M/S. MITSUI & CO. LTD.,NEW DELHI vs. DDIT (INTERNATIONAL TAXATION), NEW DELHI

This appeal filed by the assessee is directed against the order dated 29.5.2015 of the Ld. CIT(A) – 43, New Delhi relating to assessment year 2010-11

respect of all equipments supplied under First & Second Contract and other services for Lot- 6 Electrical & Mechanical works of Teesta HE Project (Stage-V).

a) Contract for Erection, Testing and Commissioning of Equipment and Materials in respect of Electro Mechanical Equipment (Lot 6. 1) of Purulia Pumped Storage Project. b) Contract for supply of equipment and materials in respect of Electro Mechanical Equipment (Lot 6.1) of Purulia Pumped Storage Project.

4. The AO asked the assessee to explain as to why the assessment should not be completed following assessment orders for earlier assessment years as the facts of the present case are similar to earlier years. Rejecting the various explanations given by the assessee, the AO held that 10% of income from offshore supplies in respect of Teesta & Purulla projects are to be subjected to tax for determination of income u/s 44BBB of the M/s. Mitsui & Co. Ltd. vs DDIT Income Tax Act 1961 and accordingly made an addition of Rs. 3,17,277/- to the total income of the assssee. The AO further held that income from offshore supplies in respect of Teesta and Purulia projects were liable to be taxed in India under the provisions of Article 7 read with paragraph 6 of the Indo-Japan DTAA protocol. The AO rejected the income declared by the assessee on account of Teesta and Purulia project on receipt basis and adopted mercantile basis for determination of the income from the above two projects and thereby made an addition of Rs. 51,60,745/-, by characterizing it as addition on protective basis. Following his order for assessment year 2005-06 the AO held that MIPL is the DAPE of Mitsui Japan in India by recording following reasons :-

“a) The commission received by MIPL from the assessee is for the purpose of securing orders in India and also ensuring that the assessee is receiving payments against its exports in India. (Reliance placed on commission agreement between Mitsui & Co. and MIPL and service agreement for Instant Noodle Project in India.)

M/s. Mitsui & Co. Ltd. vs DDIT b) MIPL has not received commission from any person outside India other than the assessee or its AEs. Further, the commission received from Indian parties is very negligible.

Therefore, all the conditions listed in Article 5(7) of the DTAA is fulfilled by the assessee. c) MIPL is economically dependent on Mitsui Japan. Reliance is placed in the commentary of Klaus Vogel. d) Reliance is further placed on the decision of the Hon’ble Mumbai Tribunal in the case of DHL Operations B.V. Netherlands. The Hon’ble ITAT has discussed the concept of agency PE in this order. e) Assessee’s contention that MIPL is legally and economically independent is not supported by the intentions of the parties in the actual sense. Reliance is placed on the decision of Apex Court in the cases of McDowell and Co. Ltd., and Raman & Co. (67 ITR 11). f) The Hon’ble Supreme Court in the case of Morgan Stanley has very clearly stated that attribution of profits would depend on the functional and factual analysis to be carried out in each case.

M/s. Mitsui & Co. Ltd. vs DDIT

The above findings are applicable for the present proceedings as well since the facts in both these years are same and this has not been disputed by the assessee with any documentary evidence.

In view of the above discussion, it is held that MIPL is DAPE of Mitsui & Co. Japan in India.”

M/s. Mitsui & Co. Ltd. vs DDIT operation to 20% as against 50% attributed by the AO. He also allowed the commission to the extent of Rs. 43,04,46,449/- as claimed by the assessee and thereby reverting the order of the AO in restricting such commission to Rs. 20,13,71,858/-.

8. Aggrieved with such order of the Ld. CIT(A) the assesse is an appeal before the Tribunal by raising the following grounds of appeal :-

1. “On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad, both in the eyes of law as well as on facts.

2. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in upholding the view of the AO that Mitsui India Pvt. Ltd. has been constituted as a Dependent Agency Permanent Establishment of the assessee company in India. 3. Without prejudice to the above and in the alternative, the learned CIT(A) has erred in not accepting the fact that the transaction between the assessee and Mitsui India Pvt. Ltd. being at arm’s length only, no further profit could be attributable to the assessee. 4. On the facts and circumstances of the case, the learned CIT(A) has erred in holding 20% of the gross trading profits to be attributable to the operations of assessee in India without there being any basis for the same. 5. That the appellant craves leave to add, amend or alter any of the grounds of appeal.”

M/s. Mitsui & Co. Ltd. vs DDIT

4. The Second ground is regarding finding of the learned CIT (Appeals) holding that no income is liable to be attributed in India even if MIPL is considered to be Dependent Agent PE in India. On this issue the learned CIT-DR though stated that though in view of the TPO order under Section 92CA(3) holding the transactions between the assessee and the MIPL at arm's length, addition may not be sustainable, yet argued that MIPL be considered as/Dependent Agent PE in India in terms of Article 5(7) of DTAA between India and Japan. It was contended by the learned CIT-DR on the basis of the allegation levied by the Assessing Officer in the assessment order that MIPL habitually secures order for the assessee in India and MIPL is economically dependent on the assessee as major revenue of MIPL is from the 8

M/s. Mitsui & Co. Ltd. vs DDIT assessee company. Accordingly, it has to be examined whether MIPL can be considered to be a Dependent Agent of the assessee company. In this regard it may be relevant to refer to Article 5(7) of DTAA between India and Japan, which reads as under :- “7. Notwithstanding the provisions of paragraphs 1 and 2, where a person—other than an agent of an independent status to whom paragraph 8 applies—is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if: (a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority, but habitually maintains in the firstmentioned Contracting State a stock of goods or merchandise from. which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise.

9. The fact that a company which is resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not of itself constitute either company a permanent establishment of the other.”

M/s. Mitsui & Co. Ltd. vs DDIT 4.1 As per above clause (7) a person other than an independent agent is treated as PE if he fulfills any of the three conditions, (a), (b) or (c). It is not the case of the Assessing Officer that MIPL habitually exercised authority to conclude contracts. It is also not the case of the Assessing Officer that MIPL habitually maintains a stock of goods or merchandise. Thus, the condition of (a) and (b) are not fulfilled. The third condition in (c) is habitually securing orders for the assessee. In this regard we note that the Assessing Officer has made this allegation on the basis that commission has been paid by the assessee company to the MIPL. On this basis it has been assumed that MIPL is securing orders. This contention of the Assessing Officer does not appear to be correct. As per the agreement which has been quoted by the Assessing Officer in the assessment order, MIPL is supposed to put best effort to collect information with regard to Instant Noodle project etc. to make the best effort to find the best candidate, to attend/take care of the visitor from Japan, to make the best effort to analyze the feasibility report. None of these clauses can be interpreted to mean that MIPL is securing orders. On the basis of this clause the Assessing Officer was wrong in assuming that MIPL is securing orders. The Assessing Officer has not brought any other material to substantiate his allegation that may demonstrate that MIPL has secured orders for the assessee. It is to be noted that this clause (c) uses the word 'habitually secures orders'. Thus, there has to be procurement of orders habitually. As against this the assessee's contention has been that MIPL is only providing support services and it is not securing order on behalf of assessee company. It may be relevant to further mention that the expression 'has' shall mean a legal existence. Whereas 'habitually secures orders' shall mean a systematic conduct on the part of the agent. Thus it is not only a legal right to secure order but also it is to be found, as a matter of fact that agent has habitually secured order. 4.2 Further, in this case the TP study of MIPL was subject matter of examination by the TPO. The FAR (Function performed, Assets deployed and Risk assumed) analysis has been accepted by the TPO. These agreement on the basis of which Assessing Officer has levied

M/s. Mitsui & Co. Ltd. vs DDIT the allegation were also before the TPO. Thus, there cannot be any allegation that MIPL has performed any function beyond what has been stated. Functional and economic analysis of the transactions entered into having been examined nothing further can be imputed. The services of MIPL to assessee company were support services similar to the activities of a Liaison offices. This fact gets also supported from the finding recorded by the Assessing Officer himself in the assessment order on page 26 whereby it has been stated by the Assessing Officer that MIPL is functioning in the same manner as the LOs of the assessee are functioning in India. It has already been held that LOs do not constitutes PE in India. Thus, the functioning of MIPL though a subsidiary and a company incorporated in India but its activities vis-à-vis assessee company were akin to liaison office. It does not have authority to conclude contract, it was not maintaining any stocks of goods and merchandise nor it was securing order for the assessee company. In view of the above facts we reject the contention of the learned CITDR that MIPL habitually secures order for the assessee company. And accordingly, none of the condition prescribed in Article 5(7) are fulfilled. 4.3 The second contention of the learned DR was that MIPL is economically dependent on assessee company as major revenue of MIPL is from assessee company. We are of the view that this per se cannot be ground to hold that MIPL is a Dependent Agent. For invoking this clause, first one of the three conditions needs to be fulfilled. As we have held hereinabove that MIPL does not get covered as PE under Article 5(7), it cannot be considered to be a Dependent Agent. The learned DR also made a reference to Conventions on Double Taxation by Klaus Vogel to support its contention that where a person works only for one principle such person is economically dependent on the principal, in "these circumstances the agent though not legally but will be bound to obey his principal's instructions and be regarded as being Dependent Agent. This contention of the learned CIT- DR again ignores the basic requirement i.e. fulfilling one of the three conditions. It is also important to note that the DTAA provide for treating a person as Dependent Agent. The DTAA has to be strictly interpreted. The DTAA having prescribed the conditions, no further

M/s. Mitsui & Co. Ltd. vs DDIT conditions can be read. What learned CIT-DR is canvassing will mean adding new condition in the DTAA. Further, it may be relevant to note that as per Para 9 of this Article 5 in DTAA, it has been specifically provided that if a company in the contracting state is controlled by a company in the other contracting state that itself shall not itself constitute either of company a permanent establishment of the other. Thus, the fact that MIPL is controlled by the assessee company shall not mean that MIPL is a PK of the assessee company. 4.4 Our view gets supported by the judgment of Hon’ble Delhi High Court in the case of Director of Income Tax And Others Versus M/s. E Funds IT Solution and Others 364 ITR 256 Delhi, where the Hon’ble court has held as under:- "

M/s. Mitsui & Co. Ltd. vs DDIT

“53. After hearing both the sides, we find the ground of appeal No.1 by the assessee relates to the order of the CIT(A) holding the assessee a Dependent Agent Permanent Establishment. After hearing both the sides, we find the above-ground raised by the assessee is identical to ground of appeal No.4 raised by the revenue in ITA No.2801/Del/2011. We have already decided the issue and following the decision of the Tribunal in assessee’s own case for A.Y. 2005-06 have dismissed the ground raised by the Revenue.”

M/s. Mitsui & Co. Ltd. vs DDIT 11.1 Since the lower authorities following the orders of the preceding years have held that M/s. Mitsui & Co. Ltd. has been constituted as Dependent Agent PE of the assessee company in India , therefore, following the consistent decisions of the Tribunal in assessee’s own case in the preceding assessment years and in absence of any contrary material brought to our notice against the decision of the Tribunal we hold that MIPL is not a Dependent Agency Permanent Establishment of the assessee. Ground No. 2 of the assessee’s appeal accordingly is allowed.

“This issue is squarely covered by the assessee’s own case for the AY 2005-06 by the order of Hon’ble ITAT Delhi dated 14.09.2017 bearing ITA No. 2335/Del/2011. Copy of ITAT order is enclosed at PB Pg. 31-58.The relevant findings of the court are as under (PB Pg. 48) The ground 2 raised in Revenue appeal is regarding attribution of the income if MIPL is taken as Dependent Agent PE. Though, this ground becomes academic in nature in view of 17

M/s. Mitsui & Co. Ltd. vs DDIT our finding holding that MIPL is not Dependent Agent PE of the assessee company but since this issue forms part of the ground No. 2 in Revenue's appeal the same is being decided on merit as well. 5.1 The Assessing Officer has made the addition holding that MIPL is a Dependent Agent PE and has computed 50 per cent of the profit in respect of the turnover in India. The learned CIT (Appeals) has deleted the addition holding that Transfer Pricing Officer has specifically stated in his order that Transfer Pricing documentation which contains the functional and economic analysis of comparable and of the assessee, has been examined. The learned CIT-DR was fair enough to point out that the Assessing Officer made the addition since at the time of passing of the assessment order he was not having benefit of the order passed under Section 92CA(3) by the TPO in the case of MIPL and the learned CIT (Appeals) has deleted the addition after taking into consideration the order passed by the TPO which was available to him by that time. 5.2 It is a fact on record that the TPO has carried out functional and economic analysis of the activities performed by MIPL towards the assessee company. No adverse inference has been drawn in respect of the same. All these facts were before the TPO. This issue is also covered by the judgment of the1Supreme Court in the case of DIT International Taxation Vs. Morgan Stanley and Co. 292 ITR416 (SC), where the court has approved the ruling delivered by the authority for advance holding that once a Transfer Pricing analysis is undertaken, there is no further need to attribute profit to a PE.”

No.2 and 3, the assessee has challenged the order of the CIT(A) in upholding the action of the AO regarding attribution of profit @ 20% of the gross trading profit determined by the CIT(A).

55. After hearing both the sides, we find this issue stands decided in favour of the assessee by the decision of the Tribunal in assessee’s own case for A.Y. 2005- 06 where it has been held that the assessee is not a Dependent Agent Permanent Establishment and no income is attributable. Respectfully following the decision of the Tribunal in assessee’s own case for the preceding assessment year, grounds of appeal No.2 and 3 raised by the assessee are allowed. Thus, in view of the above, issue is squarely covered by the assessee;s own case and no income is attributable.”

M/s. Mitsui & Co. Ltd. vs DDIT