9911796707
TMI Blog2013 (11) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... attribution of profits to Permanent Establishment (PE) 63,25,580 36,23,371 40,09,360 8,76,559 36,06,267 2. Brief facts of the case are that the assessee is an Indian Branch of Varian India Pvt. Ltd. (for short "VIPL"), which is incorporated in U.S.A. VIPL in turn is held by Varian Inc., U.S.A. and is thus 100% subsidiary of Varian U.S.A. VIPL has only an Indian Branch which is primarily engaged in the distribution of Varian products manufactured by Varian Group of companies (for short "VGCs") all over the world. These products mainly relate to analytical instruments, laboratory equipments and other scientific instruments and electronic items. In the assessment year 2002-03, the assessee had shown sales of Rs. 52,05,468, in the relevant previous year and has shown other income of Rs. 6,10,74,335, which mainly includes commission income received from various Varian Group of Companies. 3. The Assessing Officer, during the course of the assessment proceedings for the assessment year 2002-03 on a perusal of Profit & Loss Account, noted that the assessee has claimed expenses on account of dealer's commission of Rs. 23,11,639, and was accordingly required to furnish the details of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected the assessee's contentions on the ground that the expenditure pertaining to the earlier years cannot be deducted in the relevant financial year and accrual of dealers' commission is dependent on the execution of sales and the assessee cannot withhold the commission without any mutually agreed terms between the dealer and the assessee company. Accrual of dealers' commission is different from the modalities of the payments and it accrues immediately on the completion of the sale. Further, if the assessee's plea is accepted for allowing the expenditure in this year, it would result in cash system of accounting with no certainty regarding the amount of commission payable in a particular year. 6. Before us, the learned Counsel submitted that the assessee has been following the system of debiting the dealers commission based on dealers invoices which is raised after various formalities have been completed like installation, follow-up for final payment, release of bank guarantee, etc. This system of accounting has been accepted in the earlier years. Therefore, the same cannot be adversely viewed or held against. In support of this contention, reliance was placed on the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown in the same year. The assessee cannot be allowed to follow mixed system of account i.e., accrual of sales in one year i.e., at the time of raising the sale bills and expenses to be allowed in different year when various other formalities relating to the sales have been fulfilled. Thus, the findings of the Commissioner (Appeals), as given in Para-3.3, which for better appreciation of facts, are reproduced below :- 3.3 "I have carefully gone through the order of the Assessing Officer and also the submissions as made by the Authorized Representative of the appellant company. I am inclined to agree with the views of the Assessing Officer that expenses pertaining to earlier years are not deductible in the Financial Year relevant to the Assessment Year 2002-03. The accrual of the dealers commission is dependent on the execution of the sales order by the dealer. The appellant company can withhold the dealer commission in case mutually agreed terms between the dealer and the appellant company are not complied with by the dealer. Accrual of dealer commission is different from the modalities of its payments. The dealers commission accrues on the completion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution and representation agreement (for short "D.R. Agreements") with all the five companies of Varian Group for supply and sale of analytical lab instruments to the Indian customers directly. The assessee carries out two types of sale of Varian products in India - one is direct sale and other is indent sale. Insofar as direct sale is concerned, the assessee directly imports spare parts from Varian Group of Companies (for short "VGCs") and sell them to Indian customers directly on its own account on principal-to-principal basis. These spare parts are made available on discounted price by the various Associates Enterprises (for short "A.Es"), i.e., Varian Group of Companies which is sold by the assessee on its own account. In the activities relating to indent sale, the Varian group of companies sell analytical lab instruments to the Indian customers directly and the assessee carries out pre-sale activities like liaisoning and other incidental post-sale support activities for which it is entitled for commission. In the D.R. Agreement entered with the five companies wherein the Assessee has been referred to as independent contractor, is collecting the orders from the Indian custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer directly within the Territory and/or Contractor may sell on the basis of commission rate specified in Schedule A, however, Contractor's service obligations under section 4 will remain the same and not be otherwise affected Where Contractor obtains only sales orders and does not purchase Products. Contractor's entire consideration in those transactions will be a commission as set forth in Schedule A. If sales of Products are made by through or with the assistance of persons other than Contractor to customers within territory, at Supplier's sole discretion, commission may be allocated by Supplier on a fair and reasonable basis. 4. Obligations The provisions of this section below shall apply only to the extent permitted at any particular time by the laws and regulations or effect in the country in which this Agreement is made or to be performed. If any such restriction or obligation is or becomes prohibited under such laws or regulations, it shall be automatically void and separated from the remainder of this Agreement, or Varian at its option may terminate this Agreement immediately, in whole or in part, by written notice. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder to allow Varian to defend such claims. H. Contractor shall be responsible for technical support including Product installation, training, maintenance, and warranty obligations to customer. I. Contractor may employ third parties, whether related or not, in the execution of its responsibilities Contractor may participate with other Varian Contractors, where appropriate, in the joint sharing of costs where such costs provide a proportionate benefit to Contractor. 5. Sale and Payment A. Sale of Products from Supplier to Contractor shall be at prices established by Supplier from time to time in price lists or quotation(s), less the applicable discounts) set forth in Schedule A. Supplier shall have the right to change the schedule of discounts (or rate of commission in Schedule A) with 15 days notice to Contractor. Discounts and or commissions for products not manufactured by Varian shall be separately agreed to on a case by case basis. Prices are net to Supplier, Contractor may be charged extra for all export packing, handling, insurance, transportation, taxes, fees, duties and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest in each Trademark, Tradename, Servicemark and similar items Including related patents, copyrights if any and similar intangibles (collectively referred to as Intangibles). C. Contractor warrants that it will not make any representations, warranty or guaranty in connection with Product other than as authorised by Varian. Contractor shall advise Varian of any claim for damages or breach of warranty in respect to the Product asserted by a customer and shall cooperate with Varian in the defense or handling of such claim. D. Contractor further warrants that it will not at any time do or cause to be done, by any act or omission, directly or indirectly, that would in any way impair Varian's right title or interest in intangibles." 11. In pursuance of the D.R. Agreement with these five A.Es (i.e., VGCs) in relation to the indent sale, the assessee has earned following commission:- (i) Varian Australia Rs. 47,16,563 (ii) Varian USA Rs. 34,12,975 (iii) Varian Italy Rs. 58,07,471 (iv) Varian Chrompak International Netherlands Rs. 3,49,91,934 (v) Varian AG - Switzerland Rs. 53,70,674 Rs. 5,42,99,617 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also submitted that under the domestic laws under section 9(1)(i) r/w Explanation thereto, in case of a business of which all operations are not carried out in India, the income of such business is deemed under this clause to accrue or arise in India shall be only such part of income as is reasonably attributable to the operations carried out in India. Thus, in view of the provisions of section 9(1)(i) also, the assessee had shown the income which has been reasonably attributed to the operations carried out in India. Reliance was also placed on CBDT Circular No.23 of 1969. 14. The Assessing Officer analysed the assessee's contentions which has been referred to in Pages-9 to 21 of the assessment order. Finally, the assessee's Explanation was rejected by the Assessing Officer mainly on the following reasons:- "9.20 The claim of the assessee that if payment to the agent is made at arm's length, then the non resident is not liable to tax (hypothesis) is not acceptable for the following reasons :- (a) The payment to the agent and profit of the assessee from business operations in India are two separate things which cannot be compare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian product to the customers in India, it has to render "after sales and maintenance services" under the warranty period of the customers in India. Obviously, for such services, the "assessee" is not getting any thing from the customers. For any sub-standard product supplied by the Varian group the Indian branch has to incur the additional cost required in the "after Sales and maintenance services" of such products. To that extent, the Indian branch is bearing the risk on behalf of foreign supplier. Hence the profits arising on account of such risks taken by the Indian branch, is the income of the branch and not of the agent. In view of the above discussion, it is held that the assessee branch is the PE in respect of the business done out of the supplies made by Varian Group of USA, Australia and Italy." 16. Further, in the absence of actual profit attributable to the P.E., vis-a-vis three VGCs, he applied the provisions of Rule-10 of the Income-tax Rules, 1962, to estimate the profit attributable to the P.E. in view of "Force of Attraction Rule" applicable under the DTAA of U.S.A, Australia and Italy and estimated 10% of the operating profit from the business done in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian customers. Reliance was also placed on the judgment of Hon'ble Supreme Court in DIT (International Taxation) v. Morgan Stanley & Co. [2007] 292 ITR 416(SC), wherein it was held that there cannot be agency P.E. in India if the said P.E. has no authority to enter into or conclude contracts on behalf of the foreign enterprise. It was clarified that the assessee is strictly carrying out its activities as per the D.R. Agreements, wherein the assessee is only engaged or involved with incidental activities relating to pre-sale liaisoning and post-sale customer support. It provides market information and customers to the VGCs and, therefore, technical support including product installation, maintenance, warranty obligations, etc., to the Indian customers. For carrying out these activities, the assessee is compensated quite well in the form of commission income, which have been held to be as arm's length by the TPO. Regarding applicability of 10% of the operating profit on estimate basis of the profits of three VGCs, attributable to India, it was submitted that the Assessing Officer has made an assumption of that the Varian global accounts are comparable to the operating profit acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al products have been manufactured based on research and development efforts undertaken by the parent company i.e., Varian U.S. 20. On application of Rule-10, he concluded that the rate of 10% applied by the Assessing Officer is neither excessive nor unreasonable. Regarding additional evidence relating to comparative analysis, he rejected the assessee's claim after giving detail reasons. Thus, the entire conclusion drawn by the Assessing Officer and the addition made was confirmed. 21. Learned Counsel, Mr. Kanchan Kaushal, representing the assessee, summarizing the facts of the issue involved, submitted that the assessee which is an Indian Branch of VIPL is incorporated in U.S.A. and does not have any other business operations except for the Indian Branch. The assessee is engaged in two types of sales, one indent sale and the other is direct sale. Under the indent sale, the assessee is only entitled for commission as per the D.R. Agreement, wherein it carries out pre-sale activities like liaisoning, marketing and promotion of products sold by VGCs and other incidental and ancillary post-sales support service services. Under these activities, the assessee is not responsible for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t does not undertake any research and development work on its account and the tangible assets are some office equipments. The risk with regard to the indent sales viz. market risk, product liability risk, research and development risk, credit risk, inventory risk, foreign currency risk, etc., solely lies with VCGs only and the assessee does not share any part of such risks. Thus, the assessee, in any manner, cannot be said to be a dependent agent within the meaning of Article-5(4) of Indo-U.S. DTAA or Indo-Australia or Indo-Italian DTAA. For constituting a dependent agency within the meaning of Article 5(4), he submitted that it is very vital that the agent can habitually conclude the contract and similar other conditions enumerated in Para-4 of Article-5, which, in the present case, is completely lacking. 22. The learned Counsel further analysed the remarks and the observations given by the Assessing Officer as well as the Commissioner (Appeals), specifically with regard to their conclusion on dependent agency P.E., as given in Article-5(4) vis-a-vis assessee's facts. He furnished a statement showing the rate of commission received from various VGCs in support of the contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts. The assessee not only helps the VGCs in selling their products but also carries out various obligations of pre and post sale activities. The entire D.R. Agreement if it is to be understood in right perspective, then the assessee is not mainly a commission agent but a dependent agent who is carrying out all the activities on behalf of the parent companies. She further referred to various observations and the findings of the Assessing Officer as well as the Commissioner (Appeals) in support of her contentions that the VGCs are having exercising comprehensive control over the branches of Varian India and the assessee is a dependent agent within the meaning of Article 5. She submitted an analysis of various terms and conditions given in Articles 5(4) and 5(5), vis-a-vis the activities carried on by the assessee in India to support her contentions that the findings given by the Assessing Officer and the Commissioner (Appeals) are in accordance with the DTAA. Once the assessee is a dependent P.E., the "Force of Attraction Rule" as given in Article 7(1) gets clearly applicable and the global profits of the three VGCs insofar as their operations in India are concerned, becomes taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parate D.R. Agreement for carrying out various pre-sale activities and incidental and ancillary post-sale support activities. The VIB in India carries out two types of sale viz. (i) indent sale from where it earns the commission from various VGCs and the same is offered to tax in India and (ii) direct sales of spare parts which are imported from VGCs at discounted price and is sold in India on principal-to-principal basis. The profits from such activities are also offered for tax in India. The Assessing Officer as well as the Commissioner (Appeals) have held that VIB is acting as dependent agent for various VGCs and, therefore, it constitute a P.E. in India for various VGCs. Since VIB constitutes a P.E., therefore, by virtue of "Force of Attraction Rule" as envisaged in Article 7(1) of Indo-U.S. DTAA and similar provisions given in Article 7(1) of Indo-Australia and Indo-Italy DTAA, their profits attributable to India is to be taxed in the hands of the Assessee. Now, the main issues before us are that, firstly, whether the assessee company i.e., VIPL through its Indian branch (VIB) constitute a P.E. for Varian Inc., U.S.A., Varian Australia and Varian Italy. The second issue is, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh the assessee are not binding on the VGCs as they may accept or reject the order completely at their own discretion. The assessee has no authority to negotiate or conclude sale contracts on behalf of the VGCs. Coming to the nature of relationship, as illustrated in D.R. Agreements, VGCs have been termed as suppliers and the assessee as an independent contractor who does not have any right to assume or create any obligation of any kind, either expressed or implied on behalf of the supplier. The contractor will not Act as an agent and will have no power or authority to Act for or bind or commit supplier for any of the activities carried out in India. The orders received through contractor will not be binding unless accepted in writing by the supplier. From the various other obligations which are enumerated in Para-4 of the D.R. Agreement, it is seen that they are mostly in the nature of promotion of the products, maintaining sales and service organization, providing customer support, product inquiries assist in delivery, schedules, administrative support, functions such as order processing, customer credit review and host of other services. Besides this, the assessee is also engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise." 29. From the above, it can be seen that an agent is deemed to be P.E. if he is not independent and habitually exercise an authority to conclude contracts on behalf of the enterprise or if he has no such authority, but habitually maintains Stock of Goods or merchandise from which he regularly deliver goods or merchandise on behalf of the enterprise or he habitually secure orders solely or almost wholly for the enterprise. If any of these conditions mentioned in Para-4 above, are not fulfilled, the agent cannot constitute a P.E. for the foreign enterprise. We shall examine now whether any of these conditions stands satisfied or not. (i) Regarding the first condition as to whether the assessee is a habitually exercising the authority to conclude contracts on behalf of the VGCs, it can be gathered from the facts discussed above that indent sale orders booked through the assessee are not binding on the VGCs as they may accept or reject the orders completely at their own discretion. From the D.R. agreement, it is seen that the assessee has no authority and also c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preneurial risk has to be borne by the person or by the enterprise the person represents." Thus, the character of an agent who can be said to be dependent, if - (i) his commercial activities for the enterprise are subject to instructions or comprehensive control; and (ii) he does not bear the entrepreneur risk. Under OECD Modal Treaty, the main thrust of an agent being a P.E. is that "he has an authority to conclude contracts in the name of enterprise". In other words, the agent has sufficient authority to bind enterprise's participation in the business activities and the agent's activity involved the enterprise to a particular extent in the business activities. Thus, the qualified character of the agency is the authorization to act on behalf of somebody else so much as to conclude the contracts. In the present case, as stated several time in this order that the assessee does not have authority to conclude contracts as none of the orders booked through the assessee is binding on the foreign enterprise, i.e., VGCs. 31. The other important factor which needs to be seen is that whether the assessee assumes any kind of risk on behalf of the VGCs. From plain reading of D.R. Agreements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,529 5.61% Varian SPA, Italy 15% 15% 58,07,471 10.70% 3,87,16,473 21.00% Varian Chrompak International Netherlands 41% 41% 3,49,91,933 64.44% 8,53,46,178 46.28% Varian AG, Switzerland 15% 15% 53,70,674 9.89% 3,58,04,493 19.42% Total 5,42,99,616 100% 18,44,06,472 100% From the above, it is evident that the percentage of commission income and sales from the three VGCs are quite normal and with regard to Varian Inc. U.S.A., the activities of the assessee are between 5 to 7%. Hence, it cannot be said that the assessee is devoted wholly or almost wholly on behalf of any one VGC. The second condition as to whether the transactions between the assessee and VGC have been made under arm's length conditions. In the case of the assessee, the Assessing Officer has referred the matter to the TPO to determine the arm's length compensation with regard to international transactions. The TPO found that the assessee's transactions have been at arm's length price which acknowledges the fact that the assessee has been compensated by the VGCs at ALP. Even the Assessing Officer has also not adversely held that compensation in the form of commission is not at ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; (c) the person habitually secures orders in that State, wholly or principally for the enterprise itself or for the enterprise and other enterprises controlling, or controlled by or subject to the same common control as, that enterprise; or (d) in so acting, the person manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise." Article 5(4) of India-Italy, Double Taxation Avoidance Agreement "4. Notwithstanding the provisions of paragraphs 1 and 2 where a person - other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first-mentioned State a Stock of Goods or mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on certain terms of obligation as per the D.R. Agreement. All those obligations which are undertaken by the assessee are only pre-sale and post-sale facilities provided to the customers by the assessee for which it is amply remunerated in the form of commission. There is nothing such obligation which binds the VGCs. In any case, these are mere administrative support functions and not the functions as are envisaged under Article 5(4). 37. Even at the cost of repetition, we hold that in order to treat any agent as P.E. within the meaning of Paras-4 and 5 of Article-5, it is very vital that such agent should fit into the description of "Dependent Agent" and has to perform either of the activities as mentioned in Articles-5(4) and 5(5), otherwise, it cannot be held that agent constitutes a P.E. of the foreign enterprise. 38. The next issue is whether the "Force of Attraction Rule" as given in Articles 7(1)(b) and (c) of Indo U.S. DTAA, Article 7(1)(b), Indo Australia, DTAA, Article 7(1)(b) and (c) of India Italy DTAA will apply in case of assessee so as to tax the profits of foreign enterprise, i.e., VGCs in the hands of the assessee in India. The basic condition for application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia such as office, project site, factory, sales outlet, etc. (hereinafter called 'us' "PE of foreign enterprise"), it is, therefore, important to note that under the Act, while the taxable subject is the foreign general enterprise (for short, "GE9", it is taxable only in respect of the income including business profits, which accrues or arises to that foreign GE in India. The Income-tax Act, does not provide for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under Sections 44BB, 44BBA, 44BBB etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the prompts attributable to the Indian PE of foreign enterprise are required to be computed under normal accounting principles and in terms of the general provisions of the Income-tax Act. Therefore, ascertainment of a foreign enterprises taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India." 40. In view of the aforesaid findings, we hold that - Firstly, the assessee, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative are not commented upon as we feel that the same are not relevant.
43. In the result, assessee's appeal is partly allowed.
44. We not proceed to dispose off Assessee's other appeals, i.e., in ITA no.4673/Mum./2001 for A.Y. 2003-04, ITA No.4674/Mum./2011 for A.Y. 2004-05, ITA No.4675/Mum./2011, for A.Y. 2005-06 and ITA No.4676/Mum./2011 for A.Y. 2006-07.
45. In all these appeals, the only issue involved is whether the VIPL India Branch is a P.E. of various VGCs and accordingly, additions have been made on account of attribution of profits of the VGCs to the P.E. Since the issue involved is exactly similar to the issue decided in the above appeal in ITA No.4672/Mum./2011, for assessment year 2002-03, therefore, the findings given therein will apply mutatis mutandis in these appeals also. Consequently, all the appeals filed by the assessee are treated as allowed.
46. In the result, Assessee's all the appeals are allowed.
47. To sum up, Assessee's appeal for A.Y. 2002-06 is partly allowed and Assessee's appeals for A.Ys 2003-04, 2004-05, 2005-06 and 2006-07 are allowed.
Order pronounced in the open Court on 27/02/02013. X X X X Extracts X X X X X X X X Extracts X X X X
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