TMI Blog2018 (6) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts stated hereinabove amply prove that DAIPL was habitually exercising authority in India to conclude contracts on behalf of the assessee, though such contracts were formally signed by the assessee in Japan. Sub-para (c) of para 7, which has also been invoked by the AO, is clearly magnetized inasmuch as DAIPL was securing orders in India `almost wholly’ for the assessee. All the substantive parts of the key activities in making sales were done by DAIPL from India. This shows that DAIPL constituted a dependent agent PE of the assessee in India. Determination of ALP - Held that:- the benchmarking of the receipt of commission @ 10% in the hands of DAIPL was done only with reference to two functions of forwarding customers’ request to DIL and forwarding DIL’s quotations to the customers. As such, the other functions performed by DAIPL in negotiating and finalizing contracts in India on behalf of the assessee remained excluded from the process of determination of the ALP by the TPO. - Under such circumstances, the argument of the ld. AR becomes untenable. Determination of the quantum of income attributable to the PE - Held that:- It is not understandable as to why the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as such is not liable to pay interest u/s 234B of the Act. - Decided partly in favour of assessee. - ITA No. 1623/Del/2015 - - - Dated:- 28-5-2018 - Shri R. S. Syal, Vice President And Ms Suchitra Kamble, Judicial Member Assessee By : Shri Vishal Kalra, Advocate, Shri Anuj Agarwal, CA, Shri Gaurav Barchha, CA, Rajnandini Shukla, Advocate Department By : G.K. Dhal, CIT, DR ORDER Per R. S. Syal, VP The assessee has assailed the final assessment order dated 21.01.2015 passed by the Assessing Officer (AO) u/s 144C read with sections 143(3) and 254 of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2006-07. It is second round of proceedings before the Tribunal. 2. The first issue raised in this appeal is against treating M/s Daikin Air- conditioning India Pvt. Ltd. (DAIPL) as dependent agent Permanent Establishment (PE) of the assessee and the second one is against the attribution of income to the PE by the AO. 3. Succinctly, the factual matrix of the case is that the assessee is engaged in the development, manufacture, assembly and supply of air- conditioning and refrigeration equipments. It is incorporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it directly from Japan. However, it could not furnish any satisfactory documentary evidence to support its contention. Even qua the claim that it paid commission to DAIPL for rendering limited services, the assessee candidly admitted, vide its reply dated 20.11.2008, that it had not furnished any Form No.3CEB in respect of international transactions with DAIPL nor maintained any documents required to be maintained u/s 92D of the Act. On a perusal of Form No.3CEB filed by DAIPL for its own international transactions, the Assessing Officer found that DAIPL received total commission amounting to ₹ 10,64,39,135/-. The Assessing Officer noticed from the Agreement that the functions of DAIPL were shown to have been confined to forwarding the customers request to DIL and forwarding DIL s quotations and contractual proposals to the customers in India. In the absence of the assessee submitting any cogent evidence of it being directly undertaking marketing activities in respect of sales in India, the AO held that such activities were, in fact, done by DAIPL simultaneous with making sales in respect of their own distribution activity. In the backdrop of such a position, DAIPL was h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, as under:- PROVISION OF SERVICES DIL and DAIPL recognize that customers request DAIPL to procure the products from DIL. Pursuant to the request, DAIPL conveys the customers request to DIL and DIL decides and finalizes the commercial terms and conditions with the customers. The respective roles and responsibilities of DIL and DAIPL are as under: 2.1 DIL 2.1.1 Based on the customer s request, to prepare a quotation for the customers; 2.1.2 Negotiate and finalize prices, payment terms, delivery schedule and other contractual terms with the customers. 2.2 DAIPL 2.2.1 To forward the customers request for procuring products from DIL to DIL; 2.2.2 To forward DIL s quotation and contractual proposal to the customers. 6. Clause 3 of the Agreement provides that in consideration of the above services rendered by DAIPL, the assessee will pay commission at the rate of 10% of the sales value. Since the assessee claimed the role of DAIPL as a mere communication channel, restricted to forwarding the customers request for procuring products to it and forwarding its quotation and contractual proposal to the customers, the Assessing Officer sough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fortified by the fact that for selling the same products, in the capacity of a distributor, DAIPL has incurred huge Selling and distribution expenses to the tune of ₹ 14.38 crore during the relevant year, which is evident from Schedule P to its Annual report, whose copy has been placed at page 68 of the paper book. We fail to comprehend as to how the assessee came in contact with customers in India and made sales to them directly, when DAIPL, situated in India, had to spend a huge amount of selling and distribution expenses for selling similar products in India. 9. The view projected by the assessee that DAIPL was acting only as a communication channel for its direct sales, does not instill confidence because no evidence has been brought on record to demonstrate as to how the customers in India were approaching the assessee in Japan to discuss and finalize their requirements and prices. It is not a case of an assessee dealing with a single customer to whom the entire sale of ₹ 45.40 crore were made. On the other hand, the customers are scattered all over India and the amount of sale price in many cases is even below ₹ 25,000/-, which is overt from the statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India with regard to the receipt of proposals, relating to price negotiation and other documents. Not even a single direct e-mail between the assessee and its customers in India has been provided, which reinforces the view that no activity resulting into direct sales in India was done by the assessee and such marketing activities were done by DAIPL alone. 12. Be that as it may, let us examine contents of the e-mails between the assessee and DAIPL. Page 212 is an e-mail originating from DAIPL to the assessee in Japan in which the Indian entity is referring to `price approval sheets already given for the following two projects . Then it has been mentioned that certain amendments are required in case of the second project. It has been written that : `Price of FXM 200 LVE in this case is 1259 USD each. Can it be reduced to 1240 USD . This e-mail has been replied by the assessee, on page 211 of the Paper book, mentioning that: `We would like to remain previous price for FXM 200 LVE. It s due to the difference of discount rate in our previous quotation. We gave you 5% discount only for the products on original quotation. This opposite pricing is occurring not only for this produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such sales were, in fact, negotiated and finalized by DAIPL. The mere fact that the assessee was formally signing the contracts of sale does not, in any manner, alter the position. 14. At this stage, it is pertinent to mention that the AO held DAIPL as dependent agent PE of the assessee in terms of paras 7(a) and 7(c) of Article 5 of the DTAA. Such Article of the DTAA defines Permanent Establishment . Relevant parts of Article 5, run as under:- ARTICLE 5 1 to 6 7. 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 acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if (a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. ADIT Ors (2016) 240 Taxman 353 (Del) is misplaced. The Hon'ble High Court dealt with `Dependent Agent issue in para 37 of the judgment and concluded that no Dependent Agent PE was constituted because: there is no allegation that Adobe India is authorized to conclude contracts on behalf of the assessee or has been habitually doing so. Per contra, in the instant case, there is not only an allegation by the Assessing Officer that DAIPL was exercising an authority to conclude contracts and habitually securing orders in India, but, the same has also been sufficiently proved by the him, to which we accord our imprimatur. Thus it is held that the authorities below were justified in holding that DAIPL constituted dependent agent PE of the assessee in India. The assessee fails on this score. NO ATTRIBUTIOIN WHEN A.L.P. HAS BEEN DETERMINED 17. The ld. AR argued that the international transaction of commission payment by the assessee to DAIPL was subjected to the transfer pricing analysis by the TPO, who found the same at arm s length price (ALP). Our attention was invited towards the TPO s order dated 26.10.2009 passed for the year under consideration in the hands of DAIPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above two declared functions. However, the fact of the matter is that DAIPL carried out a whole range of functions in selling the products of the assessee in India, which, apart from the two functions elaborated in the Agreement, also include negotiating and finalizing the price and concluding contracts with the customers in India. Since such other functions were neither borne out from the Agreement nor declared by DAIPL and further no consideration was awarded for them, there was no occasion for the TPO to determine the ALP of the transaction of receipt of commission as inclusive of such other functions as well. Had such other functions been declared, the entire FAR (Functions performed, assets utilized and risks undertaken) analysis would have undergone a complete change. This demonstrates that the benchmarking of the receipt of commission @ 10% in the hands of DAIPL was done only with reference to two functions of forwarding customers request to DIL and forwarding DIL s quotations to the customers. As such, the other functions performed by DAIPL in negotiating and finalizing contracts in India on behalf of the assessee remained excluded from the process of determination of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee is computed at ₹ 82,335,026/-. Out of this, expenses @5% of the sale price to customers to account for all the costs incurred by the assessee in direct sales, works out to ₹ 22,700,586/-. Therefore, the additional profit earned by the assessee on account of activities of the PE in India is worked out as under: (Amount in Rs.) Additional Sale Value 8,23,35,026 Less: Expenses 22,700,586 Profits attributable to PE 5,96,34,440 22. The assessee is aggrieved against such computation of profits attributable to PE. The ld. AR vehemently argued that this mechanism of computing profit attributable to PE is unknown to law. He stated that the Assessing Officer for the assessment year 2008-09, giving effect to the directions of the DRP, determined the amount of profits attributable to the PE in India by applying global net profit margin of 8.5% to the direct sales made to customers in India. His without prejudice argument was that for the year under consideration, global n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating to India specific operations is not available or is not authentic, then, some estimation is required to be done. Rule 10 of the Income-tax Rules, 1962, deals with the determination of income in the case of non-residents. It provides that where the Assessing Officer is of the opinion that the actual amount of income accruing or arising to any non- resident person cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax shall be calculated at such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable . Considering the entirety of the facts and circumstances of the instant case, we hold that the estimation of rate of net profit at 10% is reasonable. Our estimation of such net profit rate accords with the statutorily prescribed rate of 10% given in sections 44BB and 44BBB, being, the special provisions in case of a non-resident for computing profits and gains in connection with the business of exploration, etc., of mineral oils; and special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which is to be reduced and not the gross amount. Such net profit is to be computed by reducing all the direct and indirect expenses incurred by DAIPL in earning commission income from the assessee, which include not only those incurred in respect of two activities as per the commission agreement, but also pertaining to all other activities which it actually carried on in making sales in India on behalf of the assessee, including seeking customers, negotiating prices and then finalizing the deals. The amount so deduced, when reduced from the net profit earned by the assessee on total direct sales to the end-customers at ₹ 1,36,20,352/-, would give the further amount chargeable to tax in the hands of the assessee as attributable to the operations carried out in India through its PE. 29. It has been noticed above that the assessee paid commission to DAIPL amounting to ₹ 4,54,01,172/- at the rate of 10% on the amount of direct sales to end customers. It is the income component from such receipt of ₹ 4.54 crore taxed in the hands of DAIPL, which will be reduced from ₹ 1,36,20,352/-. To illustrate, if income of DAIPL from such commission is, say, 9% of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of tax at source under the provisions of the Act. Notwithstanding the fact that tax was not actually deducted at source in a proper manner, we hold that there will be no liability on the assessee to pay interest u/s 234B of the Act. Our view is fortified by the judgment of the Hon ble Bombay High Court in D.I (International Taxation) vs. NGC Network Asia Ltd. (2009) 222 CTR 86 (Bom), in which it has been held that when a duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be imposed on the payee assessee under section 234B of the Act. Similar view has been taken in CIT Anr. vs. Sedco Forex International Drilling Co. Ltd. Ors. (2003) 264 ITR 320 (Uttaranchal). 33. At this stage, it is relevant to note that the Finance Act, 2012, has inserted a proviso to section 209(1) of the Act w.e.f. 1.4.2012, which provides that : `for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shall not, in each case, be reduced by the aforesaid amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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