TMI Blog2023 (3) TMI 782X X X X Extracts X X X X X X X X Extracts X X X X ..... mar, Accountant Member And Sh. Yogesh Kumar US, Judicial Member For the Assessee : Sh. Ajay Vohra, Sr. Adv For the Revenue : Sh. Anshuman Pattnaik, CIT(DR) ORDER Per Bench The present appeals have been fi led by the assessee against the order ld AO dated 27.01.2023 for Assessment Years 2013-14 to 2016-17 and 2020-21 respectively. 2. The assessee has raised the following grounds of appeal in ITA No. 406/Del/2023 for AY 2013-14:- General Grounds Ground 1: On the facts and circumstances of the case and in law, the Ld. AO has erred in reopening the assessment under sect ion 147 of the Act . The act ion of the Ld. AO is illegal , unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the reassessment proceedings being illegal and without any basis. Ground 2: On the facts and circumstances of the case and in law, the Ld. 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 quash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance set out in this regard. Ground 8: On the facts and circumstances of the case and in law, the Ld. AO erred in applying an ad-hoc approach and rejecting the arm's length principal even though the Rule 10 of the Act is not applicable. Ground 9: The Ld. AO and the Hon'ble DRP grossly erred in law in ignoring the jurisprudence of the Hon'ble Supreme Court in the case of DIT vs. Morgan Stanley [2007] 7 SCC / holding that once the AE is remunerated on arm's length basis, there should be no further attribution. Ground 10: On the facts and circumstances of the case, the Ld. AO/ Hon'ble DRP erred in attributing excessive profits to the alleged PE on an ad-hoc and arbitrary basis, by not considering commercial and economic factors governing the business of the Appellant and completely ignoring al l submissions of the Appellant in this regard. In doing so, the Ld. AO erred in: 10.1 Applying an ad-hoc methodology 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 dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... draft order of the AO holding that the it shall not deviate from the view taken in the previous years on the impugned issue and do not find any ground for deviating from the previous year s directions. However, the panel has duly taken cognizance of the order of the ITAT and mentioned the same in their order. 5. For the sake of ready reference the order of the Tribunal in the case of the assessee for the AY 2017-18 in ITA No. 514/Del/2021 order dated 29.04.2022 is reproduced in its entirety:- 3. The core issue arising in the appeal, as urged in ground no. 1 to 4, is whether the assessee has a Permanent Establishment (PE) in India. Of course, there are ancillary and incidental issues raised in other grounds, including attribution of profit to the PE, in case, it is held that the assessee has PE in India. However, at the outset, we will deal with the core issue as to whether the assessee has a PE in India. 4. Briefly the facts relevant for deciding the issue are, the 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer is not belonging to the assessee but belongs to DHR Holding India Pvt. Ltd. for its own inventory. 12. Without prejudice, he submitted, the conclusion of the Assessing Officer is based entirely on the statement recorded from two employees of a customer of assessee, viz., M/s. Arbro Pharmaceuticals Pvt. Ltd. He submitted, those employees are not employees of the assessee or DHR Holding India Pvt. Ltd. Therefore, their statements, if at all adverse to the assessee, would not have any relevance. He submitted, in any case of the matter, the statements recorded from the concerned employees were neither confronted to the assessee nor any opportunity of cross examining them was offered to the assessee. Thus, he submitted, the Assessing Officer has not properly understood the legal relationship between the parties. He submitted, since the assessee did not have either fixed place PE or dependant agent PE in India, no part of its income 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 App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffected directly from Singapore and no part of such sale was carried out in India. It has been submitted, in respect of such direct sales, the assessee had entered into AMC with the Indian customers and all AMC and warranty related services are subcontracted to DHR Holding India Pvt. Ltd. 15. The aforesaid claim of the assessee carries some strength in view of the sample copy of invoices placed in paper-book. On perusal of such invoices, it becomes very much clear that sales to Indian customers have been directly made by the assessee from Singapore. It is also evident, in respect of such sales the assessee has also entered into AMC with Indian customers. It is the contention of learned counsel for the assessee that all AMC and warranty related work has been sub-contracted to DHR Holding India Pvt. Ltd. As stated by the Assessing Officer, the assessee had entered into three separate agreements with DHR Holding India Ltd. The first agreement between the 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-exclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy between the products and shipping documents. Clause 4.1 says, the assessee reserves the right to sell or lease directly any product for post warranty services contract for ultimate use within the territory, regardless of whether the customer placing such order is located within or outside of the territory. Clause 5.1 provides, in respect of any direct sales by the assessee within the territory, the assessee shall pay DHR India a commission applied against the net sales price of the product towards remuneration for the assistance rendered and to be rendered, and the business goodwill developed by DHR India and such commission shall be payable by the assessee to DHR India upon the issuance of the invoices for the products shipped to the customers. Clause 11 of the Treaty say, DHR India shall report all warranty claims made in respect of all products to the assessee. In case of providing any spares under warranty/maintenance, DHR India will provide for the same out of its own stock 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 Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to the carrier contracted by the assessee to deliver the product. Clause 2.3 says, DHR India shall be the importer of record in respect of products purchased by and imported into the territory by DHR India. Further, DHR India shall be responsible for all actions necessary to obtain clearance to import all products into the territory. Clause 2.5 confers right to DHR India to cancel or reschedule any of its purchase orders for the products. However, such cancellation or rescheduling has to be in terms with the agreement. Clause 2.6 provides that during the term of this agreement, DHR India shall be entitled to purchase products from the assessee, subject to, resale or distribution discount. Clause 3 of the agreement provides for prices of products and terms for distribution activities as well as discounts to be provided thereon. 19. Thus, a reading of the Distribution Agreement as a whole, makes it clear that the purchase of products by the DHR from assessee for the purpose of resale 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er incidental marketing activities. Interaction with the customers for providing any clarifications from time to time Receipt of complaints from customers in relation to issues faced on the products sold''' directly by the overseas entities Ensure timely payment by the customer against deliveries made by overseas entities from time to time On overseas s entities request, act as a transmission channel to receive and transmit copies of any documents: Any other incidental activities in relation to servicing that may be required by the customers; 21. For providing such services, the assessee is to be remunerated at cost plus markup at arm s length basis. Clause 4 of this agreement defines the status of DHR India as an independent contractor which does not have and cannot represent itself as having any authority to enter into any obligation on behalf of the assessee or to bind the assessee contractually in any way. It also stipulates, DHR India has no authority to negotiate or conclude or 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 compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outlet is not borne out from the materials on record. The facts on record clearly reveal that the assessee s employees have never visited India. Direct sales to Indian customers were made from Singapore through shipment. The sales effected by DHR India are on its own independent status. Therefore, the products 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a which is at the disposal of the non-resident entity through which it carries on its own business. In the facts of the present case, it is not disputed that there is no direct presence of the assessee in India. It is an admitted factual position that none of the employees of the assessee company ever visited India in connection with assessee s business. Whatever sales of products have been effected to Indian customers is directly from Singapore. Thus, applying the ratio laid down by the Hon ble Supreme Court, as aforesaid, it has to be held that there cannot be any fixed place PE of the assessee in India. This is so because the revenue authorities have failed to discharge their initial burden of proving such fact. 27. As regards DHR India constituting the dependant agent PE, we have already deliberated on the issue and have held that no material has been brought by the departmental authorities to demonstrate that the Indian entity habitually exercises its authority to conclude contract etc. in terms of Article 5(8) or its activities are wholly devoted on behalf of the assessee. Thus, there cannot be any PE under Article 5(8) and 5(9) of the Indian Singapore Tax Treaty. Thu ..... 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