2013 (7) TMI 63 - AT - Income Tax

Determination of total income Article 7 of DTAA between India and USA - CIT included receipt arising on account of the services to the Head Office in USA Held that - Assessee company opened a branch in Hyderabad after obtaining permission from RBI No doubt that the assessee company has a permanent establishment in India Branch office is also rendering services of commercial nature which has been outsourced by the Head office Assessee is only carrying out the normal commercial activities of the Head Office No infirmity in the order of the CIT (A) in holding that the income earned by the assessee from the activities carried on by it is taxable in India Following the decision of ABN Amro Bank NV vs. Asst. DIT 2005 (8) TMI 294 - ITAT CALCUTTA-E and Mitsri Banking Corpn. Vs. DDIT 2012 (8) TMI 450 - ITAT MUMBAI Decided against the assessee. Estimation of profit - held that - it is seen from the facts on record that the assessee has not at all provided any basis for computing the profit. Therefore the Assessing Officer estimated the profit in terms with Article 7(2) of Indo-US DTAA and Rule 10 of Income- tax Rules by estimating the income @ cost plus 15% mark up. The CIT (A) reduced the profit to 10% on considering the fact that the estimation of profit by the Assessing Officer is not based on any specific information and data. - The view of CIT(A) appears to be reasonable. So far as the assessee s contention that the head office has suffered loss and hence there cannot be any profit to the branch office the same is not acceptable as profit of the branch office has to be computed as per the income earned by it. - Decided against the assessee.

Summary

Issues Involved:
1. Taxability of income arising from services provided by the branch office to its Head Office under the Indo-US DTAA.
2. Estimation of profit rate applicable to the assessee's income.

Detailed Analysis:

1. Taxability of Income:
The primary issue was whether the income arising from services provided by the Indian branch office to its Head Office in the USA should be considered for determining the total income under Article 7(3) of the Indo-US DTAA. The assessee argued that the income should not be taxed in India as it was providing specific services to its Head Office, which should be excluded from taxation as per the DTAA. However, the Assessing Officer and the CIT (A) disagreed, stating that the branch office was engaged in commercial activities such as software development and medical transcription, which are taxable in India. The CIT (A) noted that the intent of the DTAA is to distinguish between commercial activities, which are taxable, and non-commercial activities, which are not. Since the branch's activities were commercial in nature, the income was deemed taxable in India.

2. Estimation of Profit Rate:
The second issue was the appropriate rate for estimating the profit from the services provided by the branch office. The Assessing Officer initially estimated the profit at 15% of the expenses incurred by the branch office, based on Rule 10 of the Income-tax Rules and Article 7(2) of the Indo-US DTAA. The CIT (A) reduced this rate to 10%, considering that the Assessing Officer did not base the estimation on any specific information or comparable data. The CIT (A) held that a 10% net profit rate would be just and fair. The assessee contended that the estimation was without basis and that the Head Office had suffered a loss, thus there should be no profit attributed to the branch office. However, this argument was rejected, as the profit of the branch office must be computed independently of the Head Office's financial status.

Judgment:
The Tribunal upheld the CIT (A)'s decision, affirming that the income from the branch office's commercial activities is taxable in India and that estimating the profit at a 10% rate is reasonable. The Tribunal dismissed both the assessee's and the department's appeals, maintaining the CIT (A)'s order.

Conclusion:
The judgment clarified that income from commercial activities performed by an Indian branch office for its foreign Head Office is taxable in India under the Indo-US DTAA. The profit estimation at a 10% rate was deemed appropriate, given the lack of specific data or comparable cases to justify a higher rate. The appeals from both the assessee and the department were dismissed, upholding the CIT (A)'s order.