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2023 (4) TMI 1089 - AT - Income TaxRevision u/s 263 by CIT - profits attributable to Appellant s Permanent Establishment ( PE ) in India - As per CIT-A method of computing profits attributable to PE as adopted by appellant is inappropriate - HED THAT - As decided in 2022 (10) TMI 151 - ITAT MUMBAI , order cannot be said to be prejudicial to the interest of the revenue unless there is a categorical finding that the payment to the dependent agent is not an arm s length price vis- -vis functions performed, assets employed and risks assumed by the dependent agent. While doing so, one also has to bear in mind that DAPE is not anything distinct from the DA, in the light of the binding judicial precedents holding the field as of now, and the taxability of the dependent agent s remuneration in the hands of the DA brings an end to the taxability of the DAPE also. There is no such finding about the payment to the dependent agent being less than the arm s length price of services rendered by the dependent agent, in the present case, even though there is a finding about questioning the DAPE s FAR analysis. The Commissioner ought to have examined the arm s length price determination in respect of the services rendered by the dependent agent, in this context. That exercise has also not been done. Unless the order sought to be revised cannot be said to be prejudicial to the interest of the revenue, its being erroneous, even if that be so, cannot be said to reason enough to invoke section 263 of the Act, and the order cannot be said to be prejudicial to the interests of the revenue unless there is a categorical finding that the dependent agent has not been paid arm s length remuneration for the functions performed, assets employed and risks assumed by the dependent agent. Order being prejudicial to the interest of the revenue, inasmuch as the payment to the dependent agent not being at an arm s length, is a sine qua non for holding that the order is prejudicial to the interest of the revenue. This exercise has clearly not been done on the facts of this case. For this short reason alone, we must set aside the impugned revision order. Appeals of the assessee are allowed.
Issues Involved:
1. Jurisdiction and validity of the CIT's order under Section 263 of the Income-tax Act, 1961. 2. Attribution of profits to the assessee's Permanent Establishment (PE) in India. 3. Method of computing profits attributable to the PE. 4. Reliance on the Rolls Royce PLC case by the CIT. 5. Deduction of operating expenses in profit attribution. 6. Application of operating profit ratio. 7. Arm's length price and its impact on profit attribution. Issue-wise Detailed Analysis: 1. Jurisdiction and Validity of CIT's Order under Section 263: The assessee contended that the CIT's order under Section 263, which modified the assessment framed under Section 143(3) as erroneous and prejudicial to the interest of the revenue, was without jurisdiction, bad in law, and void ab initio. The Tribunal accepted this argument, noting that the CIT's order lacked proper jurisdiction and was invalid. The Tribunal emphasized that the Assessing Officer (AO) had conducted specific inquiries and accepted the assessee's attribution rate of 24% of gross profit based on a detailed Function, Asset, and Risk (FAR) analysis. 2. Attribution of Profits to the Assessee's Permanent Establishment (PE) in India: The CIT held that the AO's assessment was erroneous and prejudicial to the revenue's interest because the AO did not properly scrutinize the FAR analysis and the attribution of profits to the PE. The CIT argued that the AO accepted the 24% gross profit attribution without proper examination. However, the Tribunal found that the AO had indeed conducted an inquiry and that the attribution rate had been consistently applied and accepted in previous years. The Tribunal quashed the CIT's order, stating that the AO's acceptance of the attribution rate was not erroneous. 3. Method of Computing Profits Attributable to the PE: The CIT criticized the method adopted by the assessee to compute profits attributable to the PE, arguing that the method was inappropriate. The CIT adopted the same method but arbitrarily changed the allocation of weights of various activities to arrive at a higher attribution of profits. The Tribunal, however, found that the method used by the assessee was consistent with previous assessments and that the CIT's changes were not justified. The Tribunal restored the original method of computing profits attributable to the PE. 4. Reliance on the Rolls Royce PLC Case by the CIT: The CIT relied on the Delhi High Court's decision in the Rolls Royce PLC case to justify a higher attribution of profits to the PE. The assessee argued that the facts of its case were different from those in the Rolls Royce case. The Tribunal agreed with the assessee, noting that the CIT's reliance on the Rolls Royce case was misplaced and that the facts of the two cases were not comparable. 5. Deduction of Operating Expenses in Profit Attribution: The CIT attributed gross profits to the PE after reducing only the marketing fees paid to the agent in India, whereas the assessee argued that profits should be determined on a net basis after deducting full operating expenses. The Tribunal sided with the assessee, stating that the profits attributable to the PE should be determined on a net basis, considering all operating expenses. 6. Application of Operating Profit Ratio: The CIT did not apply the operating profit ratio of 1.67% for computing the profits attributable to the Indian PE, which would have been in line with the Rolls Royce PLC decision. The Tribunal found that the CIT's approach was incorrect and directed the application of the 1.67% operating profit ratio to arrive at the net profit attributable to Indian operations. 7. Arm's Length Price and Its Impact on Profit Attribution: The assessee argued that since the PE in India was remunerated at arm's length price, no further attribution of income was warranted as per the Supreme Court's decision in Morgan Stanley & Co. The Tribunal agreed, noting that the arm's length remuneration to the dependent agent exhausted the tax liability of the dependent agent permanent establishment (DAPE). The Tribunal emphasized that the CIT did not find any issue with the arm's length price determination, and thus, the original assessment order was not erroneous or prejudicial to the interest of the revenue. Conclusion: The Tribunal quashed the CIT's orders under Section 263 for both assessment years, restoring the original assessment orders framed by the AO. The Tribunal's decision was based on the consistent application of the attribution rate, the proper inquiry conducted by the AO, and the arm's length remuneration paid to the dependent agent. The appeals filed by the assessee were allowed.
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