2023 (3) TMI 782
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....AO has erred in passing the final assessment order dated 27 January 2023 without considering the direct ions of the Hon'ble DRP dated 2 December 2022 as mandated by Sect ion 144C(13) of the Act . Consequently, the final assessment order dated 27 January 2023 deserves to be quashed. Grounds with respect to al legation of constitution of Permanent Establishment ('PE') in India Ground 3: On the facts and circumstances of the case and in law, the Ld. AO as well as Hon'ble DRP have erred in assessing the total income of the Appellant under sect ion 147 read with section 144C of the Act , for the AY 2013-14 at INR 2,09,26,235 as against the NIL returned income. Ground 4: On the facts and circumstances of the case and in law, the Ld. AO has erred in completely ignoring the orders passed in favour of the Appellant by the Hon'ble Income Tax Appel late Tribunal (ITAT) in the Appellant 's own case for AY 2017-18, AY 2018-19 and AY 2019-20, wherein the ITAT after careful examination of the facts of the case (which are identical to the facts of the year under consideration) held that" no fixed place PE and Agency PE of the Appellant is constituted in India - Vio....
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....odology to attribute unreasonable 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 transact ion; 10.2 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 11: On the facts and circumstances of the case, the Ld. AO/ Hon'ble DRP erred in summarily rejecting the content ions placed by the Appellant for a reasonable profit attribution, without appreciating the analysis filed by the Appellant during the course of proceedings. In doing so, the Ld. AO/ Hon'ble DRP erred in: 11.1 Ignoring the third-party arrangement furnished by the Appellant that is comparable to the functions alleged to have been performed by the PE wherein much lower commission has been paid by the Appellant to a third party for such function; 11.2 Ignoring methodical benchmarking analysis furn....
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....he assessee is a company incorporated in Singapore and is a tax resident of that country. As stated by the Assessing Officer, the assessee is engaged in the business of manufacturing and sale of scientific research instruments and peripheral. For the assessment year under dispute, the assessee had filed its return of income in India declaring nil income. In course of assessment proceeding, after calling for necessary details and examining them, the Assessing Office noticed that the products sold by assessee require maintenance, calibration, which involves servicing, repairing and supply of spares. Therefore, the assessee offers maintenance service to its customers worldwide, including India. From the details furnished, the Assessing Officer noticed that the assessee, during the year under consideration, had received revenue of Rs.8,96,73,757/- towards receipts from Annual Maintenance Contract (AMC). Since, the assessee did not offer any income in India, the Assessing Officer raised a query, as to why the receipts on account of AMC should not be brought to tax in India. .................................................................. 11. Drawing our attention to the scope of....
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....ome is taxable in India. Therefore, attribution of profit to the PE in such scenario will not arise. In support of his contention, learned counsel relied upon the following decisions: (i) ADIT Vs. M/s. E Funds IT Solution Inc. (Civil Appeal No.6082 of 2015) (ii) DCIT Vs. Lubrizol Corporation, USA (2017) 83 taxmann.com 13 (Mum. - Trib.) 13. Strongly relying upon the observations of Assessing Officer and learned DRP, learned Departmental Representative submitted, the terms of agreements between assessee and DHR Holding India Pvt. Ltd., coupled with the statement recorded from two of the employees of a customer of the assessee in India clearly demonstrate that DHR India is carrying out functions of an agent of the assessee for sale of scientific equipments and spare parts manufactured by the assessee. Drawing our attention to the statement recorded under section 131 of the Act, he submitted, the Indian customers are negotiating with DHR India not only for purchases but post sales services. Further, drawing our attention to the observations of the Assessing Officer, he submitted, the assessee did not furnish documentary evidences to demonstrate that Indian customers placed ord....
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....assessee and DHR Holding India Pvt. Ltd. is Sales Commission Agreement. On a perusal of this agreement placed at page 13 of the paper-book, it is noticed that the assessee has appointed DHR Holding India Pvt. Ltd. on non-exclusive basis for providing services related to sales, installation, warranty for the products and spare parts sold directly by the assessee to customers in India. Clause 1.1 of the agreement says that the assessee may solicit or, upon an order being placed by a customer, take orders requiring delivery of products, whereas, the assessee designates DHR India Pvt. Ltd. as an authorized warranty-related service provider. Clause 1.2 stipulates the scope of services as per Exhibit - A to the agreement. The scope of services under Exhibit - A are as under: "EXHIBIT A SCOPE OF SERVICES * Interaction and liaising in relation to orders from customers on behalf of AB Singapore. * Other incidental activities like tracking delivery schedules, etc. for the customers based on directions provided by the overseas entities. * Installation of products supplied by overseas entity to customers in India. * Services in relation to warranty claims from customers, etc.....
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....tock and DHR India shall have the right to get a replacement product/part free of cost from the assessee or cross charge the cost of the product/part to the assessee. 17. Thus, the Sales Commission Agreement not only defines the scope of services of DHR India but also makes it clear that DHR India will have to provide the services stipulated under the agreement, regardless, whether the product was purchased from assessee or from DHR India. The scope of services under Exhibit - A to the agreement indicates that the DHR India is required to do liasoning in relation to orders from customers on behalf of the assessee. It also has to do other incidental activities like, tracking of delivery schedule for the customers. It also has to do the installation of products and provide warranty services. Thus, the scope of services do not envisage or grant any authority to DHR India to conclude any contract of sale on behalf of the assessee. 18. The next agreement which needs to be seen is Distribution Agreement. On perusal of a copy of the agreement placed at page 24 of the paper-book, it is to be seen that under the agreement, the assessee has appointed DHR India as its non-exclusive dist....
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....sale in India is on principal to principal basis and no agency relationship is there between the parties. This fact is further clarified from Clause 11.1 which provides that DHR India shall at all times act only as an independent contractor, and never as a legal representative of the assessee. It further provides that nothing in this agreement shall be construed to give either party the power to direct or control the daily activities of the other party, or to allow DHR India to negotiate or conclude contracts on behalf of the assessee, or to constitute the parties as principal and agent, employer and employee, franchisor and franchisee, partners, joint venture partners, co-owners, or otherwise as participants in a joint undertaking. It also makes it clear that DHR India has no right or authority to assume or create any obligation of any kind, express or implied, on behalf of the assessee to any customer or to any other person and/or to waive any right, interest, or claim that the assessee may have against any customer, or other person. Clause 11.2 makes it clear that DHR India shall indemnify the assessee against any claim made by any party resulting from DHR India's acts, omission....
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.... procure any contract or order on behalf of the assessee or any of its group companies or otherwise bind the assessee or any other group companies in any way in this regard. It also provides that DHR India shall conduct or deal with any potential or existing customers in a manner that may lead to the belief that DHR India has the authority to conclude the terms of the contract or to bind the assessee in any manner. It also provides that DHR India may take up/provide such services to any other parties if such arrangement does not prejudice the assessee or its group associates in any manner. Thus, even the Marketing Support Agreement makes it clear that DHR India does not have any authority or power to conclude contracts or enter into any negotiations with the customers on behalf of the assessee. 22. Thus, the three sets of agreements read together or even on standalone basis do not in any manner give impression that DHR India is habitually concluding contract on behalf of the assessee so as to make it a PE under Article 5(8). There is nothing on record, even, to suggest that DHR India is acting as an agent wholly and exclusively for the assessee and not in regular course of its b....
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....) 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. 24. Unfortunately, learned 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. either as warehouse for storage of its products or as a sales outlet for soliciting/procuring orders from Indian customers. Further, there is no cogent material on record to demonstrate that DHR Holding India Pvt. Ltd. habitually exercises authority to conclude contracts on behalf of the assessee or maintains stock of goods or merchandise from which it regularly deliver goods to Indian customers on behalf of the assessee or it habitually secures orders in India wholly and exclusively for the assessee. Thus, none of the ingredients of Article 5(8) are satisfied. The terms of the agreement as well as the conduct of parties do not make out a case for the Revenue that the premises of DHR India would constitute either a fixed place PE or age....
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.... on behalf of the assessee. Thus, there cannot be any PE under Article 5(8) and 5(9) of the Indian - Singapore Tax Treaty. Thus, applying the legal principle to the facts emerging on record, we hold that the assessee does not have any PE in India. Therefore, in absence of PE, the business profits of the assessee cannot be taxed in India. Accordingly, the additions made by way of attribution of profit to the PE in India deserve to be deleted. Accordingly, we do so. 28. For the sake of completeness, we must observe, in course of hearing, learned counsel for the assessee had taken an alternative contention to the effect that, even assuming that assessee has a PE in India, no further attribution of profit can be made to the PE as the transaction between the assessee and DHR India was accepted to be at arm's length, both, in case of assessee and DHR India. For such proposition, he relied upon the following decisions: 1. DIT vs. Morgan Stanley & Co. [2007] 162 Taxman 165 (SC) 2. Honda Motor Co. Ltd., Japan Vs. ADIT (Civil Appeal No. 2833 of 2018, dated 14.03.2018) 3. Ricardo UK Ltd. Vs. DCIT (ITA No.4909/Del.2018 and Ors., dated 17.02.2021) 29. In reply, learned Department....