TMI Blog2016 (11) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... utilization of assets and risk profile of the assessee. Therefore, the ld. CIT(A) rightly held that the action of the AO was not sustainable because he on the one hand had accepted TNMM and also used profit split method for attribution of profit on the international transaction at 50:50 ratio. In our opinion either of the two methods could have been used and not both, therefore, the ld. CIT(A) was fully justified in holding that the action of the AO was not sustainable in the eyes of law. In the present case, when the AO himself accepted that the transaction was benchmarked under the provision of Section 92 of the Act, so there was no need to attribute the profit separately to the assessee PE. Since, there is no change in the facts for the year under consideration vis-à-vis subsequent year, the ld. CIT(A) rightly restricted the adjustment to the international transaction at ₹ 54,37,717/-. We do not see any infirmity in the impugned order passed by the ld. CIT(A). - Decided against revenue - ITA No. 879/Del/2012 - - - Dated:- 12-9-2016 - Sh. N. K. Saini, AM and Smt. Beena Pillai, JM Assessee by : Sh. Harpreet Singh Rohan Khare, Advs. Revenue by : Sh. Amrendra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the selling of machines manufactured by the Head Office to various customers in India and also to the neighboring countries. He, therefore, asked the assessee to explain as to why the profit arising from the sales made by Mori Seiki, Japan in India (H.O) should not be attributed to the PE in India i.e. the assessee and taxed accordingly. In response, the assessee submitted the reply dated 18.12.2008 which read as under: The India-Japan treaty provides that profits attributable only to the activities carried out by MS-BO in India can be taxed in India. Profits to be attributed are that the PE might have earned in same of similar activities under same or similar conditions and dealing wholly independently (Arm s Length Profits). The assessee has placed reliance on the commentary of OECD and also the decision of Hon ble Supreme Court in the case of Morgan Stanley 292 ITR 416 (SC). In view of the judgment of Hon ble Supreme Court no further profits can be attributed to the PE if the transactions between MS-BO and HO are at arm s length. 5. After considering the submissions of the assessee, the AO noted as under:- a) The main argument of the assessee that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings in the aforesaid paragraphs also find support in the decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. The Protocol to the DTAA, in paragraph 6, discusses the involvement of the permanent establishment in transactions, in order to determine the extent of income that can be taxed. It is stated that the term 'directly or indirectly attributable' indicates the income that shall be regarded on the basis of the extent appropriate to the part played by the permanent establishment in those transactions. c) Article 2 of Memorandum Concerning the Reduction of Duty Commission entered between HO and MS-BO (extracted above in para 3) it is mentioned that MS-BO shall be maintaining stock of machines. In view of this fact, let us find out whether such activity of MS-BO creates any, dependent agency permanent establishment (DAPE) in terms of Article 5(7) of the DTAA between India and Japan. For this purpose, it would be relevant to reproduce the relevant article Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 8 applies - is act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctions were performed by the assessee in respect of sales made by HO in India: i) MS-BO plays a crucial role in deciding the price of machines. ii) MS-BO will expand the market for the HO in India by holding exhibitions in similar activities. iii) MS-BO will install the machines sold by the HO in India. iv) MS-BO will maintain such machines. v) MS-BO will maintain the stock of machines. Assets Used by MS-BO i) Land, building etc. owned/leased by MS-BO. ii) Equipments used for installation, maintenance etc. iii) Human capital (Quality man-power). And the risks borne by the assessee were following: i) Quality Risk If the quality of the product is not good, the MS-BO will have to bear the risk of improving the quality at its own cost. ii) Delivery Risk Any risk arising on account of non-delivery of the product is to be borne by MSBO. iii) Man power Risk The risk associated with the quality of manpower is to be borne by MS-BO. iv) Inventory Risk The piling of stock results into inventory obsolescence , ageing of the product, the price risk associated with the fluctuating market all such risks are borne by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost as the profit level indicator. It was further submitted that the assessee had used 13 comparable companies in order to benchmark the provision of support services by the assessee to the H.O. and that the assessee had taken 3 year average data to do the analysis. It was further submitted that the AO had not disputed the functions performed by the assessee nor he had questioned the assets employed by the assessee but made some general observations regarding the risk profile of the assessee. 10. The assessee also furnished copy of the assessment order dated 28.12.2010 for the assessment year 2007-08 passed by the AO on the directions issued by the DRP. The said order has been reproduced by the ld. CIT(A) at page nos. 7 to 9 which read as under: 1. MS, a company incorporated in Japan, has a branch, office in India (MS-BO) which assists MS to better co-ordinate and communicate with its existing and potential customers and be better placed to obtain the local market information in India. Such service to be provided through provision of marketing assistance party support services and other business support services. MS-BO had entered into agreements with MS Japan for providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independently with the enterprise of which it is a permanent establishment. 5. Hence, profits to be attributed are that the PE might have earned in same or similar activity under same or similar conditions and dealing wholly independently. Accordingly, an internationally accepted approach for attribution of profits to a PE is to first carry out a detailed functional analysis of the PE and the organization of which such PE is a part of and determine the economically significant activity of the PE based on such analysis. Thereafter, an arm's length profit based on arm's length principle is attributed to the PE as if it was separate and legally distinct entity. 6. In the present case, the remuneration received by MS-BO for the said support activities has already been demonstrated to be at arm's length in the Transfer Pricing documentation maintained and furnished by the assessee before your goodself. Further, it may be noted that the case of the assessee was also referred to the Transfer Pricing Officer ( TPO ) to determine the arm's length price under Section 92CA(3) of the Act in respect of the international transactions entered into by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating Profit/Operating Costs FY 2005-06 1. Agricultural Finance Corporation Ltd. -8.22% 2. Besant Raj International Ltd. -14.45% 3. Capital Trust Ltd. -9.18% 4. Crisil Ltd. 11.49% 5. Educational Consultants Ltd. 16.60% 6. Electronica Machine Tools Ltd. NC 7. Epic Energy Ltd. NC 8. ICC International Agencies Ltd. NC 9. IDC (India) Ltd. 14.05% 10. Priya International Ltd. 26.09% 11. Ratan Glitter Industries Ltd. NC 12. T S R Darashaw Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the goods or merchandise on behalf of the head office. It was also submitted that the assessee had undertaken all the risks relating to the sales and played a crucial role in deciding the price of machines and was responsible to install the machine sold by head office in India and maintained stock of such machines. Therefore, the AO was justified in holding that 50% of the gross profit arising from such sales was attributable to the assessee in India. Therefore, the ld. CIT(A) was not justified in reducing the addition made by the AO. 16. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A). It was further submitted that in the subsequent year, TNMM was used to benchmark the similar transaction which was approved by the DRP and accepted by the department. Therefore, for the assessment year under consideration also TNMM was the most appropriate method and the assessee by selecting 13 comparables in its transfer pricing study worked out the margin at 5.84% which has not been doubted by the AO. Therefore, the ld. CIT(A) rightly applied 5.84% as ave ..... X X X X Extracts X X X X X X X X Extracts X X X X
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