TMI Blog2022 (10) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... on of profit attribution, on the basis of the two taxpayer approach, is erroneous, in view of Hon ble jurisdictional High Court decision, it cannot be said to be prejudicial to the interest of the revenue unless there is a categorical finding that the payment to the dependent agent is not an arm s length price vis- -vis functions performed, assets employed and risks assumed by the dependent agent. While doing so, one also has to bear in mind that DAPE is not anything distinct from the DA, in the light of the binding judicial precedents holding the field as of now, and the taxability of the dependent agent s remuneration in the hands of the DA brings an end to the taxability of the DAPE also. There is no such finding about the payment to the dependent agent being less than the arm s length price of services rendered by the dependent agent, in the present case, even though there is a finding about questioning the DAPE s FAR analysis. The Commissioner ought to have examined the arm s length price determination in respect of the services rendered by the dependent agent, in this context. That exercise has also not been done. We are of the considered view that unless the order sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MFE India, and in view of the arrangements under the said agreement, MFE India constitutes its dependent agent permanent establishment in India. These facts are also well captured in the assessment order dated 18th December 2019 passed by the Assessing Officer, as follows: 3. The Assessee Company is a Non-resident company incorporated under the laws of Malaysia. The Assessee Company supplies aluminium formwork which finds application in the construction of buildings. The Group has a wholly owned subsidiary in India in the name and style of MFE Formwork Technology India P Ltd ( MFE-India') having its registered office at Mumbai, Andheri. The assessee is a tax resident of Malaysia in terms of Article 4 of the Double Taxation Avoidance Agreement ( DTAA') entered into between India and Malaysia. The Assessee Company had executed a Marketing Service Agreement ('MSA') with MFE-India. As per the MSA, MFE-India is required to (1) Promote and market the products of the Assessee Company within India and (2) Educate the prospective customers about the benefits of the products offered by the Assessee Company. Further, as per technical support service agreement between MFE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 24% has been determined on the basis of a detailed FAR analysis based on Function Performed, Asset Deployed Risks Assumed by each party. 9,27,20,736 5 Less: Marketing Fee paid to agent (MFE Formwork Technology India P Ltd) in India As per the Marketing Service Agreement, the Assessee Company has paid a Marketing Fee to its agent in India (MFE Formwork Technology India P Ltd) being the cost incurred for performing its duties under the agreement along with a mark-up of 15% 9,05,21,260 6 Taxable Profits Profit Attributable to Indian Operations as reduced by Marketing Fee paid to agent in India (Sr 4-Sr 5) 21,99,476 5. From the Computation of Income filed by the assessee it is seen that for the purpose of determining profits attributable to tax in India, the assessee Company has attributed 24% of Gross Profits based on FAR Analysis carried out. On going through the FAR analysis it seen that the Assessee has broken up each activity into several sub-activities and allotted weight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that the assessee has paid an arm s length remuneration for the services rendered by the agent constituting the DAPE, i.e. MFE-India, as there is no ALP adjustment in respect of the payment made by the assessee to the MFE. Yet, there is a dispute about the FAR analysis, but that is because the assessee has proceeded on the dual taxpayer approach, recognizing the distinction between the dependent agent and the dependent agency permanent establishment. While a similar approach was approved and adopted by a coordinate bench in the case of DDIT Vs Set Satellite Pte Ltd [ (2007) 106 ITD 175 (Mum)], wherein, speaking through one of us, the coordinate bench upheld the dual taxpayer approach, but then the said decision did not find favour with the Hon ble High jurisdictional Court which has reversed the said decision of the coordinate bench. We are thus alive to the fact that in the light of Hon ble jurisdictional High Court judgment in the case of Set Satellite Singapore Pte Ltd Vs DCIT [(2008) 307 ITR 205 (Bom)], so far as profit attribution of a DAPE is concerned, the prevailing legal position is that as long as an agent is paid an arm's length remuneration for the services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is indeed a dependent agency permanent establishment. 6. We have heard the rival contentions, perused the material on record and duly considered the facts of the case and in the light of the applicable legal position. 7. We find that section 263 of the Income Tax Act, 1961 provides that The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment (Emphasis, by underlining, supplied by us). It is, therefore, a condition precedent for invoking the revisionary powers under section 263 that in order to invoke the revision powers of the Commissioner, the order sought to be revised must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Commissioner has made reference to the Rolls Royce decision (supra) in this context of profit attribution to the PE, but then this is a decision in the context of a fixed place PE as evident from question number 2 before Hon ble Delhi High Court, i.e. whether the office of Rolls Royce India Limited at New Delhi constituted a permanent establishment of the assessee under Article 5 of the Double Taxation Avoidance Agreement between India and the United Kingdom. The profit attribution to the DAPE and fixed place PE are, in the light of Hon ble jurisdictional High Court judgment in the case of the Set Satellite (supra), on a materially different basis. On a conceptual note, PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, other than agent's remuneration in the source country - which is taxable in the source state anyway dehors the existence of PE, become taxable in the source state, the very approach to the DAPE profit attribution may indeed seem clearly incongruous, but then as is the settled legal position as long as the dependent agent h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort services to MSCo. MSCo. outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operations, data processing and support centre to MSCo. On 5-5-2005 MSCo. filed its advance ruling application . The basic question related to the transaction between the MSCo. and MSAS. The advance ruling was sought on two counts (i) whether the applicant was having PE in India under Article 5(1) of the DTAA on account of the services rendered by MSAS under the services agreement dated 14-4-2005 and if so (ii) the amount of income attributable to such PE. It was ruled that MSAS should be regarded as constituting a service PE under Article 5(2)(1). On the second question the AAR ruled that the transactional net margin method (TNMM) was the most appropriate method for the determination of the Arm's Length Price (ALP) in respect of the service agreement dated 14-4-2005 and it meets the test of arm's length as prescribed under section 92C of the 1961 Act and no further income was attributable in the hands of MSAS in India. The said ruling of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f MSCo. where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer of pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. In this connection, the Department has also to examine whether the PE has obtained services from the multinational enterprise at lower than the arm's length cost. In our opinion, considering the judgment, if the correct arm's length price is applied and paid then nothing further would be left to be tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been paid arm s length remuneration for the functions performed, assets employed and risks assumed by the dependent agent. The order being prejudicial to the interest of the revenue, inasmuch as the payment to the dependent agent not being at an arm s length, is a sine qua non for holding that the order is prejudicial to the interest of the revenue. This exercise has clearly not been done on the facts of this case. For this short reason alone, we must set aside the impugned revision order. 10. As we part with the matter, we may add that once the assessee has accepted the dual taxpayer approach in its computation of income, it cannot be open to the assessee to deny the tax liability that it has already accepted under the said computation. We may, in this regard, refer to a materially similar situation dealt with by the Hon ble Supreme Court in the case of Carborundum Co Vs CIT [(1977) 108 ITR 335 (SC)], wherein, even while Their Lordships held that the assessee had no tax withholding obligation in respect of technical know-how paid by the assessee, and, as such, revision order under section 263, holding the assessee liable to tax withholding treating 75% of such technica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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