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TMI Blog2012 (10) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... . Assessing Officer nowhere pointed out that income cannot be definitely ascertained on the basis of the material placed on record by the assessee and, therefore, he is computing the income under Rule 10. Further, department itself has accepted the method of assessee in a number of years and sub Article 5 of Article 7 of the DTAA between India and South Korea also provides that profits attributable to PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. Since no reasons are assigned by the AO for adopting different method from same source of income, in different years, it is held that income of the assessee be computed at cost+9% as declared by it, and accepted in subsequent year from the same contract – Decided in favor of assesse. Interest u/s 234B – Held that:- In case of a non-resident where entire income is subject to withholding tax u/s 195, then assessee could not be held to have committed default in payment of advance-tax and consequently it was not liable to pay interest u/s 234B. - ITA Nos. 3300 to 3302/Del/2009 - - - Dated:- 27-7-2012 - SHRI RAJPAL YADAV AND SHRI K.D. RANJAN, JJ. Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the following reasons: a. That the Learned CIT(Appeals) has erred on facts and in law in upholding the methodology adopted by Learned A.O. by resorting to Rule 10 of the Income-tax Rules, 1962 ( the Rules ) for determining the income of the appellant even though the income attributable to the Project Office had been offered for tax based on a Transfer Pricing ( TP ) study. b. That the Learned CIT(Appeals) has erred on facts and in law in upholding A.O s contention in concluding that the designing has not been done on an isolated basis abroad. c. That the Learned CIT(Appeals) has erred on facts and in law upholding that the project office of the appellant has a substantial role to play in the designing and manufacturing of the rolling stock. d. That the Learned CIT(Appeals) has erred on facts and in law to come to a conclusion that the transfer pricing documentation prepared by the appellant does not capture the functions and risks of PE appropriately or the head office as the case may be as there is no mention of these items in the TP study e.g. the risks undertaken by the head office with respect to supply. 7. That without prejudice on facts and in law, the CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2004-05, the return was filed on 31.10.2004 declaring an income of Rs.158,48,100. The case was selected for scrutiny assessment and notice under sec. 143(2) was issued on 16.2.2005. In this assessment year, learned Assessing Officer has made a reference to the learned TPO for determination of arm s length price of the international transactions. The assessee has also approached learned Authority for Advance Rulings on two issues, i.e. whether fees received during training and supervision and maintenance was required to be assessed as fee for technical services or not? Learned Authority has held that the receipts are taxable as fee for technical services on gross basis. Assessing Officer has passed the assessment order on 27.12.2006 under section 143(3) of the Act. The following details would depict the income returned by the assessee, addition made by the Assessing Officer and the ultimate assessed income: Assessment year (A.Y) Returned Income (Rs.) Addition to returned income (Rs.) Assessed Income (Rs.) 2002-03 652,900 108,083,945 108,736,845 2003-04 53,15,581 248,122,069 253,437,650 2004-05 15,848,696 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumable spares for a period of three years special tools, testing and diagnostic equipment. 10,538,115 34,569,358 J. Supervision and Maintenance 2,454,936 14,321,929 TENDER TOTAL 260,997,269 3,110,439,836 5. In the present three years, assessee had filed its return of income by showing the income of the project office at cost + 9% basis. According to the assessee, it has carried out transfer pricing analysis and its income was determined at arm s length price. In support of its return, it has submitted the transfer pricing study undertaken by it. As far as training and supervision fee mentioned at cost centres G J of the above chart are concerned, they were offered for taxation on gross basis, because the assessee went to the Authority for Advance Rulings, who has held that these are fees for technical services. Accordingly the income was offered @ 15% on gross basis in the respective years. As far as this aspect is concerned, it is not in dispute before us. In assessment year 2002-03, the transactional value of international transaction with head office was less than threshold limit provided in section 92C of the Act for making a reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be determined on the basis of Rule 10 ignoring the mechanism provided in sections 92 to 92F of the Income-tax Act, 1961 read with Rules 10A to 10E, wherein a mechanism for determination of arm's length price has been introduced w.e.f. 25.8.2011. If this issue is adjudicated, then all other issues would be academic in nature. Learned representatives have addressed their arguments on this issue. They have placed on record written note on this aspect. The learned counsel for the assessee pointed out that as per Article 7(2) of India Korea Tax Treaty, the income of a PE has to be determined as if it was a distinct and separate enterprises engaged in the same or similar activity under the same or similar condition as if that enterprises was carrying out. In other words, the PE has to be identified as distinct entity to the general enterprises. In order to determine the income of the PE accrued or arising in the state where it is existing, one has to evaluate the transaction with the enterprises under the arm's length price. The mechanism to determine arm's length price of the transaction has been incorporated in the formation of transfer pricing code. This mechanism was available i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice has been caused and determination of income on the basis of the arm's length price become academic. He pointed out that assessee is aggrieved with this mechanism and prejudice has been caused to it. These are the only two assessment years where Assessing Officer has adopted this method. Otherwise, on all other subsequent assessment years, the income determined by the assessee at cost.+9% has been accepted by the Department. This mechanism is totally unscientific and contrary to the procedure provided in section 92 to 92F read with rules 10A to 10E. The learned counsel for the assessee further made reference to the decision of the Hon'ble Supreme Court in the case of Hyundai Heavy Industries Corporation Ltd. reported in 291 ITR 482 on the strength of this decision he appraised us as to how income of a PE has to be determined. Similarly, he made reference to the decision of Hon'ble Supreme Court in the case of DIT, International Taxation vs. Morgan Stanley reported in 292 ITR 416. 11. On the other hand, Learned DR has submitted that for determining the income attributable to PE a discretion lies with the Assessing Officer either to resort to Rule 10 read with section 9 or to Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder arm s length analysis (Rule 10B) or on the basis of apportionment of the total profits (Rule 10). e) The revised article 7 of the OECD Model Convention which speaks of two step analysis has not been accepted not only by India but even by some of the OECD member countries and have expressed reservation on this. Further, two step approach is prescribed much later on and not applicable for relevant years. In any case, India follows UN Model Convention and, as mentioned above, UN Model allows apportionment of total profits. In view of the above position of law, it is humbly submitted that after rejecting the TP study the A.O. rightly resorted to Rule 10 for attributing profits to the PE. He also rightly held that since income of the foreign company as a whole was being determined and composite activities (including off shore supply) were performed its income for the Indian operations could not be definitely ascertained and hence rule 10 was to be involved. Without prejudice to the above, if the Hon ble Bench is of the vierw that the profit attribution should have been done u/s. 92 then the matter may kindly be remanded back to the A.O/TPO for determining the arm's length pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined either on the basis of DTAA between India and Korea or on the basis of the Indian Income-tax Act, 1961 whichever is more favourable to the assessee. Before adverting to the facts, we would like to take note of Article 7 of the Indo Korea Treaty which reads as under: "Article 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a or outside India but so far as taxability under sec. 5(2) of the Act is concerned, it is restricted to incomes which accrue or arise or which deemed to accrue or arise in India. The scope of this deeming fiction is provided in section 9 of the Act, therefore, as far as the income accruing or arising in India, income which accrues or arise to a foreign enterprises in India and only such portion of income accruing or arising to such foreign enterprises as is attributable to its business carried out in India. Hon ble Court has further observed that this business could be carried out through its branches or through some other formation of its presence in India, such as office, project site, factory as sale as outlet etc. It is, therefore, important to note that under the Act, while the taxable subject is foreign general enterprises, it is taxable only in respect of the income including business profit which accrues or arise to that foreign general enterprises in India. According to the Hon'ble Supreme Court, the Act does not provide for taxation of the PE of a foreign enterprises, except taxation on presumptive basis for certain types of income such as those mentioned under sec. 44BB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n make independently such analysis but without rejecting the transfer pricing study carried out by the assessee without pointing out any error in such study, learned Assessing Officer has jumped to apply Rule 10. This rule reads as under: In any case in which the Assessing Officer is of opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated:- (i) at such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable; (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business. (iii) In such other manner as the Assessing Officer may deem suitable . 16. On a plai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and South Korea provides that profits attributable to PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. No reasons are assigned by the Assessing Officer for adopting different method from same source of income, in different years. He simply jumped to apply rule 10 which is not a right course in this case. In view of the above discussion, we hold that income of the assessee be computed at cost+9% as declared by it, and accepted in subsequent year from the same contract. 17. The above discussion will take care grounds of appeals from 1 to 8. In ground No.9, the assessee has challenged levy of interest under sec. 234B of the Act. The learned counsel for the assessee contended that this issue is covered in favour of the assessee by the decision of Hon'ble Uttranchal High Court rendered in the case of CIT vs. Sedco Forex International Drilling reported in 264 ITR 320. He further relied upon the decision of the ITAT rendered in the case of Sedco Forex International Drilling vs. DCIT reported in 72 ITD 415 and upon the order of the ITAT in the case of ADIT vs. Western Geco International Ltd. reported in 21 SOT 549. Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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