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ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by revenue under section 253 of the Income-tax Act (‘the Act’) is directed against the order of ld. CIT(A)-56, Mumbai dated 15.02.2017, which in turn arises from the assessment order under section 143(3) rws 144C(3) on 25.05.2015, passed in pursuance of direction of Dispute Resolution Penal (DRP) for Assessment Year 2011-12.
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.
The assessing officer recorded that the assessee neither filed its objection before Disputes Resolution Penal (DRP) nor intimated the assessing officer for exercising the option to file appeal before ld CIT(A), therefore, the assessing officer passed final assessment order under section 143(3) rws 144C(3) on 25.05.2015. In the final assessment order the assessing officer made addition of Rs.2,78,87350/- as suggested by TPO.
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.
(1) Whether on the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) was correct in deleting the addition made by assessing officer without appreciating the fact that assessee is a branch office and source of income in India and the whole income is generated from the activities of the branch office in India (2) whether on the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) was correct in deleting the addition made by the assessing officer without appreciating the fact that assessee has not been able to justify that any function has been carried by the head office corresponding receipt of PE in India. (3) Whether on the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in not applying Article 12 (5) read with article 12 to of Indo German DTAA while applying the protocol of Article 7, paragraph 1(b) of the DTAA. (4) Whether on the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the TP adjustment amounting to Rs. 2,78,87,350/- by merely saying that TPO did not use any prescribed method, without providing any alternative method of benchmarking, despite the TPO’s finding that CUP method is applied by the assessee is incorrect. (5) Without prejudice to the above, whether on the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in not giving a positive finding even if it required remanded the matter to the TPO and seeking his report before passing the order. (6) Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the TP adjustment amounting to Rs. 27887350/- , without considering jurisdictional ITAT judgment in case of ACIT Vs M/s Givaudan Flavours (India) Private Ltd in /Mumbai/2009 4
DNV SE-India Branch and erred in not correctly benchmarking the transaction as per provisions of Income tax Act which he was bound to do. (7) The appellant prays that the order of learned Commissioner (Appeals) on the above grounds be set aside and that of the order of assessing officer be restored. (8) The appellant craves leave to amend or alter any ground or at a new ground which may be necessary. 4. We have heard the submission of learned departmental representative (DR) for the revenue and the learned authorized representative (AR) of the assessee and perused the material available on record. At the outset of hearing the learned AR of the assessee submits that the grounds No. 1 to 3 of the appeal are covered in favour of assessee by the decision of Tribunal in assessee’s own case for assessment year 2007-08, wherein it was held revenue earned by the head office should not be subject to tax in India. It was submitted that there is no change in the facts for the year under consideration. So far as the ground No. 4 to 6 are concerned, the learned AR for the assessee submits that revenue has raised grounds on account of deletion of transfer pricing adjustment as proposed by TPO. It was canvassed that it is evident from the order of learned assessing officer, as well as TPO have made an adjustment of the same amount, the amount representing the head office share in the invoice raised either by the branch or head office, totaling to Rs. 2,78,87,350/-. Thus there is double addition of the same amount. In the grounds of appeal the revenue has relied upon the decision of Mumbai Tribunal in Givaudan Flavours (India) Private Ltd (supra). The learned AR for the assessee
DNV SE-India Branch submits that the facts of the said case are completely differ to the facts of the present case. The Tribunal in the decision of Givaudan Flavours (India) Private Ltd (supra) observed that it was a fit case for remand the matter to the assessing officer since the provision of the Act and the Rule were totally ignored in the said case. However, there is no is such situation in the present case. The assessee during the course of transfer pricing study as well as during assessment proceeding submitted transfer pricing study report and all the supporting documents to substantiate its claim, a fact which has not been disputed by the revenue authority at any point of time. The TPO had an ample opportunity to decide on the merit of the case during the course of hearing before him. Therefore, the request of remand of case to assessing officer or TPO and the decision of Givaudan Flavours (India) Private Ltd (supra) to examine the document from transfer pricing prospective would be akin to the granting another opportunity the revenue, wherein there has been no change in the fact and circumstances as of today as compared to the time when the transfer pricing/assessment proceeding were undertaken. Therefore, the learned AR for the assessee prayed that the facts of present case are absolutely different from the said case.
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:
As regards to contribution to further profit to PE of Morgan Stanley Company 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 the associated enterprises (that also constituted PE) is remanded dated or arm’s-length basis taking into account all the risk-taking function of the multinational Enterprises. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer pricing analyses does not adequately reflect the functions performed and the risk assumed by the enterprises. In such a case, there would be made to attribute profit to the PE for those functions/ risk that have not been considered.
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
DNV SE-India Branch 7. On the contrary the learned DR for the revenue supported the order of assessing officer. On the deletion of the 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 ld DR fairly agreed that similar addition was deleted by the Tribunal in appeal for assessment year 2007- 08.
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)
Private Ltd.(supra).
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:
“27. We have heard the arguments of both the parties at length and perused the material placed before us. The three issues pertaining to attribution of Rs. 58,13,506/-, to the HO, Rs. 22,32,586/- being HO share of fee and Rs. 3,00,754/- being expenses incurred by HO on behalf of the BO are being taken up together.
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.
DNV SE-India Branch 11. Ground No.4 to 6 relates to deleting the TP adjustment. The ld. representatives of the parties made their respective submissions which we have noted in para no. 4 to 8 above. As evident from the order of lower authority while conducting TP study report the assessee applied CUP method and claimed that their transaction with its AE is at Arm’s Length.
The TPO while conducting enquiry in the reference under section 92CA(1) concluded that CUP cannot be applied. The TPO suggested upward adjustment of Rs. 27,87,350/-. The Assessing Officer made the same addition with regard to Head Office share invoices raised by branch office and branch office share in invoices raised by Head Office. The TPO not selected any of the method as prescribed under section 92C. The ld. CIT (A) deleted the addition holding that the adjustment suggested by TPO in his order under section 92CA(3) is not correct. Before us, the ld. AR of the assessee vehemently submitted that once overall attribution and taxability thereon for head office as well as branch office has been accepted, the TP analysis will not yield any result. The contention of ld AR for the assessee is acceptable to us. Similar view was taken by Hon’ble Apex Court in Morgan Satnley & Co (supra). The submissions of the ld DR for the revenue for remanding the issue to the TPO/ assessing officer is also not acceptable to us, as we have already accepted the attribution and taxability of heard officer and branch office.
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.