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TMI Blog2023 (7) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... ACIT) u/s 143(3) r.w.s. 144C(13) in pursuance of directions issued by Dispute Resolution Panel (DRP) is bad in law and void, being contrary to law and principles of natural justice. 2. That the Learned ACIT has erred in assessing and computing Business loss for the year at Rs. 25,68,94,846 as against returned business loss of Rs. 26,19,37,833 thereby making an addition of Rs. 50,42,981/-. 3(a) That the Learned ACIT and DRP have, on mere surmise and guesswork, erred in law and on facts in holding that an income of Rs. 50,42,981/- in relation to contracts with DFCCIL for Offshore Supply of equipment, is directly attributable to the assesse's Permanent Establishment (PE) in India and consequently taxable in India. 3(b) That the Learned ACIT and DRP have erred on facts and in law in ignoring that the offshore supplies were made from outside India and no part of the activities relating to Offshore supplies were carried out by the assessee in India. 3(c) That the learned ACIT and DRP have grossly erred in law and on facts that consideration for sale of equipment from Japan was liable to tax in India on incorrect appreciation of the provisions of the contract, wrong interpretation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Panel (DRP) is bad in law and void, being contrary to law and principles of natural justice. 2. That the Learned ACIT has erred in adding an amount of Rs. 90,55,226/- to the returned income thereby reducing the amount of Business loss to be carried forward in comparison to the amount claimed in the return of income filed by the assessee. 3(a) That the Learned ACIT and DRP have, on mere surmise and guesswork, erred in law and on facts in holding that an income of Rs. 90,55,226/- in relation to contracts with DFCCIL for Offshore Supply of equipment, is directly attributable to the assessee's Permanent Establishment (PE) in India and consequently taxable in India. 3(b) That the Learned ACIT and DRP have erred on facts and in law in ignoring that the offshore supplies were made from outside India and no part of the activities relating to Offshore supplies were carried out by the assessee in India. 3(c) That the learned ACIT and DRP have grossly erred in law and on facts that consideration for sale of equipment from Japan was liable to tax in India on incorrect appreciation of the provisions of the contract, wrong interpretation of the provisions of the Act and DTAA between Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off-shore supply made by the assessee during the year under consideration. After considering the submissions of the assessee the AO passed a draft assessment order, whereby he proposed addition of Rs. 50,42,987/- to the returned income. Aggrieved against this the assessee preferred its objections before the learned Dispute Resolution Panel ("DRP" in short), who after considering the objections of the assessee, issued certain directions. However, the proposal regarding profit attributable to the India PE @ 35% as computed at Rs. 50,42,987/- was confirmed by the learned DRP. Thereafter the AO passed the impugned assessment order. 4. Apropos to the grounds of appeal learned counsel for the assessee has filed written submissions. For the sake of clarity the submissions of the assessee are reproduced as under: "1. Facts of the case 1.1 The assessee, Hitachi Ltd. is a Japanese multinational engineering and electronics conglomerate company, headquartered in Chiyoda, Tokyo, Japan. It is one of the largest electronic companies in the world. Hitachi, Ltd. is the parent company of Hitachi Group which operates through several business segments including Social Infrastructure & Industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rations of the PEs in India. 2. Additions made by Learned AO in the assessment order 2.1 The Learned AO, while framing the Assessment Order, made additions to total taxable income of the assessee amounting to Rs. 50,42,987 in AY 2018-19 and Rs. 90,55,2267- in AY 2019-20, by attributing 35% of the Offshore Portion to the PE in India. Further Global profit rate of Hitachi Ltd pertaining to AY 2018-19 (6.87%) was considered as profit from operations to arrive at taxable income of both the years. It may be noted that the income from onshore supply and onshore services were already offered for taxation by the assessee as Business Income. We would like to bring before your kind notice that the Learned AO, in his order, has not given any basis for attributing part of the Offshore Portion relating to supplies from outside India to the PE in India. The rate of attribution as well as the rate of profit thereon is arbitrarily decided by the Learned AO. 3 Contentions of the assessee 3.1 The Offshore portion of the contract relates to supply of equipment manufactured by Hitachi, Ltd., at their manufacturing facility in Japan. As per the contract terms, Hitachi Ltd. delivered the equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in those transactions. It is also understood that profits shall be regarded as attributable to the permanent establishment to the above-mentioned extent, even when the contract or order relating to the sale or provision of goods or services in question is made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment...." The DTA read with its Protocol makes it amply clear that direct and indirect attribution of profits to the PE refer to involvement of the PE in those transactions. Therefore, where the PE of the assessee is not involved in manufacturing or procurement of the offshore supplies, there can be no question of attribution of any profit arising thereon on the Indian PEs. Following the Doctrine of Territorial Nexus, the profits arising from offshore supplies should not result in any profit attribution to India through the assessee's PEs in India. 3.3 Without prejudice to the above, the assessee had concluded and provided relevant workings, that Offshore Portion of the contract is already a loss at operational level. The loss for Offshore portion is arising on account of the following reasons: a. Change in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 147 taxmann.com 165 (Delhi)]. He contended that in view of the decision of the Hon'ble Delhi High Court, no addition could have been made as no profit on offshore supplies can, in any case, be attributed to the PE as offshore portion of the contract is already a loss at operational level. Moreover, the lower authorities failed to appreciate the fact that the Project Office had no activity in respect of the transaction in question. The only activity of Project Office was to the extent of customs clearance. Even otherwise also the attribution of profit is highly excessive which cannot be sustained.] 6. On the other hand, learned DR supported the orders of the lower authorities and submitted that there is no dispute with regard to the fact that the assessee has PE in the form of multiple Project Offices for which these offshore supply of equipment are made, hence there is nothing wrong to attribute revenue from offshore supply as directly attributable to the PE. 7. We have heard rival contentions and perused the material available on record. We find that the objection of the assessee regarding attribution of profit to PE was rejected by the learned DRP by observing as under: "3.3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of customs duty compliance in India including payment of customs duty and IGST, which in turn was charged back to Hitachi Ltd. Japan by the Project Office. The activities relating to customs clearance are covered under the scope of work for Onshore portion of the contract. Hence, as per the terms of contract with DFCCIL, the offshore goods supplied from Japan were handed over to M/s Mitsui & Co. Ltd. in Japan for transportation and delivery at site. Thus, no activity in respect of offshore portion of the contract is attributable to the PEs of assessee in India. 7.2. We have given our thoughtful consideration to the material available on record. The Revenue has not disputed the fact that the equipment was manufactured in Japan, transported to Mitsui & Co. Ltd. and were delivered to the client. Now the moot question that arises is the role of the Project Office. Lower authorities have not specified the role of the Project Office. What was the role of the Project Office for the transaction in question and what is the basis for attributing the profit at 35% to the PE. Moreover, before AO it was stated by the assessee company that the goods were passed through the Project Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table to the P.L. There are losses in both years as per the audited accounts. PB- Volume A of Compilation page 164, at 169 and page 180 at 185. 21. The relevant portion of the said Special Bench Judgment is quoted herein below (page 287 of Volume C, at page 949- 950): "287 .... Taking all these into consideration, we consider it fair and reasonable to attribute 20% of the net profit in respect of the Indian sales as the income attributable to the PE: The following steps are involved in computing the income attributable to the PE: First the global sales and the global net profit have to be ascertained. From the accounts presented before us as well as before the Income-tax authorities, the global net profit rate has been ascertained at 10.8% and 16.1% by the CIT (Appeals), to which no objection has been taken by either side. This percentage has to be applied to the Indian* sales and by Indian sales, we mean the total contract price for the equipment as a whole and not the bifurcated price which the Assessing Officer has referred to in the assessment order. This will also be consistent with our view that the software and the hardware constitute one integrated equipment. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N NO: 2022/DHC/005483 ITA 503/2022 Page 6 of 8 "(a) The profits of an enterprise can ordinarily be taxed only by the country in which it is located. (b) If however, the enterprise has a P.E. located in another country (which is also a signatory to the DTAA), through which it carries on its business, then a portion of its profits, to the extent it is attributable to the P.E. can be taxed in the other country." 26. On a plain reading of Article 7(1) of the DTAA, the question of attributing profits to the P.E. arises only if the foreign enterprise is making a profit. This is the condition precedent. If it is making a loss then no question arises at all of attributing any profit to the P.E., which would be taxable in India. 27. The Assessing Officer has taken gross profit margins of the Appellant Company for 2009 and 2010 as per its audited accounts instead of the net profit margins. The gross profits margins of the Appellant Company for 2009 and 2010 were positive, and that was how the A.O. could attribute profits to the P.E. In so adopting the gross profit margins of the Appellant Company, the A.O. has acted in a manner which is directly contrary to Article 7(1) of the DTAA a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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