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TMI Blog2023 (4) TMI 1089X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner ought to have examined the arm s length price determination in respect of the services rendered by the dependent agent, in this context. That exercise has also not been done. Unless the order sought to be revised cannot be said to be prejudicial to the interest of the revenue, its being erroneous, even if that be so, cannot be said to reason enough to invoke section 263 of the Act, and the order cannot be said to be prejudicial to the interests of the revenue unless there is a categorical finding that the dependent agent has not been paid arm s length remuneration for the functions performed, assets employed and risks assumed by the dependent agent. Order being prejudicial to the interest of the revenue, inasmuch as the payment to the dependent agent not being at an arm s length, is a sine qua non for holding that the order is prejudicial to the interest of the revenue. This exercise has clearly not been done on the facts of this case. For this short reason alone, we must set aside the impugned revision order. Appeals of the assessee are allowed. - ITA No. 1578/MUM/2022, ITA No. 1579/MUM/2022 - - - Dated:- 24-1-2023 - SHRI PRASHANT MAHARISHI, AM AND SHRI SANDEEP SINGH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rays that the percentage of profits as attributable to Appellant s PE in India should be restored to 24% and that profits attributable to its PE in India should be determined on net basis after granting deduction for full operating expenses. 4. Without prejudice to Ground numbers 1, 2, and 3 above, on the facts and circumstances of the case and in law, the CIT erred in placing reliance on the decision of the Hon ble Delhi High court in the case of Rolls Royce PLC 339 ITR 147 (Del), without appreciating that facts of the Appellant s case are different than the facts in the case of Rolls Royce. 5. Without prejudice to Ground numbers 1, 2, 3 and 4 above, on the facts and circumstances of the case and in law, while the CIT has relied on the decision of Rolls Royce PLC (supra) to justify his action to attribute higher amount of profits to Appellant s PE in India, the CIT erred in attributing gross profit to the Appellant s PE in India after reducing only the marketing fees paid to agent in India whereas in the case of Rolls Royce (supra) profits attributable to India as computed on net basis. Appellant prays that profits attributable to its PE in India should be determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment under section 143(3) of the Act and passing order dated 29 October. The Appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab-initio 3. Without prejudice to Ground Number 1 and 2 above, on the facts addition circumstances of the case and in law, the CIT erred in holding that the method of computing profits of ₹ 7,31,82,787 attributable to PE as adopted by appellant is inappropriate whereas the CIT has adopted the same method and arbitrarily changed allocation of weights of various activities between the Appellant and its PE to arrive at a higher attribution of profits at ₹ 28,87,84,334 being 35% of gross profits of the Appellant in respect of goods sold to Indian customers without granting deduction for full operating expenses incurred by the appellant. The Appellant prays that the percentage of profits as attributable to Appellant s PE in India should be restored to 24% and that profits attributable to its PE in India should be determined on net basis after granting deduction for full operating expenses. 4. Without prejudice to Ground Number 1, 2 and 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m formwork that finds application in construction of buildings. It is a wholly owned subsidiary of MFC Formwork technology in India Pvt. Ltd. The assessee has entered into a marketing services agreement with Indian entity to promote and market the products within India and to educate the prospective customers the benefits of the product. A technical service agreement was so entered wherein entities require to providing support of formwork supplied by Malaysia to its customer in India. The Indian entity qualifies as a dependent agent of the assessee as per Article 5 of the Double Taxation Avoidance Agreement between India and Malaysia. Therefore, assessee had a permanent establishment in India. Thus, the assessee has filed the return of income of such Permanent Establishment. The assessee submitted that 24% of gross profit based on FAR analysis as taxable income of the assessee PE. The assessee has computed the profit attributable to the activity of Permanent Establishment (PE) in India from the sales based in India. Thus, the assessee computed sales made in India of ₹420 crores, reduced the cost of sales proportionate of ₹351 crores, computed gross profit at ₹68.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer did not make any enquiry. The learned Assessing Officer simply accepted the attribution at the rate of 24% of the gross profit. The CIT also held that there is no rational for further reducing the total marketing fees of ₹11.68 crores. Accordingly, he held that the attribution should have been on the basis of net expenses. Accordingly, he held that the ratio of attribution of 24% should be applied after reduction of 11.68 crores from the gross profit of ₹68.64 crores, whereas, the assessee has applied attribution rate to the gross profit and thereafter, took the deduction of 11.68 crores.Accordingly order u/s 263 was passed. 08. Identically revisionary order was also passed for AY 2019-20. 09. The learned Authorized Representative submitted that identical issue arose in the case of the assessee for A.Y. 2017-18, wherein on identical facts and circumstances the order under Section 263 of the Income-tax Act, 1961 (the Act) was passed by the learned CIT. The matter travelled before the co-ordinate Bench in ITA No.890/Mum/2022 dated 30th August, 2022, wherein the order passed by the learned PCIT under Section 263 of the Act for that assessment year was qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent 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 between MFE-Malaysia and MFE-India, the latter is required to provide support in terms of the formwork supplied by MFE Malaysia to its customers in India; such support being in the nature of supervisory support that would be required by the customer as regards the formwork supplied. The said company qualifies as a dependent ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Agreement, the Assessee Company has paid a Marketing Fee to its agent in India (MFE Formwork Technology India 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approach, recognizing the distinction between the dependent agent and the dependent agency permanent establishment. While a similar approach was approved and adopted by a coordinate bench in the case of DDIT Vs Set Satellite Pte 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmanent establishment of the assessee under Article 5 of the Double Taxation Avoidance Agreement between India and the United Kingdom. The profit attribution to the DAPE and fixed place PE are, in the light of Hon ble jurisdictional High Court judgment 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 bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion . The basic question related to the transaction between the MSCo and MSAS. The advance ruling was sought on two counts (i) whether the applicant was having PE in India under Article 5(1) of the DTAA 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing further would be left to attribute to the PE. The situation would be different if the transfer of pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. 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 dependen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest of the revenue. This exercise has clearly not been done on the facts of this case. For this short reason alone, we must set aside the impugned revision order. 10. As we part with the matter, we may 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 accept ..... X X X X Extracts X X X X X X X X Extracts X X X X
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