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TMI Blog2024 (3) TMI 1384X X X X Extracts X X X X X X X X Extracts X X X X ..... al has decided only on the issue of existence of PE, but not adjudicated the part of attribution of profit as the same was academic. 2. As against the orders of the Tribunal dated 26/12/2022 and 29/04/2022 for A.Y 2017-18 to 2019-20, the Department of Revenue approached Hon'ble High Court of Delhi in ITA No. 800/2023 & CM APPL No. 66565/2023, ITA No. 801/2023 & CM APPL No. 66672/2023 and ITA No. 803/2023 and CM Appeal No. 66727/2023. The Hon'ble High Court, vide order dated 21/12/2023 noted that the Tribunal has dealt only with first issue and concluded that the assessee neither fixed place (PE) nor a dependent PE in India as the Tribunal reached the said conclusion, observed that the other issues was academic. Further observed that as the assessee had raised an alternative plea concerning the second issues, without disturbing the orders of the Tribunal and with the consent of the parties, remitted the matter to the Tribunal for rendering a decision with regard to second issue i.e. attribution of profit. The Relevant portion of the order of the Hon'ble High Court is reproduced as under:- 7. The record shows that two issues arose for consideration before the Tribunal. Fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent) and international guidance set out in this regard. Ground 6: 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 1 holding that once the AE is remunerated on arm's length basis, there should be no further attribution. Ground 7: 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 all submissions of the Appellant in this regard. In doing so, the Ld. AO erred in: 7.1 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 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 arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Since in the present case the functional analysis carried out in step 1 by the Hon'ble Tribunal was already answered in negative that the India entity did not perform any additional functions that would lead to creation of a PE in India, the remuneration for the same would ideally be NIL Thus, the amount of profits already offered to taxes by the Indian entity should be considered to be at arm's length and no further attribution is required. Owing to the following: Methodical benchmarking analysis submitted by the Appellant on a without prejudice basis DHR India has received the following remuneration from AB Sciex w.r.t. provision of services which were alleged to create a PE in India: * DHR India has received the following remuneration from AB Sciex w.r.t. provision of services which were alleged to create a PE in India: (i) Commission of 9% under the Sales Commission Agreement (ii) Cost-plus arm's length markup(10%) under the Marketing Support Service Agreement DHR India offered the above incomes to tax in India, which ought to be the maximum remuneration/ attribution for the functions performed by it, since the Appellant does not have a PE in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Transfer Pricing documentation. The functions/activities as performed by the assessee's AE, DHR India as PE of the assessee are additional functions/services such as DHR India acting as an Indian representative of the assessee company, maintains inventory warehouse in its premises, habitually exercised a predominant role in negotiating and concluding of contracts, for which no attribution has been made by the assessee since the assessee all along held that it does not have any PE in India. In view of the above, once it is held that the assessee has a PE in India, there is requirement for attribution of profits to the PE of the assessee, namely DHR India for the additional functions/ activities and services (as PE) performed by it. 12. Regarding the rate of attribution, the assessing officer has taken support from decision of Hon'ble Delhi ITAT in the case of Rolls Royce P/c. v. DDIT (2008) 113 TIJ 446, wherein it was held that 35% of profits on sale of equipment supplies can be attributed to the PE. Accordingly, the AO rightly attributed 29% of the total profits earned from supplies as profit of the AE considering the global net profit rate of 9.5% as provided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even if no adverse inference is drawn by the Transfer Pricing officer in the case of DHR India on the arms length nature of the commission transaction between the assessee and DHR India, it was not possible for the TPO to comment on the additional functions carried out by DHR India in the capacity of the dependent agent PE of the assessee in India. Furthermore, the additional functions performed by DHR India would also not have been reported by DHR India in its Form 3CEB and TP study. Hence, the arm's length transaction and no further attribution argument of Morgan Stanley Case cannot be relied upon by the assessee in the present case. It is pertinent to mention here that the case of neither the assessee company nor its PE, DHR India has been referred to the TPO. (vi) Lastly the assessee contended that employees referred to in the Statement recorded u/s 131 viz Himanshu Tyagi and Chhaya Warang are empolyees of DHR India. The undersigned also maintains that the above mentioned employees are employees of DHR India, and since DHR India is acting as PE of the assessee in India, the employees are working for AB Sciex only. Finally the Undersigned would want to reiterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered as the gross profit earned by the alleged PE for the commission segment * Total remuneration on sales earned by DHR India through provision of support service (i.e. commission of 9% and cost-plus 10% mark up) was converted to an equivalent return on sales of 17%. * Net attribution was worked out to 46%-17%=29%. 3 Global profitability rate (9.5%) was applied to the effective remuneration expected to be earned in step 3 above. 10. It is the claim of the Assessee that the aforesaid approach adopted by the Ld. A.O. for attribution of profit to the alleged PE of the Assessee is flawed due to the following reasons:- "DHR India does not make 46% gross profit in the buy sell segment as owing to the following, DHR India bears custom duties on imports in the buy sell segment- the cost of which has not been considered by the Assessing Officer, DHR India bears the warehousing cost in the buy sell segment - the cost of which has not been considered by the Assessing Officer, Certain amount of discount received by DHR India is also pushed down to ultimate customers which enables sales which has been completely ignored by the Assessing Officer, DHR India bears t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abases to identify independent distributors in India engaged in sale of similar products. * The Gross Profit Margin ('GPM') earned by independent distributors were adjusted to bring their GPM comparable to the commission earning entities considering the alleged PE was not performing the functions w.r.t. (i) Inventory; (ii) Credit holding; and (iii) Custom duty Results are provided below: Assessment Years Adjusted Average independent companies GPM 2017-18 13.64% 2018-19 11.80% 2019-20 15.50% 13. In view of this matter, since the AE has already been remunerated at arm's length, no further profit ought to be attributed to the alleged PE of the Assessee in India, this view is supported by the decision of the Hon'ble Supreme Court in the case of Director of Income Tax (International Taxation Vs. Morgan Stanly and Company (2007) 162 Taxman 165 Hon'ble Supreme Court, wherein it is held as under:- "The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength, adjustment can only be made in the transfer pricing assessment of the dependent agent and there could be no addition in the hands of the non-resident (which is held to have a PE in India in the form of the dependent agent). The relevant observations are reproduced hereunder:- 25. We may also mentioned that according to the A.O, the profits attributable to the activities carried out by Adobe India area to be ascertained by PSM as, according to him the Cost Plus method used by Adobe India for determining the ALP doe s not fairly capture the profits which could legitimately be taxed under the Act. In our view, the question as to which is the correct method of determining the ALP can only be debated in proceedings relating to the assessment of Adobe India. 26. The fact that the A.O. has not succeeded in persuading the DRP to accept his point of view, cannot possibly provide him a reason to now try and assess profits calculated on PSM in the hands of the Assessee." 16. Considering the above facts and legal position, we hold that no business profits are attributable to the alleged PE of the Assessee in India. In the result, the second issue which was remanded by the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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