TMI Blog2012 (4) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... blishment can be established with limited liability and shall have the body corporate capacity and it shall belong either to one natural person or one judicial person - in favour of assesee. TP adjustment made by the A.O in respect of sales made to Vega UAE and commission payment considering the controlled transactions of the assessee as comparable for benchmarking the international transaction – Held that:- Vega UAE is carrying both the inventory risk as well as credit risk and therefore is not a marketing service provider but a distributor of the assessee company - ALP has to be determined on the basis of profit on sale of goods by the assessee company as compared to the comparable companies - If the operating cost is higher in Vega US, it cannot be said that the profit margin of other Vega Entities should be at par with the profit margin of Vega US and hence, TP adjustment proposed by TPO and confirmed by DRP on the basis of operating cost/operating profit of Vega US is not sustainable – in favour of assessee. Disallowance u/s 14A of the Income tax Act, 1961 - Held that:- the assessee working regarding interest expenditure and indirect expenditure accepted without any mist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO erred in and the DRP further erred in not considering the documentary evidence furnished by the Appellant which demonstrated that Vega UAE was wholly managed and controlled in UAE and concluding that the Appellant failed to submit any details to demonstrate the same. 1.4 On the facts and in the circumstances of the case and in law. the AO erred in and the DRP further erred in alleging a case of round tripping on the ground that the Appellant was not entitled to claim the benefits of the Double Taxation Avoidance Agreement ( DT AA ) entered into between the Governments of India and UAE in respect of the income of the Vega UAE without appreciating the benefit of the DTAA was claimed neither by the Appellant nor by Vega UAE and without further appreciating that the Appellant had submitted Tax Residence Certificate dated 11 February 2009 not with the intention to claim any India-UAE tax treaty benefits but with an intention to demonstrate that Vega UAE is a resident body corporate under the laws of UAE.. The Appellant prays that the treatment of Vega UAE as the proprietary concern of the Appellant and addition to income made in this regard is erroneous, unwarranted, against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted that the article clearly mentions and certify that this FZE with limited liability is established as corporate entity and independent of separate financial liability from those of its owner and therefore, it is clearly established that it is a company, which is having its own separate entity independent stature and has its separate financial liability. The A.O. was not satisfied. He has stated in para 7.4 of the assessment order that the term 'company' has been defined in DTAA with UAE in Article 3(1)(f) as under: The term 'company' means any body corporate or any entity which is treated as a company or body corporate under the taxation laws in force in the respective contracting States. The A.O. further mentioned that Emirates of Ajman and Government of UAE do not have taxation law in force for the propose of administration of Corporate Tax and in view of this, there is no provisions available stating that the above said entity is a company or body corporate recognized under the taxation laws in force in Emirates of Ajman or UAE. The A.O. further stated that the company has been defined under Article 4 of Commercial Company Law (CCL) of UA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been shown as Manager of FZE but as per the copy his passport furnished by the assessee, it does not show that he stayed in UAE during that period. On this basis, he has stated that Vega Industries (Middle East) FZE cannot be treated as resident of UAE for treaty purpose. On this basis, the A.O. treated the income of the Vega Industries (Middle East) FZE of ₹ 554.98 lacs as income taxable in India in the hands of the assessee u/s 5(1). Now, the assessee is in appeal before us. 4. It was submitted by the Ld. Counsel for the assessee that the assessee company's wholly owned subsidiary in UAE is Vega UAE and is located in Ajman Free Zone and is incorporated under the law of UAE, more specifically the Amiri Decree 2 of 1996 issued by the Emirates of Ajman. He further submitted that the certificate of formation of Vega UAE issued by Ajman Free Zone Authority is available on page 677 of the paper book-III. He also submitted a copy of the Memorandum of Incorporation of Vega UAE which is available on pages 5-10 of the paper book-I. He also submitted that Tax Residency Certificate of Vega UAE dated 11.02.2009 issued by the Executive Director of Revenue and Budget i.e. Ministr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Federation, the UAE Constitution provided that whilst the jurisdiction to promulgate substantive legislation was confined to the Federal Government, the local Governments of the Emirates were authorized to regulate local matters. Reference was drawn to Article 120 and 121 of UAE Constitution which lists down matters in which the Union have exclusive legislative jurisdiction wherein under Article 121 'Company Law' is included. He went on to submit that in pursuant to this, UAE enacted the UAE CCL as a Federal Law No. (8) of 1984 and the same was thereafter amended in 1998, inter alia by replacing Article 2 with Articles 1, 2 and 3 which read as under: 1. The provision of this law shall apply to the Commercial Companies that are established in the UAE or that take the UAE as a base of the activity; and all companies that are established in the UAE shall take the same as their domicile. 2. The provision of the law shall not apply to the companies that are established in the Free Zones of the UAE in conjunction of which a special provision is made in the Regulations of the Free Zone concerned with the exception of acquiring the UAE nationality. 3. Save the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmercial Company Law (CCL), it was submitted that DRP/A.O. have wrongly relied on the provisions of UAE CCL in reaching to the conclusion that Vega UAE is not a company. 6. The Ld. Counsel for the assessee also submitted that Vega UAE is a body corporate u/s 2(17) of the Income tax Act, 1961. He further submitted that the A.O. has incorrectly interpreted the Circular No. 8 (26)/2(7)/63-PR dated 13.03.1963 under the Companies Act 1956 and the provision of Section 2(17) of the Act to conclude that Vega UAE cannot be recognized as 'body corporate' due to non-satisfaction of (a) perpetual succession; (b) a legal entity apart form members constituting it. With regard to these points, it was submitted that Section 2(17) of the Income tax Act, 1961 defines a company to include 'any body corporate incorporated by or under the laws of a country outside India'. It is thus clear that this section makes no reference to the provisions of Companies Act 1956 regarding need to have at least two shareholders to be treated as body corporate. It is submitted that what is relevant here is the law of the country outside India and not what is prevalent in India. Various other submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly means that Indian Taxation Authorities are to apply definition of company as per their domestic law. It is also submitted that it is clearly provided in Article 3(2) of the India -UAE treaty that any term not defined in the said treaty will have the meaning which it has under the laws of that State (India) concerning the terms to which the agreement applies. Regarding Certificate regarding tax residency form Ajman Free Zone Authority of Ministry of Finance, UAE submitted by the assessee, he submitted that these are not relevant as Indian Authorities have to apply their domestic laws in this regard. He also submitted that As per Article 121 of UAE Constitution 1971, Company is within the jurisdiction of Federal Constitution and as per Article 149 of the UAE Constitution, in respect of subject referred in Article 121 to enact legislation which is consistent with federal legislation, he submitted that the Emirates can have legislation which is not in confrontation with the constitutional provisions of UAE. He also drawn our attention to Article 151 of UAE Constitution as per which the provisions to the constitution should have precedence over the constitution of Emirates being memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ;] 10. As per these provisions of Section 2(17), for other than an Indian company, a company means any body corporate incorporated by or under the laws of a country outside India and Vega UAE is definitely not an Indian company. Now, we have to examine as to whether it can be said that Vega UAE is a body corporate incorporated by and under the law of a country outside India. The certificate of formation of Vega UAE issued by Ajman Free Zone Authority which is available on page 677 of the paper book - III. The contents of this certificate are reproduced below: Ajman Free Zone 28TH January, 2004 AFZA/408/2004/registered co./DG/as Certificate of Formation We, the government of Ajman Free Zone Authority certify that M/s. Vega Industries (Middle East) is a registered company within the free trade zone of Ajman, under the license No. 1165 which issued on 22/4/2003. The above mentioned company is formed under our seal of Ajman Free Zone. Sd./- Mohammed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... striction alone, it cannot be said that Vega UAE is not a separate legal entity. 12. The main objection of the A.O. is that since the assessee is the only shareholder and holding 100% shares of Vega UAE, it is not a valid company because as per Indian Companies Act and as per UAE CCL, two shareholders are required. The argument of the revenue is this that as per CCL of UAE, two shareholders are required and as per Article 151 of the Constitution of UAE, the provisions of constitution shall have precedence over the constitution of Emirates which are the members of the federation but the contention of Ld. counsel for the assessee is that an exception has been carved out in Article 149 of the said constitution which is available on page 715 of the paper book-III and the same is reproduced below: Article 149- In exception to the provisions of Article 121 of this Constitution, the Emirates may issue the legislation necessary to regulate the mattes indicated in the said Article, without prejudice to the provisions of Article 151 of this Constitution. 13. From the above Article, it is seen that with regard to the provisions of Article 121 of this constitution which incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.9%. This contention was raised by the assessee before the TPO that the difference in the gross and net margins of various Vega entities is because of difference in ultimate sale price and the level of operating expenses and not for this reason that different purchase price had been paid to the assessee. A working has been submitted regarding total operating expenses of these three Vega entities and its percentage to turnover. As per this, the percentage of total operating expenses to turnover of Vega UAE was worked out @ 7.7%, of Vega UK @ 14.5% and Vega US @ 11.8%. The assessee had also furnished separate working of the percentage of total employees cost to turnover which is worked out @ 1.3% for Vega UAE, 3.6% for Vega UK and @ 6.5% for Vega US. This submission was also made that true PLI for distributor can only be the Net Operating Profit margin i.e. NOPM and the same was given along with arithmetic mean of comparable companies. As per the chart reproduced by the DRP on page 23 of its order, net operating profit margin of Vega UAE is worked out @ 7.4% whereas arithmetic mean of the comparable companies has been worked out @ 8.5%. Similarly NOPM margin of Vega UK has been work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... level is of high degree, there could be no objection in taking transactions with related parties as truly comparables. In view of the above, the TPO was justified in comparing the operating profit to the total cost of the three subsidiaries/entities of the assessee company. Hence, the upward adjustment of ₹ 4,32,70,2407- made by the TPO in the sale price to Vega UAE is hereby upheld. 23. The assessee has further objected to the addition of ₹ 95,56,3607-proposed by the TPO by making downward adjustment in respect of sales commission paid to Vega UK. The assessee has submitted that the said adjustment has been made by the TPO without providing an opportunity of being heard and without examining the relevant facts. The assessee has further objected to the action of the TPO in concluding that Vega UK had not carried out its functions in respect of which the commission was paid by the assessee to Vega UK. 24. We do not agree with the claim of the assessee that while making the said adjustment, no opportunity of hearing was allowed by the TPO. A questionnaire dated 06.05.2008 was issued by the TPO and the hearing was fixed on 04.06.2008. The second notice was issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor conduct risk and hence is entitled only to a markup on value added expenses incurred by it. It was submitted that the activities carried out by various Vega entities in their respective jurisdiction are as under: (a) Estimation of market size and sales forecast; (b) Customer visits; (c) Quotation/offer to the customer; (d) Interaction with customers for pricing and performance of products; (e) Customer order/Contract; (f) Supply of material; (g) Installation of product and (h) Billing and Collection 18. It is also submitted that Vega UAE bears inventory risk also. It is further submitted that in arriving at the conclusion, the TPO and DRP have mainly proceeded on this basis that in certain cases, the goods were directly delivered by the assessee to the parties on customer's destination and the same were not stored by Vega UAE in its warehouse. In this regard, it was submitted by the Ld. Counsel for the assessee that the sales made by the assessee to Vega UAE are on free on board (FOB) basis and once the goods leave the Indian custom station, the inventory risk with regard to the said goods are categorically borne by Vega UAE and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and Philippines and two warehouses in USA and one warehouse in UK. He further submitted that manpower of Vega has been created by the parent company by transferring the part of its own employees and it does not have any person to look after distribution and logistics but consists only of technical persons. He further submitted that Vega UAE does not have capacity to handle technical issues and fixation of final pricing. 20. In the rejoinder, it was submitted by the Ld. Counsel for the assessee that the assessee has amply demonstrated that pursuant to its proper and validly executed distributor agreement, the role of Vega UAE was of a distributor for its product as clearly defined. It is also submitted that the assessee has also demonstrated consistency with the distributor agreement in its conduct with all its distributors including Vega UAE. He further submitted that the assessee has demonstrated clearly that Vega UAE actually bears the entire inventory risk and the credit risk including providing for bad debts of unrecoverable amounts from its end customers. He further submitted that since the title to the goods actually passes to the distributor on their delivery at India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case but it is a distributor of the assessee company. Once it is accepted that Vega UAE is a distributor, ALP has to be determined on the basis of profit on sale of goods by the assessee company as compared to the comparable companies. The assessee has demonstrated that the arithmetic mean of 3 years weight age average NOPM of 12 comparable companies was 7.92% as against NOPM of 18.89% of the assessee for the present year. Later on the assessee has also furnished the revised arithmetic mean of NOPM of the comparable companies on the basis of current year data only and it was 7.04% whereas mean of 3 years weight age average NOPM of 12 comparable companies was 7.92% as against NOPM of 18.89% of the assessee for the present year. Later on, the assessee has also furnished the revised arithmetic mean of NOPM of the comparable cases on the basis of current year data only and it was 7.04% as against 7.92% on the basis of 3 year weight age average. The assessee has also furnished one alternative working on the basis of net operating profit margin of Vega UAE, Vega UK and Vega US and arithmetic mean of comparable companies. The arithmetic mean of comparable companies is higher in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend income is not the objective of the assessee and the assessee was holding investment in mutual fund being incidental to its main business and in addition to this, assessee was holding shares of the companies' i.e. Paramount Centrispin Castings Ltd., Reclamation Welding Limited and Welcast Steels Limited and these are strategic investments and had been made with a view to have additional manufacturing facilities, and to eliminate competition to main business activity. He further submitted that the assessee has not recruited/employed any separate staff in relation to investment activities. He further submitted that investment of ₹ 96.68 crores was made in mutual fund other than in HDFC mutual fund and on these investments, assessee have earned dividend of ₹ 152.72 Lacs. Regarding the source of funds for making these investments, it was submitted that during November/December 2005, the assessee completed an initial Public offered of its own equity shares and collected total amount of ₹ 148.05 crores and pending utilization of these money for the intended purpose, short term investments were made in various schemes of mutual funds and hence, there was no int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamation of AIA Export Pvt. Ltd. with the assessee firm from 01.04.2002 and no borrowed funds were used. Regarding investment of ₹ 157.21 lacs in shares of Reclamation Welding Ltd. it was submitted that the said investment in the year 1992-93 and 1993-94 was made out of own funds and thereafter an amount of ₹ 150 lacs was invested in the year 2003-04 out of inter corporate deposits with RWL. The assessee worked out total interest expenditure regarding all these investments at ₹ 6,96,609/- and offered the same for the purpose of disallowance u/s 14A before the A.O. Before the DRP, the assessee further offered an amount of ₹ 4.52 lacs for disallowance in respect of indirect expenditure and in this manner, the assessee offered total disallowance of ₹ 11,48,609/-. 24. It was submitted by the Ld. counsel for the assessee that in the present year, Rule 8D is not applicable because it was inserted on 24.03.2008 and in support of this contention, reliance was placed on the judgment of Hon'ble Bombay High court rendered in the case of Godrej Boyce Mfg. Ltd. v. Dy. CIT [2010] 194 Taxman 203. 25. As against this, it was submitted by the Ld. D. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Mr. Eur Ivan Monje Castro. It is the submission of the assessee that no services had been rendered by the agent in India and, therefore, income earned by this agent cannot be deemed to accrue and arise in India because the agent does not have any business connection in India. He further submitted that even assuming without admitting that there exists a business connection of this agent in India, no part of his operations has been carried out in India. He further submitted that it has never been the case of the revenue that the business income earned by the agent is to be classified as Royalty or Fees for Technical Services under the Income tax Act, 1961. He further submitted that under the provision of Section 9(1)(i) of the Income tax Act, 1961, the income of non resident is deemed to accrue or arise in India only if any part of income is reasonably attributable to any operation carried out by the non resident in India and if no operation is carried out in India by the non resident, no income is deemed to accrue or arise in India. He further submitted that if the agent renders his services outside India, the same cannot be deemed to accrue or arise in India u/s 9(1)(i) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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