9911796707
TMI Blog2012 (10) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... not accepting the cost plus methodology adopted by the appellant for determining profits attributable to its project office ("P.O") in India. 2. That the Learned CIT(Appeals) has erred on facts and in law in holding that several important activities in relation to the contract for supply of rolling stock from outside India could not have been completed outside India. 3. That the Learned CIT(Appeals) has erred on facts and in law in not appreciating that the income attributable to the activities carried out in India had already been offered for tax as per the original return of income. 4. In any case and without prejudice to ground 1,2 and 3 above, the Learned CIT(Appeals) has erred in confirming attribution of 50% of the income from offshore to tax in India, whereas no part of the activity relating to offshore supply is carried out by appellant's project office in India. 5. That the Learned CIT(Appeals) has erred on facts and in law in directing that the methodology for determination of profits from contract adopted by the learned Assessing Officer in A.Y. 2003-04 should be followed in A.Y. 2004-05 also, irrespective of whether the method adopted by the Learned A.O. is correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and Korea ('the treaty') as business income, when according to the decision of the Authority for Advance Ruling ('AAR'), there costs formed part of cost of assets supplied from overseas. 9. That the Learned CIT(Appeals) has erred on facts and in law in upholding the order of the learned A.O. in relation to levy of interest under sec. 234B of the Act. The Appellant craves leave to submit such further grounds at or before the hearing of the appeal, so as to enable your Honour to decide the appeal according to law." 2. The facts are common in all the years, therefore, for the facility of reference, we are taking up the facts mainly from assessment year 2002-03. The brief facts of the case are that assessee has filed its return of income which was revised on 10.3.2003 claiming carry forward of losses of Rs.258,47,650. The assessee further revised its return of income on 31.3.2004 declaring income at Rs.6,52,900. The case was selected for scrutiny assessment and a notice under sec. 143(2) of the Act was issued and served upon the assessee. 3. In assessment year 2003-04, the return was filed on 2nd December, 2003 declaring an income of Rs.5,31,558. The assessee revised the return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ENTRE Total Apportioned amounts of Cost centre items US Dollars Rupees Amount A. Preliminaries and General Requirements for Rolling Stock for Rail and Metro Corridors. 52,847,413 34,088,557 B. Design of Rolling Stock for Rail and Metro Corridors 8,707,930 8,114,758 C. Offshore Manufacture, Factory Testing, Inspection, Marine Insurance and Shipping to Port in India and transit Insurance from Port in India to Depot Site of 14 No. 25 kV assessee company trains for Rail Corridor and one 1500 Vdc trains for Metro Corridor. 46,437,149 151,458,704 D. Indigenous Manufacture, Factory Testing, Inspection and Despatch, transit insurance from factory to Depot of 29 No. 25 kV are assessee company trains for Rail Corridor and 16 No. 1500 Vdc trains for Metro Corridor. 105,546,593 2,795,448,312 E. Inland transportation of trains within India including handling charges at port in India, depot or at any other place, and all other incidental costs, receipt of cars in depot, formation of trains, satisfactory completion of tests and running of train in the depot. 12,121,020 71,017860 F. Integrated Testing and commissioning of Trains on the Selection and Service trials. 19,054,140 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2003-04. He allowed the deduction for the expenses incurred for the project office in India and further deduction as per section 44C of the Act. Assessing Officer thereafter took 50% of the resultants as the profits attributable to the operations in India and computed the income on the basis of profit rate declared globally. 7. As far as assessment year 2004-05 is concerned, the issues are not much in dispute at the level of Assessing Officer, because learned TPO has accepted the transfer pricing study undertaken by the assessee. Assessing Officer has treated the receipts relatable to cost centres B-4 and B-5 pertaining to designing activities as royalty and taxed the same on gross basis in the light of Article 13 of India Korea Tax treaty. 8. On appeal before the Learned CIT(Appeals), the assessee has raised number of grounds in each year and learned first appellate authority made lucid analysis on all these issues. Learned first appellate authority has partly allowed the appeals of the assessee. 9. Before us, learned counsel for the assessee while taking us through the grounds of appeal submitted that as far as existence of PE is concerned, there is no dispute. The disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections 92 to 92F read with rule 10A to Rule 10E vide Finance Act, 2001. Similarly, Rule 11, supra, was omitted w.e.f. 21.8.2001 and simultaneously Rules 10A to 10E dealing with the mechanism for determination of arm's length price introduced w.e.f. 21.8.2001. According to the learned counsel for the assessee, with the substitution of section 92 and omission of Rule 11, the applicability of Rule 10 stands limited to the cases covered by business connection being in India as stipulated under sec. 9, because in all DTA separate entity and arm's length price approach has been incorporated. He also submitted that even if in the cases where business connection is there and there is no application of any tax treaty, those cases also have to undergo the TP Regulation, if there is some international transaction with the associate enterprise. The emphasis of the learned counsel for the assessee is that the omission of Rule 11, and introduction of Rule 10A to 10E, the Rule 10 has lost its application in cases where the treaty provides a separate entity and arms length approach for the determination of PE's income. He submitted that Learned CIT(Appeals) in paragraph No. 10 on page 31 has obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing provisions in the Indian Income-tax Act nor Rule 10B was there meaning thereby article 7(2) of the treaty was applied by resorting to Rule 10. Since Rule 10 is still there, even after insertion of section 92C/Rule 10B, the A.O. in can resort to this rule for the attribution of profit to the PE. c) The Hon'ble Supreme Court in the case of Morgan Stanley & Co. (292 ITR 416) on page 442 has approved, in principle, the decision of the AAR whereby it equated the arm's length analysis with attribution of profits. This means that for determining the income of a non-resident resort can be had either to the arm's length analysis (section 92C r.w. rule 10B) or to attribution of profit (section 9 r.w. rule 10). d) The Hon'ble Supreme Court in the above decision also referred to article 7 of the UN Model Convention. While article 7(2) of the Convention stipulates attribution of profits to the PE on the principles of separate entity approach, article 7(4) allows attribution of profits to the PE on the basis of apportionment of the total profits of the enterprise with the requirement that the method of apportionment should be in accordance with the principles contained in article 7. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act and using one of the prescribed transfer pricing methods which has been adopted by the Assessing Officer in all subsequent years. The circular issued by the CBDT bearing No.14 dated 12.12.2001 is also contemplates that transactions between foreign enterprises and its PE are subject to transfer pricing. He prayed that the income shown by the assessee on the basis of cost + 9% should be accepted. 13. We have heard the rival contentions and gone through the record carefully. There are certain aspects on which there is no dispute between the parties. The assessee has a PE within India. The income attributable to the PE and accruing from India is taxable, such income has to be determined on the basis of activities carried on by such PE in India. According to the assessee, its project office provides liaisoning, co-ordination, administrative support services to its Head Office in connection with the contract being executed in India. It has undertaken detailed transfer pricing study which contains functions performed, assets employed and risk assumed analysis. On the basis of this analysis, the assessee has determined the arm's length price for the activities carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle." 14. Hon'ble Supreme Court in the case of Hyundai Heavy Industries has considered these provisions. In this case, Hon'ble Supreme Court has formulated the question required to be answered and observed that one has to determine what are the profits reasonably attributed to assessee's PE in India. According to the Hon'ble Supreme Court, for answering this question, the scheme of the Act is required to be analysised. The Hon'ble Court has observed that under section 4 of the Act, it is total income of every "person" which is taxable. A foreign company which is not wholly controlled or managed in India is a non-resident so far as its residential status is concerned. Section 5(2) of the Income-tax Act, 1961 lays down that as far as a non-resident assessee is concerned, the scope of total income of such an assessee is confined to the income which accrues or arise in India or is deemed to accrue or arise in India and which income is received or deemed to be received by such foreign company. The conjoint reading of sections 4 and 5, according to the Hon'ble Supreme Court is that under the Act, the taxable unit is a foreign company and not its branch or PE in India. A nonresident asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see at cost+9%, apportioned the income under Rule 10 of the Global Profit. Upheld the working of A.O. 2. 2003-04 Transaction value was more but no reference. -do- -do- 3. 2004-05 Cost reference to TPO, TP analysis of the assessee accepted. A.O. made addition by treating income of cost centre B- 4, B-5 as royalty and certain other issues related to double taxation. Though reversed A.O.'s order and directed the A.O. to follow methodology, assessment years 2002- 03 and 2003- 04 4. 2005-06 -do- Written income, cost plus methodology accepted. -do- 5. 2006-07 No reference, no scrutiny assessment No reference, no scrutiny assessment -do- 6. 2007-08 Reference to TPO, TP analysis of assessee accepted. Returned income at cost+ methodology accepted. -do- 16. Now, the question before us is what is the evidence possessed by the Assessing Officer to say that the transfer pricing study undertaken by the assessee is not proper and its transactions with the HO are not at arm's length. Assessing Officer has not assigned any reason for this purpose. It is true that if a reference to the TPO was not made for making a transfer pricing analysis then Assessing Officer can make independently such an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad with rules 10A to 10E in the light of transfer pricing study carried out by the assessee vis-à-vis its consistent stand of showing income from this one project spread over in a number of assessment years under a particular method, then the scale would tilt towards the detailed method provided under sec. 92 to 92E read with rules 10A to 10E, for computing the income of PE, like the assessee. We do not have any dispute about the preposition that it is the Assessing Officer who has to determine the ultimate income of the assessee and recommendations of the TPO are not binding upon him. Similarly, in a given case, rule 10 can be applied. But before that Assessing Officer has to demonstrate that income of non-resident accruing or arising from any business connection in Indian cannot be definitely ascertained from the accounts or from the material available on the record. For the present assessee, the department itself has accepted the method of assessee in a number of years. The Assessing Officer has not pointed out as to how income of the assessee cannot be ascertained in assessment year 2002-03 and 2003-04. Sub Article 5 of Article 7 of the DTAA between India and South Korea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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