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TMI Blog2016 (7) TMI 698X X X X Extracts X X X X X X X X Extracts X X X X ..... case of non-resident - Decided in favour of assessee - I.T.A. No. 1247 / Mum/ 2014 - - - Dated:- 13-7-2016 - Shri Amit Shukla, Judicial Member And Shri Ramit Kochar, Accountant Member For the Revenue : Shri Narendra Kumar,CIT DR For the Assessee : Shri Aliasger Rampurawala Shri Forum Mehta ORDER Per Ramit Kochar, Accountant Member This appeal, filed by the Revenue, being ITA No. 1247/Mum/2014, is directed against the directions dated 23-12-2013 passed by Dispute Resolution Panel II, Mumbai (hereinafter called the DRP ) u/s 144C(5) of the Act for the assessment year 2009-10 against the draft assessment order dated 21.03.2013 passed by the AO u/s. 144C(1) r.w.s. 143(3) of the Act , and in pursuance of the directions of the DRP-II, Mumbai , the AO passed the assessment orders dated 10-01-2014 u/s 143(3) r.w.s. 144C(13) of the Act. 2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under:- (1) Whether, on the facts and circumstances of the case and in law the Hon'ble DRP is correct in holding that the assessee did not have PE in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act was passed by the DCIT (TPO)-1(9),Mumbai on 31st December, 2012 , wherein the value of international transaction with Associated Enterprises (AE)with regard to Arm s length Price (ALP) were not disturbed. It was observed by the AO that the Indian subsidiary M/s LIL is not only engaged in manufacturing of products developed by M/s Lubrizol Corporation, USA but also in the marketing of products manufactured by the assessee. The details of sale made by the assessee in India are as under:- Sales to LIL USD 10,837,412 Sales to others USD 5,309,639 USD 16,147,051 The assessee was asked to explain as to why the profits made by it on sale of products in India should not be taxed in India as assessee is having PE in the form of M/s LIL. In reply, the assessee submitted that it does not have any address in India and under Article 5(4) of the Indo-US treaty also , LIL cannot be treated as agency PE since LIL does not have authority to conclude contract on behalf of the assessee. It was also submitted that LIL does not secure orders on behalf of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Metal working Products which deals with marketing of metal working products dated 1st January, 2002. Another agreement has also been entered into between the assessee and LIL and the terms and conditions were same as for the earlier agreement except that for better services to the customers , LIL has been made responsible to purchase these products on its own account from the assessee and to resale such products to customers in India. It was also observed by the A.O. that so far as marketing of product, LIL is virtual projection of the assessee in India and it has got full rights and responsibilities in respect of marketing and sales and merely because of making orders directly on the assessee in the agreement will not save the assessee from taxability in India. It was also observed that LIL is manufacturing the products of the assessee in India and besides this LIL is also marketing the similar products of the assessee in various territories including India under exclusive sales representation agreement dated 01.04.2000. LIL is not only promoting the products of the assessee but also involved in procurement of orders and its responsibility and involvement continues up to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Tribunal for assessment year 2006-07 in assessee s own case in ITA No. 7420/Mum/2010 vide orders dated 03-06-2011 wherein the Tribunal held as under:- 22 After considering the relevant material and the relevant aspects, it is noted that the LIPL has carried out an independent business of manufacture of various products under technology transfer agreement with the assessee in India. It is having its own marketing network for sale of various products manufactured by it in India. The total sales of LIPL are ₹ 408.84 crores and commission received from the assessee is 0.756 crores which constitutes only 0.18% of the sales. The assessee also sold products to Indian customers for which LIPL rendered certain services. The assessee sold the products directly to the Indian customers. Contract of sale is concluded once the purchase order is accepted by the assessee in USA. On confirmation of the order and receipt of direct payment from Indian customer, the assessee sends the products in the name of Indian customer with the invoices raised by the assessee directly on Indian customers. The LIPL assists the assessee in the direct sale of products to Indian customers and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, and submitted that the department has not accepted decision of the Tribunal in ITA No. 6443 to 6445/Mum/2012 vide orders dated 18th January, 2013 for assessment year 2004-05, 2005-06 and 2008-09 , and also decision of the Tribunal in ITA No. 7420/Mum/2010 vide orders dated 3rd June, 2011 for assessment year 2006-07 and filed appeal against afore-stated Tribunal s orders with Hon ble Bombay High Court which is pending for adjudication with the Hon ble Bombay High Court. However, the learned CIT D.R. fairly conceded that the facts are identical in the instant assessment year vis- -vis facts of the earlier year which were adjudicated by the Tribunal vide afore- stated orders by holding that the assessee did not have PE in India in terms of Article 5(1) and 5(5) of India-US Tax Treaty whereby additions made by the AO were deleted and the additions to the income made by the A.O. being a profit margin of 5% on the sales made by the assessee in India was held to be not sustainable in the absence of assessee s PE in India and the Tribunal deleted the same, and the matter is squarely covered by the afore-stated Tribunal order s in assessee s own case in the instant assessment year un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. 5. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in bringing to tax the profits of the appellant, despite the fact that a) LIPL was remunerated on an arms length basis, which has been accepted in the transfer pricing assessment of both the appellant and LIPL, and b) LIPL is liable to tax on the commission income derived from the appellant, which extinguishes the tax liability of the appellant principal. 6. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in taxing the profits of ₹ 1,79,64,063 on sales to LIPL by applying force of attraction rule under Article 7(1) of the Tax Treaty without appreciating the fact that such s sales have been concluded outside India, the title to the goods have passed outside India, profits from such sales have accrued/arisen outside India and therefore the profit from such sales are not taxable in India under section 5 of the income-tax Act, 1961. 7. On the facts facts and in the circumstances of the case and in law, the learned ADIT has erred in considering an adhoc 5% profit, amounting to ₹ 2,29,26,152 of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits arising from such sales had to be taxed in India. 4. The assessee filed its objections before the Dispute Resolution Panel-Il, Mumbai (DRP) against the above draft assessment order. The DRP vide its directions dated September 29,2010 upheld the draft assessment order of the AO in its entirety. Consequent to such directions, the AO passed its final assessment order on 1st October, 2010 determining the income of the assessee at ₹ 16,77,58,302/-. Aggrieved, the assessee has preferred this appeal before the ITAT contesting the addition made in the final assessment order. 5. Before us, the main argument of the learned counsel for the assessee is that the assessee is a tax resident of USA and is neither having any fixed place of business In India nor any business connection in India. The learned counsel for the assessee contended that the AO has wrongly interpreted Article 5(1), 5(2) and 5(4) of the India-US Treaty. It is submitted that LIPL is a joint venture of India Oil Corporation and the assessee, both owning 50% and therefore, the assessee has no controlling ownership in LIPL. It is further submitted that during the year under consideration, the assesee did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural resources, but only if so used for a period of more than 120 days in any twelve-month period. (k) a building site or construction, installation or assembly project or supervisory activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve months period, (l) the furnishing of services, other than included services as defined in Article 12 (royalties and fees for included services) within a contracting state by an enterprise through employees or other personnel, but only if (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period or (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (associated enterprise) 3. Notwithstanding the preceding provisions of this Article, the term 'permanent establishment' shall be deemed not to include anyone or more of the following: a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise; b) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise are not made under arms' length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. 6. The fact that a company which is a resident of a contracting state controls or is controlled by a company which is a resident of the other contracting state, or which carries on business in that other state (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other . 7. The learned counsel for the assessee also drew our attention to the relevant clauses of the Exclusive Sales Representation Agreement entered into between the assessee and LIPL, which along with the amendment thereto is placed at page nos. 1 to 14 of the paper book. The relevant clauses relied upon by him are reproduced below: 3. Services to be rendered by LIPL With respect to all areas in the territory except in India, the service to be rendered by LIPL under this agreement shall include the following (collectively the 'services') i) to keep informed of business opportunities, particularly of tenders and competitive bids from customers; ii) such o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in quality of the products and shall indemnify and keep indemnified LIPL from any claim or demand made upon LIPL by any customer or any other persons whatsoever on account of the above. LIPL shall assist Lubrizol in any such manner by obtaining any reporting factual matters and positions of customers. 9.2 To supply LIPL with information, particulars and data necessary to enable LIPL to satisfactory comply with its _. obligations under this agreement. 9.3 Not to hold LIPL responsible in any manner whatsoever for payment of any tax payable by Lubrizol by reason of the sale of products and to indemnify and keep indemnified LIPL from any demand that may 'be made upon LIPL for the income of Lubrizol. 12.A No liability of LIPL 12A-1 LIPL shall not warranty or guarantee or share any quality of any other specification of the products and shall not be responsible for the same 12-A-2 LIPL shall not be responsible for the creditworthiness of any of the customers and Lubrizol will not be entitled to hold LIPL responsible for the same ... 8. The learned counsel for the assessee has relied upon the following precedents in support of the case of the assessee: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracts by the agent on behalf of the principal. 11. In view of the above, the learned counsel for the assessee has submitted that LIPL cannot be considered as acting on behalf of the assessee in India as an, agent. The learned counsel has invited our attention to Article 5(5) of the India-US Treaty and submitted that where a non-resident enterprise carried on business in India through an independent agent acting in the ordinary course of its business, it shall not be deemed to have a PE in India. It is submitted that LIPL is engaged in manufacturing and sale of products on its own account. Such business represented substantial portion of the revenues of LIPL (own sales of ₹ 408 crores approx vis-a-vis commission income of ₹ 0.76 crores received from the assessee). The manufacturing business of LIPL was an independent activity and was carried on its own account Accordingly, in the instant case, not all the sales related activities of LIPL were done only for the assessee. It is engaged in the sales and marketing activities of products manufactured on its own account. It was reiterated that LIPL in its capacity as a customer support representative only forwarded the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in India under any of the clauses of Article 5 of the India-US treaty and hence, the AO was not justified in attributing profit in respect of sales made by the assessee. It is, therefore, prayed that the assessment made by the AO is not justified on facts and hence, the income so assessed be ordered to be deleted. 15. The learned DR, on the other hand, has strongly relied upon the order of the AO and drew our attention to various clauses of the agreement between the assessee and LIPL placed at page nos. 1 to 27 of the paper book. He submitted that the AO has rightly concluded that there exists a PE of the assessee in India in terms of Article 5 of the India-US Treaty and hence, the profit attributed by the assessee is taxable in India. The learned D.R. has submitted that as per the agreement Clause 2 the Lubrizol India Pvt. Ltd. is an exclusive agent of the assessee and it has to do exclusive sales and marketing to solicit orders. The Lubrizol India Pvt. Ltd. is to keep assessee informed about the business opportunities particularly of tenders and competitive bids from customers. The Id. D.R. further submitted that as per the agreement Para 13 (13.2) the Lubrizol India&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt (ANR) is required to act exclusively for the assessee in relation to the promotion of its products and is restricted from assisting directly or indirectly to any other person, firm, company and competing with the assessee directly or indirectly, advising or representin g or associating itself with the business of any such entity in India (Para 92 of the Tribunal order). The Indian agent (ANR) has been rendering services to negotiate and secure orders in India (101,102 Paras of the Tribunal order). The payment received by the Indian agent (ANR) not yet arm's length (103,108 111 of the Tribunal order). In the present case the total sales of LIPL 408.84 crores, commission received from the assessee was 0.76 crores only which constitute only 0.18% of the total sales. This shows that the LIPL has its own substantial business apart from revenue in the form of commission from the assessee. The LIPL does not have any authority to negotiate the contract. The transactions between LIPL and the assessee are in arm's length price. The facts of the present case are entirely different from the Rolls Royce Singapore (supra) has no application to the assessee's case. 18. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the AO in its entirety by observing as under:- 1.14 .. it is clear that so far as marketing of products is concerned, LIPL is virtual projection of the assessee in India. It has got full rights and responsibilities in respect of marketing and sales. The provision of making orders directly on the assessee in the agreement will not save the assessee from taxability in India as while interpreting the agreement it has to be seen as a whole' and all responsibilities and duties of the agent appointed in India have to be seen. LIPL has been remunerated by way of commission only for the functions performed by it. For determination of profits, three things namely functions performed, assets deployed and risk undertaken have to be seen. For the sales made in India, asseessee has assumed all the risks. While the production is taking place outside India, still the risk undertaken by the assessee in sales and marketing of the products in India exists and assessee s profits for the same is to be taxed in India. 1.15 As per the AO, profits arising on sales done in India, even directly by the assessee of the same or similar products as done by LIPL will also be taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he India-US Treaty. It is submitted that the on the sales made by the assessee to LIPL and third parties. the AO computed a profit margin of 5% and made an addition of ₹ 2,29,26,152/- to the income of the assessee which is not warranted. 22. The learned counsel took us through various Articles of India-US Treaty, which are mentioned above in the arguments of learned AR to establish that the assessee does not have PE in' India. After considering the relevant material and the relevant aspects, it is noted that the LIPL has carried out an independent business of manufacture of various products under technology transfer agreement with the assessee in India. It is having its own marketing network for sale of various products manufactured by it in India. The total sales of LIPL are ₹ 408.84 crores and commission received from the assessee is 0.756 crores which constitutes only 0.18% of the sales. The assessee also sold products to Indian customers for which LIPL rendered certain services. The assessee sold the products directly to the Indian customers. Contract of sale is concluded once the purchase order is accepted by the assessee in USA. On confirmation of the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 18th January, 2013 in assessee s own case and held that the assessee did not have PE in India in the year s under consideration in terms of Article 5(1),5(2),5(4) and 5(5) of the India-US treaty and the additions made by the AO to the income of the assessee being a profit margin of 5% on the sales made by the assessee were ordered to be deleted by the Tribunal. Respectfully following the afore-stated orders of co-ordinate benches of the Tribunal in the assessee s own case , we hold that the assessee did not have not have PE in India in the year under consideration in terms of Article 5(1), 5(2), 5(4) 5(5) of the Indo-US Treaty and the addition of ₹ 40,795,524/- made by the A.O. being a profit margin of 5% of the sale made by the assessee in India is not sustainable and we affirm the directions dated 23.12.2013 passed by the DRP-II,Mumbai u/s 144C(5) of the Act which culminated into an assessment order dated 10.01.2014 passed by the AO u/s 144C(13) read with Section 143(3) of the Act. We order accordingly 10. The Revenue is also aggrieved by the decision of the DRP in holding that interest u/s 234B of the Act is not leviable in the case of non-resident despite a speci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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