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TMI Blog2022 (10) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... profit attribution on the basis of the two taxpayer approach is enhanced. Even if that computation of profit attribution, on the basis of the two taxpayer approach, is erroneous, in view of Hon ble jurisdictional High Court decision, it cannot be said to be prejudicial to the interest of the revenue unless there is a categorical finding that the payment to the dependent agent is not an arm s length price vis- -vis functions performed, assets employed and risks assumed by the dependent agent. While doing so, one also has to bear in mind that DAPE is not anything distinct from the DA, in the light of the binding judicial precedents holding the field as of now, and the taxability of the dependent agent s remuneration in the hands of the DA brings an end to the taxability of the DAPE also. There is no such finding about the payment to the dependent agent being less than the arm s length price of services rendered by the dependent agent, in the present case, even though there is a finding about questioning the DAPE s FAR analysis. The Commissioner ought to have examined the arm s length price determination in respect of the services rendered by the dependent agent, in this context. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment (MSA) with MFE India, and in view of the arrangements under the said agreement, MFE India constitutes its dependent agent permanent establishment in India. These facts are also well captured in the assessment order dated 18th December 2019 passed by the Assessing Officer, as follows: 3. The Assessee Company is a Non-resident company incorporated under the laws of Malaysia. The Assessee Company supplies aluminium formwork which finds application in the construction of buildings. The Group has a wholly owned subsidiary in India in the name and style of MFE Formwork Technology India P Ltd ('MFE-India') having its registered office at Mumbai, Andheri. The assessee is a tax resident of Malaysia in terms of Article 4 of the Double Taxation Avoidance Agreement ('DTAA') entered into between India and Malaysia. The Assessee Company had executed a Marketing Service Agreement ('MSA') with MFE-India. As per the MSA, MFE-India is required to (1) Promote and market the products of the Assessee Company within India and (2) Educate the prospective customers about the benefits of the products offered by the Assessee Company. Further, as per technical support service agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia P Ltd) being the cost incurred for performing its duties under the agreement along with a mark-up of 15% 9,05,21,260 6 Taxable Profits Profit Attributable to Indian Operations as reduced by Marketing Fee paid to agent in India (Sr 4-Sr 5) 21,99,476 5. From the Computation of Income filed by the assessee it is seen that for the purpose of determining profits attributable to tax in India, the assessee Company has attributed 24% of Gross Profits based on FAR Analysis carried out. On going through the FAR analysis it seen that the Assessee has broken up each activity into several sub-activities and allotted weights to each sub-activity and then determined what is the weightage attributable to activity of the Permanent Establishment in India. The ratio of 24% adopted by the assessee for the purpose of determining profits attributable to tax in India is in consonance with the ratio adopted by my predecessors in the earlier years. In light of the above discussion and based on the facts of the case of the Assessee, the gross profits attributable to the activity of Marketing carried out by the PE in India are computed at 24% of the Total Gross Profits from sales made in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd [ (2007) 106 ITD 175 (Mum)], wherein, speaking through one of us, the coordinate bench upheld the dual taxpayer approach, but then the said decision did not find favour with the Hon'ble High jurisdictional Court which has reversed the said decision of the coordinate bench. We are thus alive to the fact that in the light of Hon'ble jurisdictional High Court judgment in the case of Set Satellite Singapore Pte Ltd Vs DCIT [(2008) 307 ITR 205 (Bom)], so far as profit attribution of a DAPE is concerned, the prevailing legal position is that as long as an agent is paid an arm's length remuneration for the services rendered, nothing survives for taxation in the hands of the dependent agency permanent establishment. Viewed thus, the existence of a dependent agency permanent establishment is wholly tax neutral, and there are a large number of decisions of the coordinate benches, following Hon'ble jurisdictional High Court's judgment in the case of Set Satellite (supra), holding so. The question that we put to the parties was whether an order can be said to be prejudicial to the interest of the revenue even when the income is determined on the basis of the correct legal position of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment" (Emphasis, by underlining, supplied by us). It is, therefore, a condition precedent for invoking the revisionary powers under section 263 that in order to invoke the revision powers of the Commissioner, the order sought to be revised must be "erroneous in so far as it is prejudicial to the interests of the revenue". In other words, even if an order is erroneous but is not prejudicial to the interest of the revenue, the provisions of Section 263(1) cannot be put into service. In the case of Malabar Industrial Co Ltd Vs CIT [(2000) 243 ITR 83 (SC)], the Hon'ble Supreme Court has elaborated upon this point and observed that "A bare reading of this provision makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the ITO is erroneous insofar as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment in the case of the Set Satellite (supra), on a materially different basis. On a conceptual note, PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, other than agent's remuneration in the source country - which is taxable in the source state anyway dehors the existence of PE, become taxable in the source state, the very approach to the DAPE profit attribution may indeed seem clearly incongruous, but then as is the settled legal position as long as the dependent agent has been remunerated, on an arm's length basis, for the functions performed, assets employed and risks assumed, that is the end of taxability of profits so far as the profits attributable to the DAPE are concerned. As a matter of fact, the very reference to the Rolls Royce decision (supra) shows that the aspect of the distinction between profit attribution to a fixed place PE and a DAPE has been lost sight of. While the learned Commissioner has disputed the FAR analysis, there is clearly mix-up of the FAR analysis of the agent with the FAR analysis of the DAPE. Learned Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A on account of the services rendered by MSAS under the services agreement dated 14-4-2005 and if so (ii) the amount of income attributable to such PE. It was ruled that MSAS should be regarded as constituting a service PE under Article 5(2)(1). On the second question the AAR ruled that the transactional net margin method (TNMM) was the most appropriate method for the determination of the Arm's Length Price (ALP) in respect of the service agreement dated 14-4-2005 and it meets the test of arm's length as prescribed under section 92C of the 1961 Act and no further income was attributable in the hands of MSAS in India. The said ruling of AAR on the question of income attributable to the PE was the subject-matter of challenge by the Department. Insofar as the issue of PE is concerned the Supreme Court was pleased to hold that it agreed with the Ruling of the AAR that stewardship activities would fall under Article 5(2)(1). Dealing with the question of deputation, the Court held that on the facts that there is a service PE under Article 5(2)(1) and as such held that the Department was right in its contention that there exists a PE in India. Considering Article 7 of that treaty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to 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." In our opinion, considering the judgment, if the correct arm's length price is applied and paid then nothing further would be left to be taxed in the hands of the Foreign Enterprise. 8. In the present case, there does not appear to be any dispute with respect to the ascertainment of the arm's length price of the services rendered by the dependent agent to the assessee, as no ALP adjustment is made in the remuneration paid by the assessee to the MFE-India, i.e. the dependent agent. There are also several indications to suggest that DA and DAPE are being treated as distinct taxpayers, inasmuch as while the arm's length payment to the agent is not being questioned, the FAR an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y add that once the assessee has accepted the dual taxpayer approach in its computation of income, it cannot be open to the assessee to deny the tax liability that it has already accepted under the said computation. We may, in this regard, refer to a materially similar situation dealt with by the Hon'ble Supreme Court in the case of Carborundum Co Vs CIT [(1977) 108 ITR 335 (SC)], wherein, even while Their Lordships held that the assessee had no tax withholding obligation in respect of technical know-how paid by the assessee, and, as such, revision order under section 263, holding the assessee liable to tax withholding treating 75% of such technical know-how is taxable in India, is unsustainable in law, Their Lordships also made clear that the 5% tax withholding liability accepted by the assessee cannot be negated as a result of the revision order being quashed. The same will be the position here. The impugned revision order being quashed would not affect the tax liability accepted by the assessee, under dual taxpayer approach, in the original assessment proceedings. As a matter of such adjustments being made in the course of normal assessment proceedings would have been, on jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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