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TMI Blog2025 (2) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... l as business investment in various entities in Japan and overseas. Assessee, Itochu India Private Limited ('Itochu India') is a wholly owned subsidiary of Itochu Japan in India and undertakes the activities of general trading, procurement and supply of chemicals, textiles, machinery and equipment. Further, it also provides business support services to its associated enterprises and third parties. 2.1 In this case, the return of income was filed on 30.11.2017 declaring an income of 3,77,25,763/- and a draft order u/s 143(2) read with section 144C was served on the assessee on 27.12.2019, proposing certain variations in the, income returned. AO in passing the draft assessment order has placed reliance on the draft assessment order for AY 2013-14 and AY 2015-16. 2.2 The assessee has made sale of Apps. INR 1790,12,21,208 and AO observed that assessee could not produce even a single document/ contract to substantiate its position of no PE no tax in India pertaining to its so called business activities. 3. Now from the submission made before us by Ld. Sr. Counsel and as made before the tax authorities below it comes up that as far as non-existence of a permanent establishment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all costs incurred and Itochu India bears all the cost arising from the performance of its duties. Further that the Itochu India is not habitually exercising authority in India to bind the assessee under any contracts with the Indian customers. It was also pointed out that the Transfer Pricing Report of Itochu India specifically mentions that the role of Itochu India is limited to act as a communication channel between the associated enterprises and the customers. 4. Now all these aspects when put up before the DRP, the same were not found sustainable and we consider it appropriate to reproduce the relevant part of DRP order here in below; Decision and Directions of the DRP "3. The Panel has very carefully considered the grounds of objections and written and oral arguments made on behalf of the assessee. The grounds raised by the assessee are descriptive and detailed. For the sake of convenience, they may be reduced to two core issues before the Panel for consideration: (a) Issue of permanent establishment: (b) Issue of attribution of income liable to tax in India 3.1 Existence of Permanent Establishment in India 3.1.1 The Assessing Officer has contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services. * To negotiate with suppliers on behalf of the assessee for amicable settlement of claims or complaints. * Any other services which may be authorized or instructed by the assessee in connection with conclusion or execution of the Purchase Contract. 3.1.2 He also noted that Itochu India Pvt. Ltd. was being compensated on all the cost incurred including the cost incurred for the contracts with the third parties. He, accordingly, held that Itochu India Pvt. Ltd. (Itochu India) secured orders in India for the assessee (which is controlling Itochu India) and Itochu India also negotiated and finalized the prices with the customers of assessee in India, though such authority was not vested in them through any agreement, but in practice they were deciding the prices and such prices were later on being confirmed by the assessee through documents. Such prices decided by Itochu India have the binding effect on the assessee, as the otherwise has not been proved. The AR of the assessee did not even submit any instance wherein Itochu India have proposed a price which were rejected by the assessee. Accordingly, it was held that approval of price negotiation by the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaken by Itochu India in relation its obligations for purchase transactions to hold that Itochu India secures orders in India for Itochu Japan. The services in relation to the purchase of goods from Indian suppliers are said to be different and distinctly mentioned in the said agreement and were different from those relating to sale of goods. This fact was clearly highlighted to the AO during the course of assessment proceedings. It is further submitted that negotiation of prices with Indian Customers, as alleged by the AO did not relate to the activity of sales at all. Itochu India had no authority whatsoever to conclude contracts on behalf of the Itochu Japan with regard to sale of goods as available to it in relation to purchase of goods. Clause 2 "Power of the Agent" specifically provides that all contracts, orders, proposal and offer for sale or purchase of the goods shall be subject to final and formal approval and acceptance by the assessee and Itochu India will have no power, right or authority to approve or accept the same on behalf of the assessee. It is also submitted that Itochu India and third-party independent agents only acted as a communication channel between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement (DTAA'). 3 On the facts and in the circumstances of the case & in law, the Ll. AO has failed to appreciate that the Itochu India has not fulfilled either of the pre-requisite conditions to constitute a dependent agent PE of the Appellant in India. 4. On the facts and in the circumstances of the case and in law, the addition of Rs. 79.48.43.605 made in the final assessment order is bad in law and needs to be deleted/quashed as it is a mere replica of the assessment order passed for AY 2013-14 and AY 2015-16 and based on account of incorrect appreciation of facts. 4.1 On the facts and in the circumstances of the case & in law, the Ld. AO erred in holding that the Appellant has not produced evidence to substantiate its position that it does not have a PE in India and has failed to appreciate that the company has provided all the documentary evidences including party wise sale details, copy of contracts/ bill of ladings/invoices/ purchase orders and copy of agency agreement to substantiate the fact that the appellant made sales in India without any involvement of Itochu India or with a limited role of Itochu India where it is only acting as a communication channel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a PE of the appellant. 6. On the facts and in the circumstances of the case and in law, the Id. AO/ Ld. DRP have not discharged their primary onus to prove that the appellant has a PE in India as per Article 5 of India-Japan DTAA. 6.1 That the Ld. AO/ Ld. DRP has made unsubstantiated allegation on the appellant that the appellant has a PE in India and have not even controverted to the voluminous details filed by the appellant before the Ld. AO and the Ld. DRP. 7. Without prejudice to the above grounds, the Ld. AO/ Id. DRP has erred on facts and circumstances of the case and in law in attributing 50% of the total sales made by the appellant and assuming a profit margin of 10% to the alleged PE, thereby assessing the income attributable to the alleged PE amounting to Rs. 79.48.43.605, which is not only arbitrary but highly unreasonable and excessive. 7.1 That the Ld. AO/ Ld. DRP has erred in attributing 50% of the total sales value in India to the alleged PE without any justification and reasonable basis and without controverting to the various judicial precedents which have accepted a lower rate of income attribution 7.2 That the Ld. AO/ Ld. DRP has failed to app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR, submitting that this is second round of litigation and that AO has examined the fact about the presence of key personnel on secondment. Ld. DR has heavily relied the findings of the Co- ordinate bench in assessee's case for AY AY 2013-14 and AY 2015-16, and submitted that in this year too the issue may be restored to the files of AO for further verification of facts and assertions of assessee. 6.1 The Ld. Sr. Counsel however, contended that engagement of personnel on secondment is not the case of AO. It was submitted that these personnel were employees of ITOCHU India. 7. Giving thoughtful consideration to the material on record we find that following is the summary of International transactions entered into by the Itochu Japan with its AE, relevant FY; International transactions Name of the AE Value (in INR) Commission income Itochu India 2,06,04,537 Total 2,06,04,537 Provision of consultancy services Itochu India 50,62,947 Total 50,62,947 Receipt of IT support charges Itochu India 1,01,61,633 Total 1,01,61,633 Reimbursement of expenses received Itochu India 12,33,533 Total 12,33,533 8. If we examine the relevant clauses of the Memorandum of Agency Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment imposition and others that the Principal may encounter in the course of carrying out a contract with buyer or seller in the Territory." 8.2 Then as to commission in clause 5 of the agency agreement it is agreed as follows; "5. COMMISSION The Principal shall pay commission to the Agent at the rate described in the Schedule (A) hereto for all transactions with sellers or buyers of the Goods in the Territory made by the Principal with the assistance of the Agent as paragraph 3 including the transactions made as a result of dealings under paragraph 2 (b) hereof. The rate of commission herein provided is subject to increase or decrease for a particular transaction if both parties hereto may from time to time so agree, and confirmed by the supplement of Agency Agreement. Payment of the commission shall be effected basically within a month after the completion of each transaction." 9. Thus from the relevant clauses in memorandum of agency agreement entered into between the assessee with Indian subsidiary, we find that as per Article 1, the appointment of the Indian subsidiary as agent was for the purpose of performing the functions as selling and purchasing agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h prices) lies with Itochu Japan, and ltochu India only facilitates the negotiation process. 11.1 In contract with suppliers Itochu Japan is the party to contract with suppliers and therefore bear any consequential liability. Itochu India does not enter into contracts with suppliers. In trading transactions, Itochu India enters into contracts with Itochu Japan from whom it takes title to the goods. 11.2 In regard to the Identification of customers. The majority of India customers are either existing customers of Itochu Japan i.e. companies having headquarters in Japan and prior business dealings with the Itochu Group or are generally well-known companies. Itochu Japan already possess substantial amount of information on the India customer base or such information is readily available in the public domain. As such, Itochu India does not generally identify the customers. 11.3 Coming to the Negotiation with customers. Itochu Japan is principally responsible for negotiations with customers. Normally, before finalizing a deal, Itochu Japan evaluates, among other factors: credit worthiness of the customer; past experience with the customer or its group; pricing; terms of payment; spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrent economic information to Itochu Japan on a regular basis to enable Itochu Japan to consider these factors in formulating its strategy for India. 11.8 In regard to the ordering and order processing, Itochu Japan receives, negotiate, and process all sales orders for third party customers in India. For trading transactions, Itochu India is responsible or receiving and processing sales orders for Indian customers. 11.9 As far the pricing is concerned, Itochu Japan is solely responsible for developing the pricing for products and services. Itochu India does not independently develop pricing recommendations. However, Itochu India communicates pricing expectations of the customers to Itochu Japan to enable them to negotiate with the customers. In respect of trading transactions, where Itochu India takes title from its AE and re-sells to customers in India, price negotiation is conducted between the customer and Itochu India. 11.10 In regard to the financing, invoicing, and collection. Itochu Japan, based on the terms negotiated with customers, may extend credit to customers. Financing, invoicing, and collection are carried out directly by Itochu Japan vis-a-vis the customers. Ito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such information through various sources such as published reports, journals, newspapers, magazines and attending seminars organized by industry trade bodies. 11.14 However, Itochu Japan and Itochu India are responsible for their respective administrative, financial and legal matters, "they may coordinate certain activities, and may rely on certain central systems (e.g., information technology System). 11.15 Coming to facilitation support by Itochu Japan (resultant commission income for Itochu Japan) we find in certain cases, Itochu Japan provides facilitation support to Itochu India in relation to the trading transactions (back-to-back) entered into by Itochu India with third party customer. The services provided by Itochu Japan includes: - Support, advise and inform Itochu India of product specification, technical issues etc.; - Assist in negotiation with third party; - Assisting Itochu India in purchase scheduling; and - Assisting Itochu India in achieving appropriate quality of the products. 11.16 As from the above services, Itochu Japan earns a commission, which is based on the sales value and same happened to be one of the international transaction under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment under the provisions of that paragraph;" 15.1 In this regard, based on the agency agreement we find that ITOCHU India does not have any authority to conclude any contract on behalf of ITOCHU Japan in India in relation to the sale activities. ITOCHU India does not have the power to negotiate any term of the contract with the Indian customer. Thus, the first condition is not satisfied in the present ease. 15.2 The second condition for application Article 5(7) of the India- Japan DTAA is; "(b) he has no such authority, but habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise;" 15.3 What we find is that ITOCHU India does not maintain any stock of goods or merchandise. The goods are supplied offshore and are imported by the Indian customer directly. The same is evident from the copies of various import documents filed in PB Volume II. Thus, this condition is also not satisfied. 15.4 The third condition for application Article 5(7) of the India- Japan DTAA is; "(c) he habitually secures orders in the first-mentioned Contracting State, wholly or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of stock in trade of the traded goods which are similar to the details of sales of traded goods. Further, going through the copy of non-consolidated financial statement of Itochu Japan for the year ending 31st March, 2017 available at pages 63 to 76 of the paper book, we find that the total trading transactions for the year ending 31st March, 2017 was Rs.44,70,329/- million yen. On perusal of the commission income of the Itochu India from Itochu Japan, we find that it forms a very small portion of the total revenue of Itochu India. 18. There is nothing in the form of evidence which show that Itochu India habitually exercises the authority to conclude contracts in India or maintains stocks in India for delivery to customers or secures orders in India. The AO has rejected all the arguments of the assessee on the basis that the assessee has failed to produce India specific accounts for the trading operations and the profit earned thereon and, accordingly, held that as the profits earned by the assessee from Indian operations are not available guidance is drawn from Rule 10 r.w.s. 44BB of the Act wherein the deemed profits is estimated @ 10% of the revenue of price/consideration. We a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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