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TMI Blog2017 (2) TMI 848X X X X Extracts X X X X X X X X Extracts X X X X ..... vice and technical services to the customers on behalf of its head office in India, is also marketing Nipro brands in India. The head office of the assessee company is also directly undertaking sales activity in India. The assessee company made sales in India of Nephrology products and cardiology products, injection related products and bulk products through distributors or through the sales from overseas to the end users. The Indian branch office showed only the transactions in its account which were routed through the branch and the value of products sold directly or through distributors was not incorporated. It is undisputed that the Indian branch undertakes all the activities for marketing, selling and after sales services of the products sold by the assessee in India, either directly or through the distributors, apart from making sales to customers in India from the branch office. In the given facts, the AO held that the branch office constituted permanent establishment in India under Article 5 of the Double Taxation Avoidance Agreement with Singapore as well as the business connection in India in terms of section 9(1) of the Income-tax Act, 1961 (hereinafter also called 'the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been accounted for while computing gross Profit)= Rs. 1,11,68,113 Net Income = Rs. 85,21,812 Less H.O. expenses @ 5% u/s 44C of the Act = Rs. 4,42,090 Net Taxable Income = Rs. 80,95,721/-" 4. Aggrieved thereby, the assessee moved the first appellate authority against the addition of Rs. 80.95 lac. The ld. CIT(A) came to hold that the transfer pricing study report was rightly rejected by the AO inasmuch as it did not give any indication key for allocation of cost and how the segments were created. He, therefore, refused to take cognizance of the segmental results shown by the assessee for the purposes of comparison. He further did not agree with the AO in taking 40% contribution of selling and marketing functions. Taking note of the TP study report of the assessee for the A.Y. 2006-07 in which the assessee had used cost plus of 15% as a mark-up on the total cost incurred by the branch office in India as against the compensation to the branch office at cost plus 5%, the ld. CIT(A) held that Cost Plus Method should be the most appropriate method in the given facts and circumstances of the case. As the business model of the assessee for all the years remained the same, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r direct customers. Under these circumstances, it is incorrect to argue that the AO applied force of attraction' rule for determining the income of the assessee. Au contraire, We find that the AO has restricted himself to the profit attribution' principle, inasmuch as the branch office in India rendered marketing services to its head office for making direct sales and the AO has confined the computation of income only to the extent of the contribution made by such marketing services rendered in India. An income which is a quid pro quo to the branch office for rendering marketing services directed towards effecting direct sales by the head office in India, falls within the sweep of profit attribution'. Force of attraction' rule is said to be applied when income from activities directly undertaken by head office in India, de hors the involvement of Indian branch office, is also included in the total income. Where, however, the Indian branch office renders some services in respect of the direct sales made by the head office, the determination of income for such services, cannot be brought within the ambit of force of attraction rule. As the AO has restricted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see applied TNMM and not the CPM as has been noticed by the ld. CIT(A), which disturbs the entire calculation for the current year on such basis. 9. The working done by the AO is also equally not up to the mark. He computed gross profit' margin at 28.60% of Nipro Corporation and its consolidated subsidiaries. Such gross profit rate was applied to all the sales made by the assessee in India, whether directly or through its branch office. 40% of such determined profit was attributed to sales activity in India through PE. That is how, profit rate from the activities in India was determined at 11.44% (i.e. 40% of 28.60%). We are unable to countenance the view adopted by the AO because he took the figures of net sales and cost of sales and computed gross profit at 28.6% from the accounts of Nipro Corporation and its consolidated subsidiaries. The table from which such percentage of 28.6% was worked out, also shows the amount of Selling, general and administrative expenses to the tune of 36695 millions of yen, which is a little more than 20% of sales value. Adoption of base as gross profit rate by the AO, instead of net profit, does not lend credence to his calculation. 10. At th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that profit of the assessee be computed under Rule 10 at 10% of the sales consideration to the customers in India, either directly by the head office or through the branch office. In holding so, we draw strength from the prescription of sections 44BB and 44BBB which provide for profit rate of 10%. 12. Then comes the question of attributing income to the activities of marketing and sales carried out by the branch office in India. In this regard, it is seen that the Delhi Bench of the Tribunal in Rolls Royce PLC vs. DDIT 2007-TII-32-ITAT-DEL-INTL, has applied 35% of 10% of the total profit as pertaining to marketing activities, which stands affirmed by the Hon'ble Delhi High Court in Rolls Royce PLC vs. DIT(IT) (2011) 339 ITR 147 (Del). It is further noted that the Delhi Bench of the Tribunal in ZTE Corporation vs. Addl. DIT (2016) 159 ITD 696 (Del) has also attributed 35% of the profits attributable to marketing activities in India. It is still further noted that the Delhi Bench of the Tribunal in G.E. Energy Parts Inc. VS. ADIT in ITA No.671/Del/2011, after considering the earlier decisions and the nature of activities carried out by the PE in India, has attributed 26% of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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