DCIT, (IT)-2(1)(2), MUMBAI vs. DNV SE- INDIA BRANCH, MUMBAI

Brief facts of the case are that the assessee-company is a tax resident of Germany and engaged in the business of inspection and certification services in Marine Industries, filed its return of income on 30.11.2011 declaring total income of Rs. 30,57930/-. The return of income was DNV SE-India Branch selected for scrutiny. In the return of income the assessee reported international transaction with its associated enterprises (AE). The assessee selected comparable uncontrolled price (CUP) as most appropriate method to conclude the transaction at arm’s length. The assessing officer made reference under section 92CA(1) to transfer pricing officer (TPO) for computation of Arms Length Price (ALP). The learned TPO after granting opportunity to the assessee suggested upward of adjustment of Rs. 2,78,87350/-. The assessing officer while passing the final assessment order also made addition of Rs. 1,43,48,061/- on account of head office share of income in invoice raised by heard office and addition of Rs. 1,35,39,289/- on account of head office share of income in invoice raised by branch. The assessing officer made additions by taking his view that, though, the assessee had given breakup of invoices bill wise showing the share of head office and sheer offered by the assessee in their hands, no convincing reply was offered is too high head office share was not offered for taxation in India. The assessee is a branch and therefore PE of the principle. Though, services were rendered in India and source of income in India. Therefore the entire receipt resulting out of activities of the branch office in India arise in India.

There is no basis of treating head office share exempt as whole income generated from activities of branch office in India. All the activities were DNV SE-India Branch held in Indian what and there was no specific work located to the head office for which income arise in Indian Territory have to pay to head office branch in such big ratio. The allocation of revenue based on a split ratio, provided by head office is presumptive and not actual. Therefore, the assessing officer took the view that in absence of specific finding, and failure on the part of assessee to substantiate its claim adequately, the head office share is also taxable in India. The assessing officer after receipt of the report/ order of TPO passed and served draft assessment order under section 143(3) rws 144C (1) on 31.03.2015 to the assessee.

On appeal before the ld. CIT(A), the additions addition of Rs. 1,43,48,061/- on account of head office share of income by heard office and addition of Rs. 1,35,39,289/- on account of head office share of income by branch was deleted. The upward adjustment suggested by TPO of Rs.2,78,87350/- was also deleted. While deleting the transfer pricing adjustment ld CIT(A) hold that the while determination of APL, when the TPO concluded that the CUP cannot be applied, TPO should have adopted one of the five method prescribed under the section 92C of the Act. The ld. Commissioner (Appeals) concluded that the TPO has not determined ALP in accordance with the provisions of section 92C, therefore, the order of TPO is not correct. Being aggrieved against the order of learned CIT(A) the revenue has filed the present appeal by raising the following grounds of appeal.

In without prejudice submission, the learned AR of the assessee submits that the transfer pricing analyses and adjudication of Arm’s Length Price is case subset of the overall profit attribution exercise of a foreign taxpayer in India. Once the overall attribution and taxability thereon has been accepted, the transfer pricing analyses will not yield any result/ finding contrary to the attribution evaluation. In support of his submission the learned AR of the assessee relied upon the decision of Hon’ble Supreme Court in case of Morgan Stanley & Co. (62 Taxman 165) wherein it was held as under:

The learned AR for the assessee further submits that the Tribunal in assessee’s own case for assessment year 2007-08 and assessment year 2005-06, while dealing with the taxability of the head office of the assessee has accepted the amount attributed by the assessee branch to head office. In the light of decision of Tribunal in assessee’s own case, the remand proceeding on the transfer pricing would not yield any different result as compared to the result arrived at normal proceeding and would be an exercise in futility. 7

For Ground No.4 to 6 the learned DR for the revenue further submits that if the learned Commissioner (Appeals) was of the view that the TPO has not applied any prescribed method for benchmarking, the learned Commissioner (Appeals) instead of allowing the appeal of the assessee should have required the remand report from the TPO before passing the impugned order. The learned DR for the revenue prayed for demanding the case to the TPO/assessing officer for computation of arm length price afresh. In support of his submissions the ld DR for the revenue relied on the decision of Tribunal in ACIT Vs M/s Givaudan Flavours (India)

We have considered the rival submission of the parties and have gone through the orders of authorities below. Ground No. 1 to 3 relates to deleting the addition of addition of Rs. 1,43,48,061/- on account of head office share of income in invoice raised by heard office and deleting the addition of Rs. 1,35,39,289/- on account of head office share of income in invoice raised by branch. We have noted that similar addition on account of attribution of income toward head office by Indian branch and the expenses incurred by head office on behalf of Indian Branch officer was made in assessment year 2007-08, which were affirmed by DRP, however, on appeal before Tribunal the additions were deleted vide order dated 05.06.2013 in ITA No. 8975/M/2010. The operative portion of the order is extracted below:

It is an undisputed fact that India Branch Offices are under the Korean Registry wherein the India BO undertakes inspection and validation of ocean fairing vessels by physically examining the vessels. After physical examination, the reports are sent to HO located in Germany, who issues validation certificate, regarding the fitness of the vessel.

The business model followed by the assessee and its parent in Germany are, ships and vessels, in order to operate in sea are required to be classified by a classification society approved by an authority. The classification is done at the insistence of the ship owner on behalf of the respective government. In certain instances, classification is done as per report coming directly from the ship owner. In either case, the post examination approval reports are submitted to the respective government, which is then hands it over to the ship, whose flag it is carrying.

The Indian Operations were started from 06.11.1989 as a branch of its German parent, who in turn is a member of International Association of Classification Societies, who decides the scope of monitoring activities of its members. The scope of Indian Branch could be summarized as : a) Classification and certification of ships. b) Certification of marine related materials and components. c) Certification relating to International safety management Co. 9

These activities are carried out with the technical assistance and cooperation of its HO in Germany, who, as submitted are available 24X7. On computation of its classification, invoice is raised by the Indian BO or the German HO, as the case may be, and the receipts are assigned as per the agreed standard module herein followed globally, whereby, the HO retains 30% and the BO retain 70% as per fee splitting arrangement.

We find that as per Article 7 of the India Germany DTAA, the business profits of the permanent establishment in India, only are offered to tax. 33. Treading strictly on the DTAA route, the issue becomes clear, that the split of fee which is attributed to its German parent HO, become non taxable under the Indian tax regime. This would become applicable on all the three figures that are impugned before us, because the share of Rs. 22,55,981/- is also of the similar nature & character, as that of fee attributed towards HO by the Indian BO at Rs. 58,13,506/- and the expenses incurred by the HO on behalf of India BO at Rs. 3,00,754/- u/s 40A(2)(b). 34. We are in agreement with the decision of Intergrafia Print & Pack GMBH (supra), where after following the India German DTAA treaty, the Coordinate Bench at Delhi had approved of the fee split arrangement. We are also in agreement to the decision of the assessee own case in penalty proceedings, wherein, the CIT(A) came to a factual finding that, "following a well defined system, the revenue earned from the activities of the HO cannot be taxed in India", which ultimately has been attributed to the HO and fully backed by the India German DTAA and Para1(b) of the Protocol, as was recited by the AR and reproduced by us earlier. 35. In these circumstances, we reverse the decision taken by the DRP and direct the AO to delete the three impugned amounts of Rs. 58,13,506/-, Rs. 22,55,981/- and Rs. 3,00,754/- from the income of the assessee.”

Considering the decision of the coordinate bench of Tribunal for assessment year 2007-08, on similar set of facts, and wherein no variation in facts is brought on record, thus, we respectfully following the same, we hold that these grounds of appeal raised by the revenue are covered in favour of assessee and against the revenue. Hence, we do not find any infirmity in the order of the ld. Commissioner (Appeals). In the result the grounds of appeal No. 1 to 3 are dismissed.

In the result the ground No. 4 to 6 of the appeal is also dismissed.

In the result the appeal of the revenue is dismissed.