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2014 (6) TMI 941 - AT - Income TaxTransfer pricing adjustment - whether the assessee constitutes a Permanent Establishment in India in terms of Article 5 of the DTAA between India and the USA? - Held that:- We agree with the Ld. CIT(A) that the compensation which has been represented to a sale consideration for the equipment represent the payment for works contract where entire installation and customisation has been carried out in India. That the subsidiary has not only acted as a service provider for the assessee, but at the same time acted as a sale outlet cooperating with after sale service and also providing any assistance or service requested by the assessee. The assignment agreement between Indian subsidiary (assignor), the assessee company (assignee), the parent company Nortel Network Canada (the guarantor) and Reliance Infocom (the Purchaser) indicates that the contract initially signed by the Indian company gets assigned by the Indian subsidiary to the assessee and all the risk and responsibility in this regard are assumed by the parent company.In the background of the aforesaid discussion, we agree with the Ld. CIT(A) that activities of the assessee in India constitute PE of the Assessee in terms of Article 5 of the Indo US DTAA. The activities carried out by the PE are the core activities of the assessee resulting in generation of income to the assessee and they cannot be considered to be preparatory and auxiliary and therefore, the contention of the assessee that it do not have PE in India is rejected. Profits arising to the assessee from supply of telecom hardware to Indian customers is attributable to the PE in India @50% as per CIT(A) - Held that:- We are in agreement with the AO that the accounts of the assessee furnished in the assessment proceedings have no sanctity. The same were not audited. The gross trading loss incurred from transaction within the group cannot be explained except for the reasons, that it has been designed as such to avoid taxation in India. Hence, we agree that for all purposes the accounts of the Nortel Group would give a true and correct picture of the profit of the assessee. Hence, AO’s reference to the global accounts of the Nortel and gross profit margin percentage as 42.6% is accepted. Now we come to the issue as to how much of the profit is attributable to the PE. The AO in this regard has only allowed 5% of the turnover as deduction pertaining to other selling general and marketing expenses. We find that Ld. CIT(A) has held that AO was justified in resorting to Rule 10 as stated hereinabove. We have already concurred with the same. We find ourselves in agreement that the CIT(A)’s proposition that when profits are computed under Rule 10 after applying the profit rate, the expenses pertaining to the PE have to be allowed as deduction. Assessee has contended before the Ld. CIT(A) that in other cases attributed profits was determined @ 20% in the case of Nokia and 35% in the Rolls Royce. In this regard, Ld. CIT(A) has held that income of the PE has to be computed on the facts of each case. Ld. CIT(A) has held that he was of the view that an attribution of 50% of the profits to the activities of PE in India would be a reasonable attribution. Thus we note from the gross profit computed by reference to the rate applicable to the global accounts of the assessee, further substantial deduction has been allowed for selling general and marketing expenses and also R&D expenses. Thereafter, 50% of the resultant figure has been attributed to PE. This in our opinion meets the ends of justice.
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