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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & SHRI SANDEEP SINGH KARHAIL, JM
A.Y. 2019-20 and for A.Y. 2018-19 is filed by the assessee against the order passed under Section 263 of the Income-tax Act, 1961 (the Act) by the CIT, International Taxation-3, Mumbai, dated 7th June, 2022 for A.Y. 2017-18 and A.Y. 2018-19.
2. The assessee has raised following grounds of appeal for A.Y. 2018-19:-
The Appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab initio addition the original assessment order of the Assessing Officer be restored.
2. On the facts and circumstances of the case and in law, the CIT erred in holding that the assessment order is erroneous and prejudicial to interest of revenue on the issue of profits attributable to Appellant‟s Permanent Establishment („PE‟) in India even though the same had been discussed and scrutinized by the Assessing Officer in detail while framing the assessment under section 143(3) of the Act and passing order dated 15 April 2021.
The Appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab initio.
3. Without prejudice to Ground numbers 1 and 2, on the facts and circumstances of the case and in law, the CIT erred in holding that the method of computing profits of ₹ 4,79,33,403 attributable to PE as adopted by appellant is inappropriate whereas the The Appellant prays that the percentage of profits as attributable to Appellant‟s PE in India should be restored to 24% and that profits attributable to its PE in India should be determined on net basis after granting deduction for full operating expenses.
4. Without prejudice to Ground numbers 1, 2, and 3 above, on the facts and circumstances of the case and in law, the CIT erred in placing reliance on the decision of the Hon‟ble Delhi High court in the case of Rolls Royce PLC 339 ITR 147 (Del), without appreciating that facts of the Appellant‟s case are different than the facts in the case of Rolls Royce.
5. Without prejudice to Ground numbers 1, 2, 3 and 4 above, on the facts and circumstances of the case and in law, while the CIT has relied on the decision of Rolls Royce PLC (supra) to justify his action to attribute higher amount of profits to Appellant‟s PE in India, the CIT erred in attributing gross profit to the Appellant‟s PE in India after reducing only the marketing fees paid to agent in India whereas in the case of Rolls Royce (supra) profits attributable to India as computed on net basis.
6. Without prejudice to Ground numbers 1, 2, 3, 4 and 5 above, on the facts and circumstances of the case and in law, the CIT erred in not applying the operating profit ratio of 1.67% for computing the profits attributable to Indian PE which would have been in line with the decision in the case of Rolls Royce PLC 339 ITR 147 (Del) as relied on by the CIT himself to compute the income of the Appellant.
The Appellant prays that the CIT to be directed apply 1.67% operating profit ration to arrive at net profit attributable to Indian operations.
7. Without prejudice to Ground numbers 1, 2, 3, 4, 5 and 6 above, on the facts and circumstances of the case and in law, the CIT erred by not considering that since the PE in India was remunerated at arm‟s length price no further attribution of income is warranted as per decision of Hon‟ble Supreme Court in the case of Morgan Stanley & Co. 292 ITR 416 (SC) and thus the original assessment order of the Assessing Officer is not erroneous and prejudicial to interest of revenue.
The Appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab initio.”
“1. On the facts and circumstances of the case and in law, the order passed by the CIT under section 263 of the Act enhancing and modifying the assessment framed under section 143(3) of the Act vide order dated 29 October 2021 as erroneous and prejudicial to the interest of the revenue is without jurisdiction, bad in law and void ab-initio.
The appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab initio and the original assessment order of the Assessing Officer be restored.
2. On the facts and circumstances of the case and in law, the CIT erred in holding that the assessment order is erroneous and prejudicial to interest of revenue on the issues of profits attributable to Appellant‟s Permanent Establishment („PE‟) in India even though the same had been discussed and scrutinized by the Assessing Officer in detail while framing the assessment under section 143(3) of the Act and passing order dated 29 October.
The Appellant prays that the order dated 7 June 2022 passed under section 263 of the Act, by the CIT be struck down as invalid, null and void ab-initio
3. Without prejudice to Ground Number 1 and 2 above, on the facts addition circumstances of the case and in law, the CIT erred in holding that the The Appellant prays that the percentage of profits as attributable to Appellant‟s PE in India should be restored to 24% and that profits attributable to its PE in India should be determined on net basis after granting deduction for full operating expenses.
4. Without prejudice to Ground Number 1, 2 and 3 above, on the facts and circumstances of the case and in law, the CIT erred in placing reliance on the decision of the Hon‟ble Delhi High Court in the case of Rolls Royce PLC 339 ITR 147 (Del), without appreciating that facts of the Appellant‟s case are different than the facts in the case of Rolls Royce.
5. Without prejudice to Ground number 1, 2, 3 and 4 above, on the facts and circumstances of the case in law, while the CIT has relied on the decision of Rolls Royce PLC (Supra) to justify his action to attribute higher amount of profits to Appellant/s PE in India, the CIT erred in attributing gross profits to the Appellant‟s PE in India after reducing only the marketing fees paid to agent in India whereas in the Appellant prays that profits attributable to its PE in India should be determined on net basis after granting deduction of full operating expenses incurred by the appellant from the gross profit to derive income attributable in India.
6. Without prejudice to Ground number 1, 2, 3, 4 and 5 above, on the facts addition circumstances of the case and in law, the CIT erred in not applying the operating profit ration of 6.70% for computing the profits attributable to India PE which would have been in line with the decision in the case of Rolls Royce PLC 339 ITR 147 (Del) as relied on by the CIT himself to compute the income of the Appellant.
The Appellant prays that the CIT to be directed to apply 6.70% operating profit ratio to arrive at net profit attributable to India operations.
7. Without prejudice to Ground numbers 1, 2, 3, 4, 5 and 6 above, on the facts and circumstances of the case and in law, the CIT erred by not considering that since the PE in India was remunerated at arm‟s length price no further attribution of income is warranted as per decision of Hon‟ble Supreme Court in the case of Morgan Stanley & Co. 292 ITR 416 (SC) and thus the original assessment order of the Assessing Officer is not erroneous and prejudicial to interest of revenue.
5. The learned Assessing Officer accepted the ratio of 24% gross profit ratio for attribution of profits. Accordingly, the total income of the assessee was assessed under Section 143(3) of the Act by learned DCIT, International Taxation, Circle 3(2) (1), Mumbai under Section 143(3) of the Act as per order dated 15th April, 2021 at the returned income.
The learned PCIT, on examination of the records, found that the reason for selection of case for scrutiny was the large claim of refund, which has arisen because of ratio of attribution of profit. The learned Assessing Officer has not applied his mind on the FAR analysis submitted by the assessee on the issue of attribution of income to the permanent establishment. The learned Assessing Officer has also not conducted proper enquiry. Further, marketing expenses accepted as borne exclusively by the assessee is again incorrect and without due application of mind. Therefore, the profit further reduced by the assessee by ₹11.68 crores is not correct. Accordingly, a notice under Section 263 of the Act was issued on 4th April, 2022 holding that the assessment order passed on 29th April, 2021, was erroneous and prejudicial to the interest of the Revenue.
8. Identically revisionary order was also passed for AY 2019- 20.
The ld CIT DR relied up on the orders of the ld PCIT.
We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also carefully gone through the order passed under Section 263 of the Act by the learned PCIT. We also find that identically for A.Y. 2017-18 the learned PCIT invoked the provisions of Section 263 of the Act vide order dated 25th March, 2022, which travelled before the co-ordinate Bench in wherein the order dated 30th August, 2022 was passed setting aside the revision order for that year. There is no change in the facts and circumstances of the case.
12. The co-ordinate Bench held as under:-
“1. By way of this appeal, the assessee appellant has called into question correctness of the order dated 25th March 2022, passed by the learned
On the fact and in the circumstances of the case and in law, the order passed by the CIT under section 263 of the Act, enhancing and modifying the assessment framed under section 143(3) of the Act vide order dated 18 December 2019, as erroneous and prejudicial to the interest of the revenue is without jurisdiction, bad in law and void ab initio.
To adjudicate on this appeal, only a few undisputed material facts need to be taken note of. The assessee before us is a company incorporated in, and tax resident of, Malaysia, and there is no dispute on the point that the assessee is entitled to the benefits of the India Malaysia Double Taxation Avoidance Agreement [Indo-Malaysian tax treaty, in short]. The assessee group has a wholly owned subsidiary in India, by the name of MFE Formwork Technology India Pvt. Ltd (MFE-India, in short). The assessee has entered into a Marketing Service Agreement (MSA) with 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:
The assessee has computed its profits, under the „Dual Taxpayer Approach‟ or the „Authorised OECD Approach (AOA)‟- as it is technically termed, in the paragraph 4 and 5 of the assessment order, as follows:
4. During the course of assessment the AR was asked to submit the Computation of Income for the Return of Income filed by the assessee for the year under consideration. It was seen from the Computation of Income filed by the AR that the assessee has computed profit attributable to the activity of PE in India from the sales made in India. From the Computation of Income filed by the Assessee, it is seen that for the purpose of determining the profits attributable to tax in India, the Assessee Company had attributed 24% of Gross Profits based on FAR Analysis carried out. The AR explained the basis of Computation as under:
Step Particulars Basis Amt (Rs) 1. Sales made in India Sales made to 1,691,493,506 customers in India during the relevant financial year. 2. Less: Cost of Sales In ratio of overall 1,305,157,104 cost of sales incurred by the Assessee Company for global operations, based on the Global Financial
The Assessing Officer accepted the computation of profits attributable to the dependent agent permanent establishment, and, accordingly, proceeded to finalize the assessment. The matter, however, did not rest there. The assessment so finalized was subjected to revision proceedings mainly on the ground that “no enquiry has been conducted with regard to how attribution of 24 percent gross profit was arrived at” and that “the Assessing Officer has simply accepted the Function Asset Risk Analysis [FAR analysis] submitted by the assessee company disregarding several other factors, which demonstrate lower than Arm‟s Length Profit are attributed to Indian operations”. The learned Commissioner then proceeded to reject the FAR analysis on the basis of which PE profits were computed, and proceeded to compute, under rule 10 of the Income Tax Rules,
When this appeal came up for hearing, it was noticed that admittedly the form of permanent establishment is a dependent agent permanent establishment (DAPE), and there also does not seem to be any controversy about the 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
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 “erroneous in so far as it is prejudicial to the interests of the revenue”. In other words, even if an order is erroneous but is not prejudicial to the interest of the revenue, the provisions of Section 263(1) cannot be put into service. In the case of Malabar Industrial Co Ltd Vs CIT [(2000) 243 ITR 83 (SC)], the Hon‟ble Supreme Court has elaborated upon this point and observed that “A bare reading of this provision makes it clear
……….At this stage we may note that on behalf of the assessee learned Counsel has produced an order passed by the Additional CIT (Transfer Pricing-II), Mumbai in the matter of determination of arm's length price with reference to all the transactions reported in Form No. 3CEB filed by the assessee. The assessee is SET India, the depending agent. The order records that the assessee is engaged in the business of providing audio-visual television content and also acts as an advertising agent of Set Satellite Singapore Pvt. Ltd. The assessee distributes these channels to the Indian cable operators and that the assessee has applied the TNM method to determine the arm's length price for its
We may now consider the judgment in Morgan Stanley & Co. Inc's case (supra). The Appeals dealt with the Double Tax Avoidance Agreement (DTAA) between India and United States. That treaty advocated application of the arm's length principle or provided a mechanism for avoiding double taxation on income. The issue involved, Morgan Stanley and Company (for short, "MSCo.") and one of the group companies of Morgan Stanley, Morgan Stanley Advantages Services Pvt. Ltd. (for short "MSAS"). An agreement was entered into for providing certain support 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 "As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm's length principle we have quoted Article 7(2) of the DTAA. According to the AAR where there is an international transaction under which a nonresident compensates a PE at arm's length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by the Central Board of Direct Taxes. This is the key question which arises for determination in these civil appeals."
"As regards attribution of further profits to the PE of 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 the present case, there does not appear to be any dispute with respect to the ascertainment of the arm‟s length price of the services rendered by the dependent agent to the assessee, as no ALP adjustment is made in the remuneration paid by the assessee to the MFE India, i.e. the dependent agent. There are also several indications to suggest that DA and DAPE are being treated as distinct taxpayers, inasmuch as while the arm‟s length payment to the agent is not being questioned, the FAR analysis for the PE has been called into question. The two taxpayer approach adopted by the assessee has been accepted, and, taking it further, the profit attribution on the basis of the two taxpayer approach is enhanced. Even if that computation 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-à-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
In view of the above discussions, as also bearing in the entirety of the matter, we are of the considered view that unless the order sought to be revised cannot be said to be prejudicial to the interest of the revenue, its being erroneous, even if that be so, cannot be said to reason enough to invoke section 263 of the Act, and the order cannot be said to be prejudicial to the interests of the revenue unless there is a categorical finding that the dependent agent 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.
11. In the result, the appeal is allowed. Pronounced in the open court today on the 30th day of August 2022.”
We find that the order of the Co-ordinate Bench squarely covered the issue before us. Therefore, respectfully following the decision of the co-ordinate Bench, we also set aside the impugned order passed by the learned PCIT under Section 263 of the Act for A.Y. 2018-19 and 2019- 20. Accordingly, both the appeals filed by the assessee are allowed.
In the result, both the appeals of the assessee are allowed.
Order pronounced in the open court on 24.01.2023.