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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 ..... d 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 are of the considered view that when the financials of Itochu India and the assessee were there along with the agency agreement, then making such observations without an independent inquiry on its own is not justified. AO has laid burden on the assessee to establish the nature of agency. However, no attempt was made to examine the agreement. Only because the nature of business of trading is a continuous flow of the business process that cannot be a foundation to conclude a principal-agent relationship for the purpose of Article 5 of the DTAA. DRP at the same time discredited the case of the assessee only on the basis of assumptions and surmises, as to how, to his mind, the two entities 'may' have been 'actually' transacting their business. As before us for the present AY the factual aspects are crystal clear that there is no PE of assessee in the form of Itochu India. Thus there is no justification to follow the AY 2013-14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the AO had alleged existence of dependent agent PE in India in terms of Article 5 of the India-Japan Double Taxation Avoidance Agreement ('DTAA') and thereby assessing the income attributable to the alleged PE amounting to Rs.89,50,61,139. Ld. Sr. Counsel submitted that AO has arrived at this conclucions without appreciating the fact that none of the following pre-requisite conditions to constitute a dependent agent PE were fulfilled by Itochu India and so Itochu India was not a dependent agent PE: * Itochu India does not habitually exercise the authority to conclude the contracts in India for and on behalf of the assessee; and * Itochu India does not habitually maintains stock of goods in India for delivery to customers for and on behalf of the assessee; and * Itochu India does not secure orders in India for and on behalf of the assessee; and * Itochu India is not legally or economically dependent on the assessee. 3.1 Ld. Sr. Counsel has submitted that Itochu India is not legally and economically dependent on the assessee and that AO ignored to appreciate the fact that Itochu India is an independent entity, primarily engaged in trading activities with major sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made sales of JPY 31,43,32,27,020 and 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. He accordingly held that the assessee was consciously and deliberately hiding some relevant documents required to decide on the taxability of the assessee company. He also noted that the assessee has admitted in its reply that sales were also made through agents in India, however none of the details were produced for verification, not even the name of the agents were provided. In view of the above and also the fact that the AR of the assessee failed to provide any information or agreements in relation to nature of relationship and dealings with these agents in India, the Assessing Officer held that the assessee has made sale in India to Indian customers wherein Itochu India Pvt Ltd. provides support in execution of sale. From the perusal of the agreement between Itochu Japan and Itochu India Pvt Ltd. following clauses may be observed:- From the service agreement, the AO also noted that a few clauses from the scope of services mentioned in the service agreement where Itochu India Private Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormality. He accordingly returned a finding that Itochu India was a dependent agent of the assessee in India and the business of the assessee was carried on wholly or partly being carried on. He relied, in this regard on Para 32.1 of the Commentary on OECD Model Tax Convention, Article 5 of the India-Japan tax treaty and the decision of ITAT Delhi in Galileo International Inc. Deputy Commissioner of Income-tax, [2009] 116 ITD 1 (Delhi). 3.1.3 The assessee contended, on the other hand, that it is a company incorporated in Japan and is one of the leading sogo shosha (trading company) in the country. It is engaged in domestic trading, import/export, and overseas trading of various products. Itochu Japan supplies to various Indian customers, several products including oil, chemical products, textile etc. The trading is done either directly or with the support of Itochu India or other third-party independent agents. Itochu Japan receives majority of its revenue from India by making direct sales to Indian customers such as Reliance Industries Limited, Essar Oil Limited etc. The remaining revenue is earned through sales that are completed with the help of Itochu India (however, contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian customers and the assessee considering the language and cultural barriers. The negotiation activities performed by Itochu India were in relation to purchase functions and not sale functions. It is further submitted that purchase activity is incapable of creating a business connection in India, much less a PE in India. Reliance in this regard was placed on Explanation 1(b) of section 9(1)(i) of the Income Tax Act, 1961 which states as under:" in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. It is further submitted that the activity performed by Itochu India is not the core revenue earning activity, which is a sine quo non for creation of PE. Reliance is placed on Morgan Stanley 292 ITR 416 and E-funds Solutions (399 ITR 34). 3.1.4 The Panel has considered the submission. It is noticed that the issue of permanent establishment in India in the form of assessee's 100% subsidiary Itochu India Pvt Ltd has been examined at great length by the this Panel in assessee's case for AY 2013-14 and AY 2015-16 and it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nel. 4.2 That the Ld. AO/Ld. DRP has further erred in holding that the Appellant has failed to provide any information or agreements in relation to nature of relationship and dealings with these agents in India and has failed to appreciate various evidences including financial statements of Itochu India and email correspondences filed by the appellant to substantiate that the role of Itochu India was limited to being a communication channel and that Itochu India is not legally or economically dependent on the appellant. 4-3 That the Ld. AO/Ld. DRP has erred in holding that Itochu India secures orders in India on behalf of the appellant and has failed to appreciate that: * the services in relation to the purchase of goods are different from sale of goods; * the purchase and sale functions performed by Itochu India are separately mentioned in the agency agreement; * no negotiation activity was undertaken by Itochu India for sale purposes; and * Itochu India had no authority whatsoever to conclude contracts on behalf of the appellant. 5 That the Ld. AO/Ld. DRP has erred in holding that the appellant had a dependent agent PE in India. 5.1 That the Ld. AO/Ld. DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciate that as per the audited non- consolidated accounts for the subject year, the global profit margin earned by the appellant is 0.36%, which ought to have been considered by the Ld. AO/Ld. DRP while determining the profit margin. 7.3 The Ld. AO/Ld. DRP has erred in considering the profit margin as 10% of the sales as per the provisions of Rule 10 of the Income-tax Rules, 1962 read with section 44BB of the Act without appreciating the fact that the provisions of Section 44BB of the Act are not applicable in the present case since the appellant is a trading company and is not involved in the business of extraction/ production/ prospecting of mineral oils or supplying machinery on hire or any related services thereof in India. 7.4 That the Ld. AO while attributing the income to the alleged PE has exceeded his jurisdictional powers and authority as the Ll. AO is specifically restricted from determining the arm's length price as per CBDT instruction No 3/2016 dated 10 March, 2016 read with section 92CA of the Act. 8. Without prejudice to the above grounds, the Ld. AO has failed to appreciate the fact that where the international transactions between Itochu India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement, the copy of which is available at page no. 27- 32 of the PB we find that clause 2 defines the power of agent as follows; "2. POWER OF AGENT (a) Unless otherwise authorized by the Principal, all contracts, orders, proposals, and offers for sale or purchase of the Goods are subject to final and formal approval and acceptance by the Principal at its discretion and the Agent has no power, right, or authority to approve or accept same on the Principal's behalf or to bind the Principal in any way. (b) Notwithstanding the preceding (a), the Agent may at any time subject to the Principal's approval, deal or transact with the Principal on account and risk of the Agent for the import and export of all Goods to and from the Territory and Japan." 8.1 Then as with regard to the individual transactions in the agency agreement it was agreed that; "4. INDIVIDUAL TRANSACTIONS (a) Quotation: Unless otherwise agreed to by Principal, price of the goods shall be quoted in US dollar as follows : 1) C.I.F. or C. & F. main port located within the Territory in case of the export of the Goods from Japan. 2) F.O.B. main port located within the Territory in case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for the export from Japan and the import into Japan of all kinds of goods. Article 1 itself mentions that the assessee company as a principal reserved the right to quote price, place orders of the goods and otherwise deal directly with buyers and/or sellers located in the territory or visiting Japan from the territory, if all the actions of the assessee as principal, circumstances make it necessary advisable to do so. 10. Learned DR has submitted that these recitals in Article 1 establish a principal and agent relationship and apart from that no other evidence would be actually required. However, we are of the considered view that merely be referring to the parties as principal or agent, the provisions of Article 5(6) cannot be invoked. What is essential is to establish that specific condition laid down in Article 5(7) of India-Japan DTAA are fulfilled. Establishing that the said agent habitually exercises authority to conclude contracts in India or habitually maintains stocks of goods in India for delivery to customers or habitually secures orders in India. It is necessary to establish that the business activities of the agent are without any control or supervision of the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifications of product or service required; and delivery terms and conditions: Itochu India does not take active part in price negotiations with prospective customers. Itochu India only acts as a facilitator in Itochu Japan's negotiations with customers. Itochu Japan is responsible for concluding customer negotiations and making all final decisions on pricing and terms. In relation to trading transactions!; Itochu India takes title and holds inventory. However the inventory held by Itochu India is backed by confirmed orders. In majority of cases, Itochu India holds flash title to the goods. 11.4 The role of Itochu India in identification of customers, and in the negotiation process is very limited. Services rendered by Itochu India to Itochu Japan are recommendatory in nature and decision as to the sale / purchase is taken by Itochu Japan directly. Also, the final decision of approving/ rejecting the customer (along with pricing) lies with Itochu Japan, and Itochu India only facilitates the negotiation process. 11.5 The credit evaluation of the customers is made by Itochu Japan. Itochu India gathers relevant information on potential customers and Itochu Japan makes all fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Itochu India does not assist Itochu Japan in collection of dues from customers. However, upon specific request of Itochu Japan, Itochu India may assist in collection in rare circumstances. In trading transactions Itochu India is responsible for customer invoicing and collections activities. 11.11 The Logistics required is with Itochu Japan who is responsible, directly or indirectly, for developing and maintaining these systems. Itochu Japan develops the overall logistic policies and bear the costs and associated liabilities of logistics depending on the contractual arrangement with the supplier and customer. Itochu Japan is responsible for arranging, managing and monitoring shipments. Itochu India is only responsible for keeping a track of the movement of goods sold by Itochu Japan and informs the same to the customers upon request. In case of trading transactions with Itochu Japan, generally Itochu India does not hold inventory and only takes flash title to the goods. In this case, Itochu India is involved in entering into a contract with the customer, following-up with the customers and providing information about delivery of goods. In case Itochu India holds inventory, Itochu I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration at time of TP Study. 12. Then we find that as far as the provision of services/ cost allocation to Itochu India is concerned, Itochu India also receives IT support services from Itochu Japan which are in the nature of recharge in relation to the SAP cost [usage of ITOCHU Overseas standard System' ('G-SAP') and IP-VPN, Cisco router. G-SAP includes the following functionalities: - Business function; - Accounting and finance function; - Consolidation function; - Business intelligence function; and - Interface function between G-SAP, and other systems. 12.1 The above transaction is entered into on the basis of reasonable allocation keys without any element of mark-up. 12.2 As with regard to provision of consultancy services, Itochu India receives certain consultancy services from Itochu Japan. As per the arrangement, Itochu Japan is responsible for provision of support services in the nature of human resource strategy for recruiting, training and development of foreign staff, tax services, etc. in respect of the following divisions of Itochu India: - Research and business development; - Human resources and general affairs; - Legal; - Finance; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise." 15.5 In this regard, we find that securing an order means complete involvement from the starting to the end including active involvement in negotiating the terms of the contract and convincing the customer to place orders. However, there is no such fact present in this case. We have reproduced all the relevant aspects of the process of entering into contract by assessee, directly with customers or through Itochu India. We find that the role of ITOCHU India is limited to act as a communication channel. We have examined the email correspondences and there is nothing to show ITOCHU India is acting in its individual capacity to conclude the contract or even a part thereof. It is merely bridging the communication gap between ITOCHU Japan and the Indian customer. 16. Then we find that ITOCHU India has been paid a service fee/ commission by the Assessee for the services provided by it which has been tested and found to be meeting the arm's length criteria. In this regard, we have made reference to the transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are of the considered view that when the financials of Itochu India and the assessee were there along with the agency agreement, then making such observations without an independent inquiry on its own is not justified. The AO has laid burden on the assessee to establish the nature of agency. However, no attempt was made to examine the agreement. Only because the nature of business of trading is a continuous flow of the business process that cannot be a foundation to conclude a principal-agent relationship for the purpose of Article 5 of the DTAA. The ld. DRP at the same time discredited the case of the assessee only on the basis of assumptions and surmises, as to how, to his mind, the two entities 'may' have been 'actually' transacting their business. 19. We are of the considered view that before us for the present AY the factual aspects are crystal clear that there is no PE of assessee in the form of Itochu India. Thus there is no justification to follow the AY 2013-14 and 2015-16 orders of Co-ordinate bench to set aside the assessment to the files of AO for further verification of the facts about nature of contractual relationship between the assessee and Itochu India. 20. As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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