TMI Blog2014 (11) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... oticed that Indian entity provides engineering design and consultancy services to the Head Office - in Raymond Woollen Mills Limited Versus Income-Tax Officer And Others [1997 (12) TMI 12 - SUPREME Court ] – it has been held that where there is a prima facie material, the sufficiency and correctness of the belief cannot be questioned at this primary stage - the action of the AO was proper and in conformity with the provisions of the Act – Decided against assessee. Business profit to be taxable in India or not – Permanent Establishment in India or not - Held that:- As per list submitted by the assessee before the authorities for the period 2003-04, there were 95 employees of high qualification working for the associated enterprises of US - In terms of Article 5(2) (b) of Indo US DTAA, the assessee entity represents a fixed place of business of the enterprise through which substantial work was carried out by the assessee which constitutes PE of the assessee in terms of Article 5(2)(b) and (c) of Indo-DTAA - the income attributable to the operation carried out by the PE shall be taxable in India. In this context, we may refer letter of the assessee dated 29.4.2008 wherein the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to calculate attributable profit @50% of the figure arrived after applying profit rate of 8.5% for AY 2003-04 and 10.6% for AY 2004-05 - the contentions of the assessee for wrong adoption of global profit of the US Head office are not sustainable - the CIT(A) was reasonable and justified in directing the AO to calculate the attributable profit at 50% of the figure arrived by the AO after applying global profit rate of US Head office for the respective assessment years – Decided against assessee. Status of assessee to be treated as individual or Foreign Company – Held that:- The assessee has mentioned that US Head office is a firm and not a company even in the US tax status, therefore, the assessee should be given the status of individual instead of foreign company - the CIT(A) has rightly concluded that while applying or determining the status of the appellant, the provisions of Income-tax Act have to be applied - As per provisions of Income- Tax Act, anybody corporate incorporated by or under the laws of any country outside India has to be treated as a company - the assessee was rightly treated as a foreign company for the purpose of tax status and the AO correctly applied a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involving only in preparatory and auxiliary activities for US Non-resident the cost whereof is reimbursed by US hence there could be no income accrued to the appellant and consequently the assumption of income at ₹ 19,62,250j - as business income is arbitrary, unjust and bad in law. Even in US where the firm has HO and is based, even they are not making even a part of this profit %. How can a branch who is simply doing a small portion of the job such as drafting and engineering can be deemed as making so high % of profit, when the most of the crucial job of the project lies with the HO, including the liabilities of the design if the building fails at any given time. 8. That in the absence of any income embedded in the amount reimbursed by US Nonresident to its Branch (appellant), acting as a pure a cost centre the assessment at a figure of ₹ 19 ,62,250 / - as business income is bad in law. 9. That there is no international transaction with an Associated Enterprise (AE) as contemplated under Section 92C of the Income Tax Act, 1961 hence no income ought to have been deemed under Section 92C of the Income Tax Act, 1961. 10. That the provisions of Section 92C in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any rate very excessive. 6. Without prejudice to grounds above the AO ought to have adopted the correct figure of the profit from US Return for the calendar year 2003 for the determination of attributable profits and subjected it to a further downward adjustment for functions performed, assets employed, working capital available and risk assumed and consequently the adoption of global profit rate of 10 % is very high. 7. That the CIT (Appeals) had erred in directing the AO to calculate attributable profit at 50% of the figure arrived at by the AO after applying the profit rate of 10.6% representing the global profit ratio of the assessee. 8. That the authorities ought to have adopted the status of the appellant as individual instead of Foreign Company. CEC is a firm and not a company even in US. It is 100% owned by the single individual hence does not fall in the category of a Company. 2. The grounds of the revenue in ITA No. 1275/Del/2009 for AY 2003-04 and in ITA No. 1172/Del/2009 for AY 2004-05 are similar which read as under:- 1. In the facts and in the circumstances of the case the CIT(A) has erred in directing the AO to calculate attributable profit at 50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and income account requires to be computed by adding mark up of 8.5% in AY 2003-04 and the mark up of 10% for AY 2004-05. Therefore, the assessee has raised similar grounds on this count in both the appeals. The assessee also challenged conclusion of the AO that the assessee appellant has a fixed place of business in India as PE in the form of branch office through which the business of the assessee is partly carried out, therefore, in terms of para 2(c) of Article 5 of Indo US DTAA, this represents a fixed place of business through which business of the enterprises is carried out and, accordingly, this constitutes Permanent Establishment (PE) of the assessee and the income attributable to the operation carried out by the PE shall be taxable in terms of Article 7 of the Indo US DTAA. 6. In both the assessment years under consideration, the CIT(A) upheld the findings of the AO that the assessee has PE in India in the form of branch office. The CIT(A) partly allowed ground of the assessee on the issue of attribution of profit to the branch office, PE of the assessee in India and directed the AO to calculate attributable profit at 50% of the figure arrived at after applying the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 147 of the Act. A reference can be made to the decision of Hon ble Supreme Court in the case of Raymond Woollen Mills (1999) 236 ITR 34 (SC) and ITO vs Selected Co. Ltd. (1996) 217 IGTR 597 (SC) where it has been held that formation of belief is within the realm of subjective satisfaction of ITO. Ld. DR also pointed out that during the assessment proceedings for AY 2004-05, it was found by the AO that the assessee was liable to tax in India but a higher mark up depending upon the activities performed by the assessee branch office in India as the 1.83% mark up did not represent the Arms s length remuneration, therefore, the case of the assessee was well within the ambit of deemed escapement as provided in subsection clause (a) of Explanation 2 to section 147 of the Act. 10. On careful consideration of above submissions and on careful perusal of the relevant operative part of the impugned order, we observe that the CIT(A) rejected the legal objection and contention of the assessee against the reopening of assessment u/s 147/148 of the Act with following observations and conclusion:- 5.2 A careful examination of the submissions made by the appellant in this regard, indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h notice u/s 147 has been issued). Similar views have been expressed in the case of ITO vs. Selected Co. Ltd. (1996) 2 J 7 IGTR 597 (SC) where it has been held that formation of belief is wherein the realm of subjective satisfaction of ITO. (ii) Similar view has been expressed in the case of Hindustan Aluminum Corporation vs. ITO (2002) 254 ITR 370 (Cal.) (iii) It is enough, if the AO has reason to belief that Income has escaped assessment. It is not necessary to have all the details of computation of escaped assessment at the time of issue of notice. It was so held in the case of G. Sukh vs. DCIT 252 ITR 320. Thus, the action of the AO is strictly in conformity with the provisions of the law as laid down in the act as well as jurisprudence evolved as a result of court decisions. The ground of appeal raised by the Appellant on the validity of invoking the provisions of section 147 by the AO is, accordingly, dismissed for the assessment years 2003-04. The above legal position clearly indicates that the AO has rightly jurisdiction u/s 147 and accordingly the ground of appeal no. 1 to 4 are rejected. 11. In view of above, from page no. 5 of the impugned order, we observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also raised additional grounds before the CIT(A) by alleging that there is no PE in India in terms of DTAA (Double Taxation Avoidance Agreement), with the US, and no business profit can be said to have accrued in India and, accordingly, the assessee is not liable to be taxed in India. The ld. Counsel for the assessee submitted that the ld. CIT (Appeals) has erred in holding that the assessee branch office in India constitutes its PE. Ld. Counsel of the assessee further pointed out that the assessee denies its liability to be assessed to tax in India as all sums received by it are on account of reimbursement of expenses only and do not bear the character of income. 14. Ld. DR replied that on the facts of the case and physical presence of the assessee in India in the form of immoveable property, offices, development centers, fixed assets at various places and number of employees, their qualification and nature of work done by them clearly indicate that the core business of preparing drawing and design is being done in India. Ld. DR has submitted following written submissions on the issue:- Based on the facts of the case and physical presence of the assessee in India in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxillary character for the enterprises shall not be deemed to be the permanent establishment as contemplated under Article 5 of the DTAA and because the Indian branch is only engaged in the supporting services to the US Head Office which are in the nature of preparatory and auxillary services; hence no income can be assessed in terms of Article 7 of the US DTAA because as per Article 7, only such income which is attributable to the PE can be assessed in the source country. 16. To support the above contention, ld. Counsel of the assessee has placed reliance on the decision of Hon ble Supreme Court in the case of DIT (International Taxation) vs Morgan Stanley and Co. Inc. (2007) 292 ITR 416 (SC) and contended mainly threefold propositions and arguments:- (i) In the instant case also, the Indian branches are only engaged in back office support services which are in the nature of preparatory and auxillary services. The Indian branches are not doing any independent business and have no authority to conclude any contract in India. They are d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities of the assessee entity are in the nature of preparatory and auxiliary services, hence, no income can be assessed in India in terms of Article 7 of Indo US DTAA because as per Article 7, only such income which is attributable to the PE can be assessed in the source country. 18. In this context, ld. DR has drawn our attention towards page no. 304 and 305 of the Paper Book of the assessee and submitted that as per assessee entity during the year under consideration, there were 95 employees of high qualification in the field of civil engineering, draftsmanship coupled with high skill of management working in Indian Branch office of the Indian entity. Ld. DR also pointed out that the physical presence of the assessee in India at various places in the form of immoveable property etc., number of employees, their qualification and the nature of work done by them clearly indicates that the core business of preparing drawing and design was being done in India. Ld. DR vehemently contended that the claim of the assessee is not sustainable that its activities are covered by Article 5(3) (e) of the Tax Treaty and the activities are auxiliary and preparatory in nature. 19. On car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Morgan Stanely and Co. Inc. (supra) the Hon ble Apex Court in the peculiar facts and circumstances of the case observed that as per agreement between Morgan Stanely and Co. USA and Indian company the Indian entity was engaged in supporting the front office and in para 8 of this order, their lordships held that when Indian entity is performing in India, only back office operations, then to the extent of the back office functions, the second part of Article 5(1) is not attracted. The ld. DR pointed out para 15 of this order and submitted that even deputationist employees constitute PE, then in the present case, 95 employees of high technical and managerial sill would definitely constitute PE. 22. On vigilant reading of this decision, we note that the benefit of the ratio of first part of decision is not available for the assessee as on careful examination of activities and modus operandi of the assessee, we have already reached to a conclusion hereinabove in this order that the important work assigned to Indian branch office was preparation of drawing, designs and doing structural calculations which require high technical and managerial skill, therefore, this important facet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract. This ruling has been challenged by the applicant. 23. Thus, we respectfully hold that the case laws cited and relied by the assessee are clearly distinguishable from the facts and circumstances of the present case. In view of our conclusion that the assessee is a PE in India as per provisions of Article 5(2)(b) and (c) of Indo-US DTAA, the contentions of the assessee are dismissed and hence ground no. 6 and 10 in AY 2003-04 and 1 to 5 in AY 2004-05 are dismissed. Ground No. 11 12 in ITA No.1597/Del/2009, Ground No. 6 7 in ITA 1598/Del/2009, Ground no. 1,2 4 of the Revenue in ITA No.1275/Del/2009 for AY 2003-04 and ITA No.1172/Del/2009 24. Apropos these similar grounds in the both the years, ld. Counsel for the assessee submitted that without prejudice to the earlier grounds of the assessee, it is further contended that the AO ought not to have taken into consideration the figure of profits from the US return for the calendar year 2003 but should have taken the figures for the calendar year 2002 for 2003-04 and figures for the calendar year 2003 for AY 2004-05 for the determination of attributable profits and subjected it to a further downward adjustment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er results in the profit of the enterprise relatable to Indian operations. However this has to be attributed to the PE on the basis of risks assumed, assets used and activities performed by the PE. Given the set up activities allocation between the head office and the PE, it is seen that even though marketing, sale promotion and quality checks are being carried out by the Head Office, the Indian branch does the entire drawing and design work which also includes assuming the risks of drawing and design. It is thus true that the Indian branch also takes some risk as the important drawing, designing and calculations are carried out by the Indian company. Looking to the totality of situation it is seen that 50% of the profits determined by the AO after applying rule 10 are attributable to the operations carried out by the PE in India. Accordingly the AO is directed to calculate attributable profit at 50% of the figure arrived at after applying the profit rate of 8.5% which represents the global profit ratio of the appellant. This covers the grounds of appeal no. and 10 of the appellant. Ground of appeal no. 7 relates to adoption of status of foreign company as against correct status ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrolled transactions and the record of analysis, how the uncontrolled transactions are comparable to the case of the assessee as per requirement of Rule 10B(2) of the Income Tax Rules, 1962. In this situation, the AO was right in adopting the profit of 8.5% for AY 2003-04 and 10.6% for AY 2004-05 to calculate attributable profit. However, the ld. Counsel of the assessee has raised this objection that the AO adopted the wrong calendar year for adoption of global profit rate but we are unable to accept this contention as financial year for respective assessment years is spread over upto 31st March and in the light of this fact that the percentage of global profit was higher in calendar year 2003, the adjustment would be neutral and academic, therefore, this contention of the ld. Counsel of the assessee is not found to be acceptable. 28. Turning to the ground of the revenue in cross appeals, ld. DR submitted that the CIT(A) has erred in directing the AO to calculate attributable profit at 50% of the figures arrived after applying profit rate of 8.5% for AY 2003-04 and 10.6% for AY 2004-05 which actually reduce the global profit ratio of the assessee by ignoring the fact that the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which they are engaged will be determined and then the relative contribution made by each of the AE towards the earning of such combined net profit should be evaluated on the basis of function performed, assets employed and risk assumed by each enterprise and then combined net profit is split amongst the enterprise in proportion to their relative contribution as evaluated under sub clause (ii) of Rule 10B. 30. Ld. Counsel has also drawn our attention towards page 20 to 22 of the Paper Book and submitted that the relative contribution to the whole transaction which was carried out by the US Head office and branch office in India has been furnished before the CIT(A) on his direction during the first appellate proceedings. It was further contended on behalf of the assessee that from perusal of the contribution of work in a particular contract, it is clear that right from the stage of discussion and obtaining the contract and till its finalisation, all risks including capital risk, professional risk, investment risk, bad debts, legal suits, matters relating to patent, trade mark and intellect property rights, insurance and damages are entirely borne by the US Head office and the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and Indian PE based on mark up to cost incurred by them and there cannot be further attribution as all the development activities have taken place in India and only the marketing and quality control activities have taken place in USA. 33. On careful consideration of above rival submissions, from the relevant part of the impugned order, we observe that the AO has not brought out any fact or material into existence that the risk of marketing and quality control activity have taken place and all developmental activities have taken place in India. In this situation, it cannot be said that risk is involved exclusively either on the Head office or on the PE branch office in India. Obviously, from stage of discussion and obtaining the contract till its final marketing to the respective client have been undertaken by the US Head office but at the same time this fact cannot be ignored that the PE branch office in India contributed towards all development activities at the cheaper cost of service and human resources in comparison to USA, therefore, we are of the view that for earning higher profit in comparison to USA, comparable companies as adopted in transfer pricing study, the US He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the assessee further contended that the authorities below ought to have adopted the status of the appellant as individual instead of foreign company because the assessee is a firm and not a company even in US as it is 100% owned by a single individual, hence, does not fall in the category of a company. 36. Ld. DR replied and pointed out that that as per details of employees with designation and salary available on page 304 and 305, Mr. A.K. Jalla is the Vice President of Indian PE and in the ground itself, the assessee is accepting that the CEC is a firm and not a company even in US, then in terms of Indo US Treaty Part 2 of Article 3, wherein any term has not been defined in the treaty, then the provisions of the laws of that contracting state will be applied. The DR further pointed out para 6 of the impugned order and submitted that the assessee was rightly treated as a company for the purpose of status as per the provisions of the Act and in consonance with the provisions of the Indian US Treaty. 37. On careful consideration of above submissions, we find it appropriate to reproduce the relevant operative part of the impugned order in para 6 which reads as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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