TMI Blog2019 (10) TMI 1131X X X X Extracts X X X X X X X X Extracts X X X X ..... tax, as claimed by the Revenue, or as the income to be determined by adopting ALP method, as claimed by the petitioner, cannot be considered by this Court and decided at this stage, since the order impugned is only a draft assessment order and the petitioner is only called upon to make objection against the same, if they are not agreeable. Therefore, the disputes raised by the petitioner herein are to be considered by the competent forum provided under the statute itself and resolved accordingly. It is not any empty formality but an effective mechanism. Therefore, to settle such dispute, necessarily the petitioner has to go before the Dispute Resolution Panel as provided under Section 144C of the Income Tax Act, 1961. When the statute provides a mechanism for resolving the dispute between the parties and before which forum, the assessee is entitled to file objections of any nature and when such forum is also vested with power to issue directions to the Assessing Officer for completion of the assessment, this Court is of the view that it is not correct to contend as if the scope and ambit of such forum is with limited purpose and jurisdiction on certain issues. If the above conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the petitioner conducted a detailed analysis of the Functions, Assets and Risks ('FAR') of the petitioner and its Head Office and Transactional Net Margin Method ('TNMM') for testing the arm's length results of the petitioner's international transaction. Based on the said TP analysis, the profit earned by the petitioner was found to be at arm's length as per the applicable TP regulations having regard to the FAR undertaken by the petitioner in its operations and the margins earned by the comparable companies found on the basis of the detailed benchmarking analysis. The income declared by the petitioner in its return of income was more than the profit arrived at based on the arm's length margin determined above. The return of income filed by the petitioner as a Permanent Establishment in India was selected for scrutiny assessment. The respondent issued notice under Section 143(2) of the Act on 18.09.2017. The respondent did not make a reference to the Transfer Pricing Officer (TPO) for verification of the FAR analysis and determination of arm's length nature of the petitioner's international transaction. After expiry of one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction is the domain of a TPO, as provided by Section 92C of the Act, Rule 10B(2) and 10C(2) of the Income Tax Rules, 1962 ('the Rules'). Though the respondent has power to determine arm's length as per the provisions of the Act, the same has been restricted by Instruction 3 of 2016 dated 10.03.2016 issued by the CBDT, for better administration of the Act. The respondent is bound to follow the directions provided in the instruction, in view of the settled position of law that the circulars issued by the CBDT under Section 119 of the Act is binding on the AOs. The respondent has exceeded her jurisdiction in analyzing the FAR of the petitioner and determining the arm's length attribution at 100 percent of the global profits earned from the sales in India by EOS Germany on the basis of such FAR analysis, which can be undertaken only by the TPO. Even if the action of the respondent is construed valid, the impugned order is bad in law for the following reasons: i) The respondent did not provide any reason for rejecting the TP analysis conducted by the petitioner, as required under Section 92C (3) of the Act; ii) The respondent failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2016-17. In response, the petitioner filed its reply on 20.12.2018. d) The contention of the petitioner was not accepted by the respondent for the reason that the activities of EOS India Branch Office prove that it is more than a mere agency support office and that it was a fully functional branch office in India. It was ascertained by the respondent that the employees in the EOS India Branch Office are involved in the activity of identifying potential customers and explaining the product features and its utility and application and therefore held that the petitioner's claim of mere liaison between EOS Germany and third party distributors is not correct. Since sales and marketing personnel in EOS India are directly involved in the identification of customers, solicit orders for EOS products in India, offering technical services like checking of pyrometer, process chamber, optic chamber, re-coater alignment, knuckle joint platform pin, laser power at process chamber, wiper sheet, etc., the respondent concluded that the functions performed and the risk assumed by India office significantly proves that it is more than that of a mere agency support branch offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice i.e. the petitioner significantly proves that it is more than that of branch office. The respondent had added only the income to the extent it was attributable to the profits earned from the sales in India. The respondent had not carried out any Transfer Pricing Analysis to recompute the income of the petitioner but had only determined the income based on the details furnished by the petitioner in 3CEB report without making any adjustments. h) The respondent cannot exercise power suo-moto to make a reference to Transfer Pricing Officer (TPO), unless the case falls under any of the circumstances mentioned in Central Board of Direct Taxes (CBDT) Instruction No.3/2016 dated 10.03.2016. i) The petitioner is trying to divert the issue by dragging Transfer Pricing (TP) issue before the Court, which is not at all of relevance here. The respondent has neither assumed the jurisdiction of the TPO nor analyzed the FAR of the petitioner. The functions performed and the risk assumed by India Branch Office i.e. the petitioner significantly proves that it is more than that of branch office. The respondent had added only the income to the exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de his oral submissions. He has also filed written arguments. The sum and substance of the contentions raised on behalf of the petitioner are as follows: The petitioner is a branch office of EOS GmbH ('EOS Germany') engaged in agency services and after-sale services to its Head Office. The petitioner is an admitted Permanent Establishment by virtue of Article 5(2)(b) of the Double Tax Avoidance Agreement ('DTAA') entered between India and Germany. For services rendered (agency and after sales), the petitioner is remunerated with a commission at the rate of 1 percent of the sales made by EOS Germany in India. The said remuneration has been justified to be at arm's length (hereinafter referred to as ALP), based on a Transfer Pricing (TP) analysis undertaken in the TP documentation by adopting Transactional Net Margin Method (TNMM) whereby the petitioner's net profit was computed by 13 percent as compared to the range of profits earned by the comparable companies from 7.25 percent to 11.38 percent. The same was also certified by an independent Chartered Accountant in Form No.3CEB. This ALP remuneration translates to an attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the profits under the fiction that the PE is a separate enterprise which is independent from the rest of the enterprise of which it is a part, i.e. The Head Office. The second part of that fiction corresponds to the ALP which is also applicable under the provisions of Article 9 for the purpose of adjusting the profits of associated enterprises. Paragraphs 20 to 22 of the Commentary to Article 7 further elaborates that the attribution of profits to a PE involves two steps. Under the first step, a functional and factual analysis is to be undertaken. Under the second step, any transaction of the PE with its associated enterprises are priced in accordance with the guidance of the OECD Transfer Pricing Guidelines and these Guidelines are applied by analogy to dealings between the permanent establishment and the other parts of the enterprise of which it is a part. The wordings of Article 7 of the Model Tax Convention is pari-materia to Article 7 of India-Germany DTAA. The present case would fall under the second category discussed by the Hon ble Supreme Court in the case of Morgan Stanley Co. [2007] 292 416 ITR (SC), wherein the respondent is alleging that the FAR analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of inspection and various records perused at the time of inspection, it was found that the petitioner is involved in identifying the potential customers, the marketing of its business by explaining the product profile, product feature, its utility and application in India. Based on branch office operation performed by the sales support personnel orders are solicited from customers and preliminary evaluation of the customers and distributors are done to finalise the sales process. Since all the activities like purchase, sale, operations, services everything was carried out by the India branch office of EOS Gmbh, a show cause notice dated 13.12.2018 was issued to the petitioner stating that why the profit of the branch office of the petitioner company should not be computed by taking into consideration the revenue earned through sales in India and taxed at the rate of 40 percent for the relevant Assessment Year 2016-17. The petitioner filed its objections explaining the various operations carried out by its India Office and German Office and how the remuneration received by it @ 1% of the sales revenue and the invoice raised by it on its German Office of cost +15% is at A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reveal the real facts as found out by the respondent herein at the time of survey regarding the extent of work done by the India Office. Therefore, in this case there is no question of reference to a Transfer Pricing Officer in as much as the conclusion arrived on an analysis of the facts found at the time of inspection and the records perused at that time reveals that the petitioner s contention that it is only an agency PE and that the customers are the customers of the German Head Office and therefore entire sales is to be treated as sales revenue of the German Head Office is a farce and an attempt to evade taxes in India. The reference to a Transfer Pricing Officer pre-supposes the fact that the assesse has not hidden the true facts and that the assessee s submissions with regard to the extent of work done by it and the extent of work done by the Associated Enterprise is correct. In the present case, the results of the survey show the same to be false. The assessing Officer has not made any Function, Asset and Risk study (FAR Study) as alleged by the petitioner and therefore Instructions No.3/2016 dated 10.03.2016 issued by CBDT is not applicable to the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of inspection and on perusal of various records, it was found that the petitioner was involved in identifying the potential customers and marketing of business by explaining the product profile, product feature, its utility and application in India. It is further claimed by the Revenue that based on the branch office operation performed by the sales support personnel, orders are solicited from customers and preliminary evaluation of the customers and distributors are done to finalise the sales process and since all the activities like purchase, sale operations, services were carried out by the petitioner in India, a show cause notice was issued to the petitioner on 13.12.2018 to show cause as to why the profit of the branch office of the petitioner Company should not be computed by taking into consideration of the revenue earned through sales in India and taxed at the rate of 40% for the relevant Assessment Year 2016-17. In other words, it is the case of the Revenue that all the activities carried out by the petitioner is within India and thus, the profits derived out of such activities should be computed as the revenue earned through sales in India and brought to tax. The petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich EOS Germany sells products to customers. By stating so, the assessee contends that the profit earned by the petitioner is to be determined by adopting arms length pricing method. Therefore, it is stated that such ALP determination is within the domain of Transfer Pricing Officer and not that of the Assessing Officer. 11. On the other hand, the Assessing Officer, after considering the objections of the petitioner, has in clear and categorical terms found in the draft assessment order that the above contention of the assessee is not acceptable for the reason that the activities of the petitioner prove that they are more than the branch office in India and that the employees of the petitioner in EOS India Branch Office involve in the activity of identifying potential customers and explaining the product features and its utility and application. Therefore, the Assessing Officer rejected the claim of the assessee as mere liaison between EOS Germany and third party distributors. The Assessing Officer has also found that the sales and marketing personnel in the petitioner Company are directly involved in identification of customers, verification of know your customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961. 13. It is pertinent to note that Section 144C of the Income Tax Act, 1961 deals with reference to the Dispute Resolution Panel. In the said provision, the Assessing Officer, shall in the first instance, forward a draft of the proposed order of assessment to the assessee, if the Assessing Officer proposes to make any variation in the income or loss returned, which is prejudicial to such assessee. Under Sub Clause (2) of Section 144C, the Assessee, on receipt of such draft order, shall file his acceptance of the variations to the Assessing Officer or file his objections, if any, to such variations with the Dispute Resolution Panel and the Assessing Officer. If the assessee intimates his acceptance of the variations to the Assessing Officer or if no objections are received within the period of 30 days, the Assessing Officer shall complete the assessment on the basis of the draft order, as contemplated under Section 144C(3). On the other hand, if the assessee has filed his objections, the Dispute Resolution Panel shall issue such directions as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment as contemplated under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer. Therefore, this factual dispute has to be settled first for which purpose only the Dispute Resolution Panel is constituted. At this juncture, it is to be stated that a jurisdictional issue raised must be of such nature which should be apparent on the face of the action/order of the authority evidently showing that such authority lacks jurisdiction. On the other hand, if the jurisdictional issue raised could be considered and decided only by further probing the matter and culling out certain facts, it need not necessarily decided by this Court by exercising its discretionary jurisdiction under Article 226 of the Constitution of India, except to relegate the parties to agitate before the next fact finding authority. b) Secondly, the Assessing Officer has only passed the draft assessment order thereby giving sufficient opportunity to the petitioner to raise their objections. The objections to be raised under Section 144 (2b) are certainly not with a limited scope and on the other hand, it is very clear that objections of any kind can be made by the assessee against the draft assessment order which certainly include the jurisdictional issue as well. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe and power of the Dispute Resolution Panel in W.P.Nos.26814 and 26815 of 2017 and passed an order on 28.09.2018, by observing that issuance of directions as contemplated under Sub Section (5) of Section 144C cannot be made mechanically or an empty formality and on the other hand, it has to be done only after considering the materials referred to under sub Section (6). 19. Learned counsel for the petitioner relied on the decision of the Supreme Court reported in (2007) 292 ITR 416 (SC), Director of Income-tax (International Taxation) vs Morgan Stanley Co. In support of his contention that in each case, the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Perusal of the facts and circumstances of the case before the Apex Court would show that the Apex Court has observed so in an appeal filed by the Revenue against the Ruling of the Advance Ruling Authority, wherein the said Authority has held that the respondent Company therein cannot be regarded as having a fixed plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this case is within India and therefore, no question of referring the issue for Transfer Pricing Officer would arise. Since such disputed issue has to be considered and decided by the Dispute Resolution Panel, I am of the view that the above decision and the Circular are also to be considered at the appropriate stage, after a decision is taken by the Dispute Resolution Panel. 21.Since this Court is inclined to direct the petitioner to approach the Dispute Resolution Panel for resolving the dispute raised in this writ petition, the other two decisions relied on by the learned counsel for the petitioner reported in (1978) 1 SCC 405, Mohinder Singh Gill v. Chief Election Commissioner and (53) SOT 142), Hyundai Rotem Company vs. Adit are not relevant to be discussed at this stage. 22. It is well settled that in fiscal matters, the parties cannot directly approach this Court and file writ petition, when an effective alternative remedy is available under the Statute. In other words, the parties cannot attempt to short circuit the whole process, by filing a writ petition straight away and inviting this Court to either assume the role of the Appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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