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TMI Blog2024 (3) TMI 1384X X X X Extracts X X X X X X X X Extracts X X X X ..... as not been remunerated at arm s length, adjustment can only be made in the transfer pricing assessment of the dependent agent and there could be no addition in the hands of the non-resident (which is held to have a PE in India in the form of the dependent agent). Thus we hold that no business profits are attributable to the alleged PE of the Assessee in India. Decided in favour of assessee. - SH. SHAMIM YAHYA, ACCOUNTANT AND SH. YOGESH KUMAR U.S., JUDICIAL MEMBER For the Assessee: Shri Ajay Vohra, Sr. Adv Ms. Sucheta Kanodia, CA For the Revenue: Shri vizay B. Vasanta, CITDR ORDER PER YOGESH KUMAR, U.S. J M: The above three Appeals are filed by the assessee assailing the orders of CIT(A) for Assessment Year 2017-18, 2018-19 and 2019-20. In the earlier occasion, the captioned appeals have been heard by the Coordinate Bench of the Tribunal, vide order dated 29/04/2022 (A.Y 2017-18) and vide order dated 26/12/2022 (A.Y 2018-19 and A.Y 2019-20), partly allowed the Appeals of the assessee. There were two issues arose for consideration at that point of time before the Bench, first whether the assessee had Permanent Establishment ( PE for short) in India and the second whether the subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed order, as well as the order passed upon remand by the Tribunal, will have liberty to approach the court by way of a statutory appeal. 13. Furthermore, since the instant appeal concerned the impugned orders passed by the Tribunal as and when the appellant/revenue files an appeal, the period spanning between the date when the above-captioned appeals were instituted in this court and the date when the Tribunal passes the order post remand, will not be factored in while calculating the period of limitation. 14. The appeals are disposed of in the aforesaid terms. 15. The Tribunal is requested to dispose of the matter at the earliest, though not later than three (3) months from today. 16. Parties will act based on the digitally signed copies of the order. 3. Now, the only issue to be decided by the Bench is regarding attribution of profit to the PE. The assessee has raised the said ground in Ground No. 5, 6 7 in the Appeal Memo which reads as under:- Grounds with respect to attribution of profits to the alleged PE Ground 5: The Ld. AO and the Hon'ble DRP grossly erred in law, in attributing profits to the alleged PE on an unrealistic and ad-hoc basis which are in complete violatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by AO between the buy sell segment and commission segment tantamount to comparison between two controlled transactions which is extremely incorrect Impractical to equate the global profitability of AB Sciex which performs various functions like manufacturing, R D with the profitability that alleged PE which at the most helps in sales should earn for very limited functions. Reliance placed by Ld. AO on Hon'ble Delhi ITAT order in the case of Rolls Royce Plc. v. DDIT (2008) 113 TIJ 446 is fallacious, misplaced and cannot be accepted in the present case In the case of Rolls Royce Plc. v. DDIT (2008) 113 TIJ 446 Present case Rolls Royce Plc. had a PE in India and the same was upheld by the Hon'ble ITAT The Appellant does not have a PE in India (As Held by Hon'ble Tribunal and such findings were not disturbed by Hon'ble High Court) As per para 24.1 of the order of Delhi ITAT, in case of a PE, total profits of the enterprise should be apportioned on the basis of two factors: (i) Identification of activities carried on through the PE (using the functional and factual analysis) (ii) the remuneration of any such dealing with reference to the functions performed, assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court. Further submitted that, during the TP assessment proceedings of the assessee for Assessment Year 2018-19, the Ld. TPO did not draw any adverse inference with respect to the international transaction of inter alia sale of goods, business support services and distribution and marketing service. The Ld. Counsel has also relied on Judgment of Hon'ble Supreme Court in the case of ACIT Vs. eFunds IT Solution and ors: 399 ITR 34 and also the Judgment of Jurisdictional High Court in the case of Adobe Systems Incorporated Vs. ADIT 292 CTR 407 (Del). The Ld. Counsel has also submitted that for the Assessment Year 2015-16 and 2018-19, the Revenue has accepted the Arm s Length nature of the functions of non-resident assessee and has not attributed any income to the alleged PE of the assessee in non-resident, therefore, sought for deciding the issue in favour of the assessee. 6. Per contra, the Ld. Departmental Representative has filed a written submission which is reproduced as under:- 11. In this regard as seen from the above assessment order, the transactions between the assessee and it's AE are reported to be at arm's length with respect to the reported transactions as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further profits would be attributable even if it is alleged that DHR India constitutes PE of the Appellant. This position has been settled by the decision of Hon'ble Supreme Court in the case of DIT vs. Morgan Stanely [2007] 7 SCC1. 8. The said plea of the assessee has been rejected by the A.O. in following manners:- (v) The next contention of the assessee is that since arm's length of nature of transactions between the assessee and DHR India is not disputed, no further profits would be attributable even if it is alleged that DHR India constitutes PE of the assessee/ The assessee quoted Supreme Court decision in the case of Morgan Stanley that there is no justification to attribute any further profits to such PE it has supposedly remunerated DHR India at Arm s Length. However from a conjoint reading of the discussions in preceding paragraphs along with the terms of the Contracts between the assessee and DHR India it is clearly established that DHR India was undertaking activities/ functions that were beyond the scope of the said commission agreement. Hence, it cannot be said that DHR India has been adequately compensated at arm's length. Further, even if no adverse infe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nerated and such activities have led to the creation of a PE of the assessee company in India and such PE is required to be attributed a profit. The assessee company has submitted in its submission dated 17.12.2019 that even in Direct Sales of Equipment to Indian Parties, DHR Holding India Pvt. Ltd provide services to the customers such as sales support, after sales support, warranty services and post warranty services. In view of the above, the profit is required to be attribute to the deemed PE of the assessee as held in this order on basis of assets, risks and functions performed by DHR India (dependent Agent). 9. During the relevant Assessment Years under consideration, the Ld. A.O. observed that the DHR India constitutes a fixed place PE and also a dependent agent PE of the Assessee in India. The Ld. A.O. attributed profits to the alleged PE of the Assessee i.e. DHR India by using the following methodology. # Particulars 1 Direct sales made by the Company to India customers including AMC income as provided by the Assessee was considered 2 Resale discount of 46% provided to DHR India under Buy-Sell segment was considered as the gross profit earned by the alleged PE for the comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of profits already offered to taxes by the Indian entity should be considered to be at arm's length and no further attribution is required. 12. Apart from the above it is also to be noted that the effective commission rate (using commission and cost + arm s length mark up) earned by the DHR India is as 17% as claimed by the Assessee which is falling above the arms length average margin earned by comparable companies. The Assessee has also contended that, DHR India has received the following remuneration form AB Sciex w.r.t provision of service which were alleged to create a PE in India: (i) Commission of 9% under the Sales Commission Agreement (ii) Cost-plus arm s length mark up (10%) under the Marketing Support Service Agreement DHR India offered the above incomes to tax in India, which ought to be the maximum remuneration/attribution for the functions performed by it, since the Assessee does not have a PE in India. Based on the functional, assets and risk analysis of the alleged PE, the Assessee has undertaken a methodological search on public databases to identify independent distributors in India engaged in sale of similar products. The Gross Profit Margin ( GPM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of Economic Nexus is an important feature of Attributable Profits (profits attributable to the PE). 14. The Judgment of Morgan Stanly (supra) has been followed and reiterated in the subsequent decisions rendered in eFunds IT Solution and ors 399 ITR 34 and Honda Motor Co. Ltd. Japan Vs. ADIT order dated 14/03/2018 in Civil Appeal No. 2833/2018. 15. The Hon'ble Delhi High Court in the case of Adobe Systems Incorporated Vs. ADIT: 292 CTR 407(Del) held that in situation where the dependent agent has not been remunerated at arm s length, adjustment can only be made in the transfer pricing assessment of the dependent agent and there could be no addition in the hands of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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