TMI Blog2022 (5) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... cts purchased by DHR India under the Distribution Agreement and kept in its inventory cannot be considered to be the products belonging to the assessee, as, they are sales transaction on principal to principal basis for resale by DHR India to Indian customers. Further, clause 11.1 and 11.2 of Sales Commission Agreement makes it clear that any replacement of products/spares under warranty/maintenance has to be provided by DHR India out of its own inventory and DHR India will have the right to either get a replacement from assessee or cross charge the cost to the assessee. Therefore, the terms of the agreements make it clear that assessee does not have a warehouse or sales outlet in India to constitute a fixed place PE in India under Article 5(1) of the Treaty. Thus, in our view, the conclusion drawn by the Assessing Officer that the assessee has fixed place PE or dependant agent PE is not borne out from any cogent material/evidence brought on record. Unfortunately, DRP has not properly appreciated the facts and simply adopted the version of the Assessing Officer. There is nothing on record to suggest that the assessee is utilizing the premises of DHR Holding India Pvt. Ltd. eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit to the PE in India deserve to be deleted. - Decided in favour of assessee. - ITA No.514/Del/2021 - - - Dated:- 29-4-2022 - Shri G.S. Pannu, Hon ble President And Shri Saktijit Dey, Judicial Member For the Appellant : Sh. Ajay Vohra, Sr. Advocate, Ms. Suchitra Kanodia, CA For the Respondent : Sh. Sanjay Kumar, Sr. DR ORDER PER SAKTIJIT DEY, JM: Captioned appeal has been filed by the assessee assailing the final assessment order dated 16.04.2021 passed under section 143(3) read with section 144C of the Income-tax Act, 1961 (for short the Act ) for the assessment year 2017-18, in pursuance to direction of learned Dispute Resolution Panel (DRP), New Delhi. 2. Grounds raised by the assessee are as under: Grounds with respect to allegation of constitution of Permanent Establishment ('PE') in India Ground 1: On the facts and circumstances of the case and in law. the Ld. AO as well as DRP has erred in assessing the total income of the Appellant under section 143(3) read with section 144C of the Act, for the assessment year ( AY ) 2017-18 at INR 4,46,50.443 as against the Nil. returned income. Ground 2: On the facts and in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonable profits to the alleged PE. In this regard, the AO erred in benchmarking the profits attributable to the alleged PE with the resale discounts agreed by the Appellant with its AE, DHR India, under a buy-sell distribution arrangement, which is a controlled transaction; 7.2 Ignoring the significantly higher level of functions performed, assets employed and risks assumed by DHR India under the distribution arrangement versus those alleged to have been performed by the PE, leading to excessive and unreasonable profits attribution. Ground 8: On the facts and circumstances of the case, the Ld. AO/ Hon'ble DRP erred in summarily rejecting the contentions placed by the Appellant for a reasonable profit attribution, without appreciating the additional evidences and analysis filed by the Appellant during the course of DRP proceeding. In doing so, the Ld. AO/ Hon ble DRP erred in: 8.1 Ignoring a third-party arrangement furnished by the Appellant that is comparable to the functions alleged to have been performed by the PE; 8.2 Ignoring an analysis furnished by the Appellant determining the profit attribution based on resale margins earned by independent distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax in India. The assessee submitted, the routine and emergency visit to customers place are provided by its Associated Enterprise (AE), namely, DHR Holding India Pvt. Ltd. as per the guidelines of the assessee, for which, DHR Holding India Pvt. Ltd. is compensated with arm s length remuneration, comprising of cost plus markup. In response to further query, the assessee submitted that it does not maintain any India specific books of account. Hence, segmental profit and loss account of sales made to Indian customers during the relevant financial year is not readily available with the assessee. However, the assessee submitted an unaudited sales statement, as per which, the total sales made to Indian customers worked to USD 23.607 Million. 6. After examining the details furnished, the Assessing Officer noticed that the assessee had entered into three separate contracts with DHR Holding India Pvt. Ltd., namely, Sales Commission Agreement, Distribution Agreement and Marketing Support Services Agreement. On perusing these agreements, the Assessing Officer wanted to ascertain the legal relationship between the assessee and DHR Holding India Pvt. Ltd. Since, as alleged by the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Having held so, he proceeded to attribute profit to the PE by extrapolating the net figure of 9.5% on global sales to the earning from India, and computed an amount of Rs.15,39,67,046/- as profit from India. Further, he observed, as per Sales Commission Agreement, DHR Holding India Pvt. Ltd. is paid commission at 9%. Whereas, as per Distribution Agreement, DHR Holding India Pvt. Ltd. gets initial resale or distribution discount of 46%. The Assessing Officer observed, when DHR Holding India Pvt. Ltd. is performing the same function under both the agreements, there is no justification for such huge difference in commission. He observed, for performing certain functions/services DHR Holding India Pvt. Ltd. has not been remunerated at all. Therefore, there is need to attribute profit to the PE in India for the employment of assets, risks and functions performed by DHR Holding India Pvt. Ltd. Accordingly, he held that 37% of the profit earned by the assessee in India is attributable to the PE. Thus, he worked out the profit attributable to PE in India at Rs.5,69,67,807/- and taxed it at the rate of 40% with surcharge and education cess thereon. 9. Being aggrieved with the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs from outside India and none of its employees have visited in India for any work, there cannot be any fixed place PE of the assessee in India. He submitted, DHR Holding India Pvt. Ltd. cannot also be treated as dependant agent PE as it has no authority to conclude any contract on behalf of the assessee. He submitted, the finding of the Assessing Officer that DHR Holding India Pvt. Ltd. habitually concludes contracts on behalf of the assessee has no basis at all. He submitted, no material has been brought on record by the Assessing Officer to demonstrate that the core activities of the assessee are being carried out in India. He submitted, the burden is entirely on the Assessing Officer to show that an agency relationship exists between the assessee and DHR Holding India Pvt. Ltd. He submitted, DHR Holding India Pvt. Ltd. is not dependant on assessee and has its own independent business. He submitted, even assuming that DHR Holding India Pvt. Ltd. is an agent of the assessee but it has to be proved on record that such agent has authority to conclude contract on behalf of the assessee. He submitted, the alleged warehouse as mentioned by the Assessing Officer is not belonging to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, he submitted, the Assessing Officer has rightly held that assessee has PE in India, both, unders Article 5(8) and 5(9) of India Singapore DTAA. 14. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. Undisputedly, the Assessing Officer has treated DHR Holding India Pvt. Ltd., an associated enterprise of the assessee based in India, as the fixed place PE, agency PE and dependant agent PE under Article 5(1), 5(8) and 5(9) of India Singapore DTAA. The basic facts based on which the Assessing Officer has come to such a conclusion are certain clauses in the agreements between the assessee and the DHR Holding India Pvt. Ltd. and mainly the statement recorded from two employees of one of assessee s Indian customers M/s Arbro Pharmaceuticals Pvt. Ltd. As discussed earlier and accepted by the Assessing Officer, the assessee is a manufacturer and seller of scientific equipments, spare parts and peripherals and sales them globally, including in India. The assessee has asserted from the stage of assessment proceeding itself that these sales made to Indian customers are effected directly from Singapore and no part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct warranty, irrespective of the fact, whether the product was purchased directly from the assessee or DHR Holding India Pvt. Ltd. This clause also provides that for performing installation and warranty related services, DHR Holding India Pvt. Ltd. shall be remunerated in the terms provided under Exhibit- B. Exhibit- B stipulates commission for sales related activities at 6% and commission towards installation and first year warranty of instruments at 3%. Clause 2 of the agreement provides that DHR India shall intimate the order from customer to the assessee and the assessee shall make all efforts to ship the products by the delivery date requested by DHR India and shall indemnify and hold DHR India harmless for any damages incurred by DHR India as a result delays in shipment that are caused by the assessee. Clause 2.2 says, the assessee shall arrange for and bear the cost of carriage/freight and insurance of the product and clearing the goods for export. Clause 3.1 says, after delivery of the products, DHR India or its designee shall inspect the product and notify the assessee of any damage, tampering, shortage or other discrepancy between the products and shipping documents. Clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement and which is to be purchased by DHR India either from the assessee or from third party for resale. This Article further makes it clear that notwithstanding the agreement of appointment of DHR India, the assessee reserves the right to solicit, or upon the request of a customer, take orders requiring delivery of products either within or outside of the territory. Clause 1.2 makes it clear that DHR India shall make all reasonable efforts to distribute or sell all products on its own account. Clause 1.3 provides that the assessee shall supply DHR India with all technical data and other product information customarily made available to facilitate sales of the products. Clause 1.5 provides, DHR India shall maintain an inventory of products sufficient to meet, in its business judgment, the forecast sales for each product within the territory. Clause 2.2 provides that assessee shall arrange for and bear the cost of carriage/freight and insurance of the product, and clearing the goods for export. However, title to any product, possession and the risk of loss shall pass from assessee to DHR India once the product is delivered to the carrier contracted by the assessee to delive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which needs to be examined is Marketing Support Services Agreement. As per the terms of this agreement DHR India is required to provide assessee and other group companies the following marketing support services: Identifying market opportunities for AB Singapore Identifying potential customers and marketing of the products for AB Singapore Providing demonstration of the products of the overseas entities to prospective customers Conducting seminars and exhibitions for providing information (pertaining to products of overseas entities) to customers Pass on all enquiries to overseas entities for comments and quotations; Receipt of clarifications and follow-up with the potential customers Provide information and product training to the customers Advertising, publicity and public relation activities through third parties; Market surveys and studies to standardize and improve the performance of the products of overseas entities; In conjunction with tire personnel of overseas entities, prepare an annual marketing plan for the territory: Any other incidental marketing activities. Interaction with the custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo of the employees of an Indian customer of the assessee. However, it is the assertion of the assessee from the very beginning that the statements recorded of these persons were neither confronted, nor any opportunity of cross examination was granted. This assertion has not been controverted by the departmental authorities. Therefore, in our view, the Assessing Officer could not have utilized such adverse material to the detriment of the assessee without giving any opportunity to the assessee to cross examine. In any case of the matter, the persons whose statements have been utilized by the Assessing Officer are neither employees of the assessee nor DHR India. They have only stated certain facts without being aware of the legal relationship and real nature of the transaction between the assessee and DHR India. 23. Therefore, in our view, basis such statement, it will not be safe to conclude that the assessee either has a fixed place PE or dependant agent PE. Further, the allegation of the Assessing Officer that the assessee utilizes the premises of DHR India as a warehouse to stock its goods and sales outlet is not borne out from the materials on record. The facts on record c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any independent status and was not acting in the ordinary course of its business. We have noted, from the stage of assessment proceeding itself, the assessee has consistently urged that DHR India is having its own independent status and business and its activities are not wholly devoted to the assessee. However, the departmental authorities have rejected the claim of the assessee without bringing any contrary material on record to demonstrate that the activities of DHR India are wholly and exclusively devoted to the assessee. That being the factual position, it cannot be said that DHR India constitutes dependant agent PE of the assessee. Thus, in our view, conditions of Article 5(9) of India Singapore DTAA are not fulfilled. 26. At this stage, it is necessary to observe, in case of E Funds IT Solution Inc. (supra), the Hon ble Supreme Court has held, the burden of proving the fact that a foreign entity has a PE in India is on the Revenue. In the said decision, the Hon ble Supreme Court has further elucidated that for constituting a fixed place PE, there must exist a fixed place of business in India which is at the disposal of the non-resident entity through which it carries ..... X X X X Extracts X X X X X X X X Extracts X X X X
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