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TMI Blog2009 (1) TMI 305X X X X Extracts X X X X X X X X Extracts X X X X ..... than agent of independent status within the meaning of Article 5(4) of DTAA between India and UK. It is also held that since the appellant has a business connection/PE in India in the form of liaison office and hence profit is attributable to the PE. In this regard the applicant submits that certain arguments/judicial pronouncements/circulars which were taken up during hearing of the aforesaid appeals have not been considered by the Tribunal while pronouncing the order. The same are narrated as under: (1) The decision of Hon'ble Supreme Court in the case of Director of IT (International Taxation) v. Morgan Stanley & Co. Inc. (2007) 210 CTR (SC) 419 : (2007) 292 ITR 416 (SC) has not been considered. (2) Though the Tribunal has referred a question "what is the extent of income earned in or whether the same can be held as paid by the appellant to Rolls Royce India Ltd. (RRIL) and no further income can be attributed to the PE in India", yet this question framed has not been answered or adjudicated upon. (3) The effect of Circular No. 23, dt. 23rd July, 1969 issued by CBDT has not been considered. (4) The decision of Hon'ble Madras High Court in the case of Annamalais T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered for this purpose is not spelt out. The assessee does not maintain separate account in respect of its Indian operations, In respect of global profits some profit is attributable to the extent of activities carried out in India yet the starting point about which profit should be considered for this purpose is not spelt out. The global profit for all purposes should be net profit before tax. However, the AO has taken such profit even before net of R&D expenses and shares of profits of associated undertaking. In fact only the gross profit as reduced by commercial marketing and product support cost and general and administration cost have been reduced but not the R&D cost. 4. The learned Departmental Representative Shri Davendra Shankar on the other hand, submitted that all the arguments raised during the course of assessment (sic-appeal) have been considered. The Tribunal has allocated the profit in terms of Rule 10 of the IT Rules. The Tribunal have given a finding that there exists 3 forms of PE and not only a dependent agent PE. The Tribunal have concluded that the appellant has a PE in India within the meaning of Article 5(1) of the treaty. This finding is given in paras 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely reflect functions performed and the risk assumed by the enterprises. In such a case there would be need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, even in terms of the decision of Hon'ble Supreme Court as applied by the Hon'ble Bombay High Court since income attributable to the assessee is not wholly channelled through his agent and since the agent's commission does not fully represent the value of profit attributable to his service, it will not extinguish the assessment of the assessee. 4.2 As regards the amount of profit to be attributed, Shri Shankar submitted that the assessee has not maintained separate account for PE in India. Therefore, the profit to be attributed is to be computed on the basis of global profit i.e., trading profit which is equal to gross profit less commercial marketing product support cost, general and administration cost but before the exceptional items or the expenses on R&D activities. The Tribunal have given a categorical finding that the R&D activities are not carried out in India. The expenses in this regard are separately booked. However, since only trading profits are to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried on by the assessee and with the assistance of RRIL were much more than that as per material found during survey and as noted in para 19 of the order. This factual finding has not been challenged as perverse or otherwise not carved out from the material found during survey. Even the factual finding given in other paras like 21, 22 and 23 are also not challenged. Therefore, the effect of this finding is that the appellant's sales to Indian customers are not secured entirely through services of the agent in India for which it was appointed but by deputing own personnel and also availing the services of RRIL which was not part of the agreement with RRIL. The extinguishment of assessment as envisaged in para 6(c) of Circular No. 23 of 1969 will not apply as in this case the non-resident principal's business activities in India are not wholly channelled through his agent in India. The assessment in India will be on the sum total of the amount of profit attributed to his agents in India and the amount of profit attributable to his own activities in India. Since it is found that the appellant's business activities in India are not wholly channelled through his agent in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. In this connection, the Department has also to examine whether the PE has obtained services from the multinational enterprise at lower than the arm's length cost. Therefore, the Department has to determine income, expense or cost allocations having regard to arm's length prices to decide the applicability of the transfer pricing regulations. Economic nexus is an important aspect of the principle of attribution of profits. (Emphasis, italicized in print, supplied). From the above conclusion it can be held that the assessment of nonresident 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 nonresident in India, no remune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 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 b ..... 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