee - The assessee paid 10% commission to DAIPL on its direct sales - Held that - In the absence of the assessee furnishing any shred of credible evidence showing its direct involvement from Japan in making sales to customers in India and proving that the role of DAIPL was simply confined to a communication channel, the inescapable conclusion which follows is that the entire activity starting from identifying customers, approaching them, negotiating prices with them and finalization of products and prices were done by DAIPL in India not only for the products sold directly by them as distributor, but also for which the assessee is claiming to have made direct sales. Not even a single direct e-mail between the assessee and its customers in India has been provided, which reinforces the view that no activity resulting into direct sales in India was done by the assessee and such marketing activities were done by DAIPL alone. The facts stated hereinabove amply prove that DAIPL was habitually exercising authority in India to conclude contracts on behalf of the assessee, though such contracts were formally signed by the assessee in Japan. Sub-para (c) of para 7, which has also been invoked by the AO, is clearly magnetized inasmuch as DAIPL was securing orders in India almost wholly for the assessee. All the substantive parts of the key activities in making sales were done by DAIPL from India. This shows that DAIPL constituted a dependent agent PE of the assessee in India. Determination of ALP - Held that - the benchmarking of the receipt of commission @ 10% in the hands of DAIPL was done only with reference to two functions of forwarding customers request to DIL and forwarding DIL s quotations to the customers. As such, the other functions performed by DAIPL in negotiating and finalizing contracts in India on behalf of the assessee remained excluded from the process of determination of the ALP by the TPO. - Under such circumstances, the argument of the ld. AR becomes untenable. Determination of the quantum of income attributable to the PE - Held that - It is not understandable as to why the amount of commission was reduced straightway from the amount of direct sales and then what is the logic in applying 79.85% and then allowing expenses at the rate of 5%. Correct method in such circumstances is to first find out the amount of profit which would have been earned by the assessee in India from direct sale to end customers and then reduce it with the amount which has already suffered taxation in the hands of its subsidiary, DAIPL, through the transaction of commission. It goes without saying that there can be no hard and fast rule of determining the rate of profit attributable to marketing activities carried out in India. It is a fact based exercise, depending upon the role played by the PE in the overall generation of income. Considering the whole gamut of the facts and circumstances prevailing in the instant case, we estimate 30% of the above total profit @ 10% of the sales, as attributable to the operations carried out by the PE in India. Accordingly, the amount of net profit attributable to the marketing activities carried out in India would be 30% of the amount of net profit relatable to sales in India at ₹ 4,54,01,172/-, which comes to ₹ 1,36,20,352/-. Amount of profit attributable to the PE which has already been taxed in the hands of DAIPL through Since necessary details of income offered by DAIPL from the receipt of commission at ₹ 4.54 crore are not readily available on record, it is not possible at our end to work out the exact amount of further income chargeable to tax in the hands of the assessee as attributable to the PE in India. We, therefore, set aside the impugned order and remit the matter to the file of the AO to determine the amount attributable to the PE in India in the manner indicated above. Needless to say, the assessee will be allowed an opportunity of hearing in deciding the issue. the transaction of commission payment. Interest u/s 234B - The liability to pay advance tax and the consequential interest u/s 234B will not be eclipsed merely if income is liable for deduction of tax at source. Unless the payer actually deducts tax at source, the liability to pay advance tax and interest u/s 234B will continue in the hands of the payee. Since the assessment year under consideration is 2006-07 and the proviso is applicable from the A.Y. 2012-13, we hold that the assessee is not hit by such proviso and as such is not liable to pay interest u/s 234B of the Act. - Decided partly in favour of assessee.
Issues Involved:
1. Whether DAIPL constituted a dependent agent Permanent Establishment (PE) of the assessee in India. 2. Attribution of income to the PE by the AO. 3. Whether no further attribution of profits is called for on merits. 4. Credit of TDS and taxes paid after original assessment. 5. Charging of interest u/s 234B of the Act. Issue-wise Detailed Analysis: 1. Permanent Establishment: The first issue was whether DAIPL constituted a dependent agent PE of the assessee in India. The assessee, a Japanese entity, sold air-conditioners to its subsidiary DAIPL and made direct sales to third parties in India. The assessee paid 10% commission to DAIPL for marketing support services. The AO held that DAIPL was a dependent agent PE under Article 5 of the DTAA between India and Japan, as DAIPL was involved in negotiating and finalizing contracts on behalf of the assessee, despite the assessee's claim that it handled such activities from Japan. The Tribunal concluded that DAIPL was indeed a dependent agent PE due to its substantial role in the sales process in India. 2. Attribution of Income to the PE: The second issue was the attribution of income to the PE. The AO attributed ?5,96,34,440/- to the PE. The assessee argued that once the commission was found at arm's length price (ALP), no further income should be attributed. However, the Tribunal noted that the assessee did not maintain proper transfer pricing documentation, and the TPO's analysis in DAIPL's case only covered limited functions. The Tribunal held that additional profits needed to be attributed to the PE for the unconsidered functions performed by DAIPL. 3. Attribution of Profits: The Tribunal addressed the method of computing profits attributable to the PE. The AO's unique method was found to be flawed. The Tribunal proposed a two-step process: first, determine the global net profit rate (estimated at 10%) and apply it to the direct sales in India; second, attribute a portion of this profit (estimated at 30%) to the operations carried out in India. The Tribunal remitted the matter to the AO to compute the exact amount of profit attributable to the PE, considering the net profit of DAIPL from the commission transaction. 4. Credit of TDS and Taxes Paid: The assessee sought credit for TDS and taxes paid after the original assessment. The Tribunal directed the AO to verify the assessee's contention and allow the necessary credit as per law. 5. Charging of Interest u/s 234B: The last issue was the charging of interest u/s 234B. The Tribunal held that since the assessee was a non-resident and its income was liable for TDS, it was not liable to pay advance tax and consequently, no interest u/s 234B could be imposed. This view was supported by judgments from the Bombay High Court and Uttaranchal High Court. The Tribunal noted that the proviso to section 209(1) introduced by the Finance Act, 2012, was not applicable to the assessment year 2006-07. Conclusion: The appeal was partly allowed, with the Tribunal remitting the matter to the AO for re-computation of profits attributable to the PE and directing verification of TDS credit. The Tribunal also held that the assessee was not liable to pay interest u/s 234B for the assessment year 2006-07.
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