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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
AadoSa / O R D E R महावीर स िंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM:
This appeal is arising out of the order of Dispute Resolution Panel- 1(WZ), Mumbai [in short ‘DRP’], in objection No. 125 vide direction dated 04.09.2018. The Assessment was framed by the Dy. Commissioner of Income Tax (Int. Tax)-Circle 2(2)(2), Mumbai (in short ‘DCIT/AO’) for the ITAs No. 6601/Mum/2018 assessment year 2015-16 vide order dated 27.09.2017 under section 143(3) read with section 144C(13) of the Income Tax Act, 1961(hereinafter ‘the Act’.
The first issue in this appeal is as regards to the order of DRP/ AO in attribution of the income of the assessee holding that the assessee has permanent establishment in India. Consequently, making addition on account attribution of income being recipient of such commission income. For this assessee has raised the following 6 grounds: - “1. On the facts and circumstances of the case and in law, the Hon’ble Dispute Resolution Panel ('Hon'ble DRP') / Learned Assessing Officer ('Ld. AO') erred in further attributing Rs. 6,23,87,957 as income of the Permanent Establishment (PE) of the Appellant, taxable in India.
2. On the facts and circumstances of the case and in law, the Hon'ble DRP / [Ld. AO erred in not appreciating that the Appellant has attributed the appropriate profits having regard to the operations that are carried out in India as required under section 9 of the Income-tax Act, 1961 ('IT Act).
The Appellant prays that the return of income of the Appellant be accepted.
3. On the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld.AO erred ITAs No. 6601/Mum/2018 in not appreciating that the Appellant has attributed the appropriate profits to its Permanent Establishment in India as per Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore.
The Appellant prays that the return of income of the Appellant be accepted.
On facts and circumstances of the case and in law, the Hon'ble DRP / Ld. AO erred in attributing additional profits to the PE of the Appellant, without considering the fact that the Appellate has paid an arm's length commission to the agent and such payment of commission extinguishes the liability of the Appellant in India.
The Appellant prays that the return of income of the Appellant be accepted
On the facts and circumstances of the case and in law, the Hon'ble DRP / Ld. AO further erred in:
5.1 rejecting the transfer pricing study report without any basis; 5.2 alleging that the PE has not been compensated for market risk, product liability, risk and credit risk attributable to it; ITAs No. 6601/Mum/2018 5.3 rejecting the comparable companies as functionally different; 5.4 not undertaking the facts finding exercise and failed to substantiate their assumption by not bringing anything on records; 5.5 computing the arms' length price of the transaction without referring the issue to the transfer pricing officer, which is in gross violation of Instruction NO. 3012016 issued by the CBDT; 5.6 determining an ad-hoc attribution of profits, without any basis / comparative study and without considering the audited financial statement for the year ended on 31 December 2014.
On the facts and circumstances of the case and in law, the Hon’ble DRP / Ld. AO erred in:
6.1 not appreciating that no further attribution of income is warranted, once the international transaction has been accepted to be at arm's length price in the assessment proceeding of respective Indian entity i.e. Hempel Paints (India)
ITAs No. 6601/Mum/2018 Pvt. Ltd. ('Hempel India') who is recipient of such commission income; - 6.2 not considering the fact that for the same nature of transaction there could not be multiple arm's length price i.e. while performing the agency function the 141. AO/Hon'ble DRP has determined 25% of the sales made in India as income attributable to the PE, however, while remunerating Hempel India for performing same function/ agency services, the Ld. AO has concluded 8.17% commission on sales as expense deductible while computing the profits of PE. Thus for the same nature of transaction the Ld. AO/ Hon'ble DRP has determined two different remunerations i.e. 25% of the sale for income side and 8.17% on sale for expense side; 6.3 not appreciating that there are no significant people function being performed by the PR of the Appellant in India and thus, consequentially no risk is to be allocated.”
Briefly stated facts are that Hempel Singapore Pte. Ltd. (‘Hempel Singapore’/ ‘the Assessee’) a Hempel group company, is incorporated under the laws of Singapore. It is engaged in the business of selling ITAs No. 6601/Mum/2018 protective coatings/ paints including marine, protective, container, yacht and decorative coatings. The AO in the draft assessment order proposed the income of the assessee at ₹ 6,23,88,000/- by holding that the assessee has permanent establishment in view of the agency agreement between the assessee and its subsidiary Hemple India. It was noted by AO and DRP that pursuant to the said agency agreement, Hempel India assisted the assessee in sale of its products in India to third party consumers. The Assessee earned sales revenue from India arising from above business activity. The rights and responsibilities under the agency agreements between the Assessee and Hempel India created Agency Permanent Establishment (PE) of the assessee in India as per Article 5(4) of the India – Singapore Tax Treaty. In consideration of the services rendered by the Hempel India to the assessee, the former charges commission based on percentage of sales to the later under the arm’s length principle. In view of the above, the learned Counsel for the assessee took us through the Tribunals order in assessee’s own case for AY 2014-15 in vide order dated 08.02.2019, wherein Tribunal has considered this issue and held that there is no dispute about the existence of assessee’s agency PE in India but held that a foreign company is liable to be taxed in India on so much of its business profit as is attributable to its PE in India. The Tribunal accepted the assessee’s cost plus 8.17% markup as commission on sales and deleted the addition made by AO / DRP, who estimated the profit of assessee PE at an adhoc rate of 25% of the sales. The Tribunal observed in Para 7, 8 and 9 as under: - “7. We have carefully considered the rival submissions. The appellant before us is a resident of Singapore and has business ITAs No. 6601/Mum/2018 activities in India. Admittedly, it has appointed its 100% owned subsidiary, Hempel India as a sales agent, who is rendering sales support services. It is compensating its Indian subsidiary at cost plus 8.17% mark-up as commission on sales effected through the agent in India. There is no dispute about the existence of assessee’s agency PE in India. A foreign company is liable to be taxed in India on so much of its business profits as is attributable to its PE in India. In the present case, the point sought to be made by the assessee is that the commission payment to Hempel India by the assessee is adequate and justified on the basis of transfer pricing analysis, which has indeed been affirmed by the income- tax authorities in the case of Hempel India for the instant assessment year. Therefore, according to the assessee, no further income could be attributable to its agency PE again. In other words, as per the assessee, once transfer pricing analysis of the transaction between assessee and its agent in India has been undertaken, there is no further need to attribute profits to the agency PE so long as the remuneration to the Indian agent has been held to be at an arm’s length price. Undoubtedly, the proposition sought to be canvassed by the assessee has the approval of Hon'ble Supreme Court in the case of M/s. Morgan Stanley & Co.
ITAs No. 6601/Mum/2018 Inc (supra). The judgment of the Hon'ble Bombay High Court in the case of SET Satellite Singapore Pte Ltd. (supra) is also on the same lines in terms of which it is safe to draw the premise that if appropriate arm’s length price has been found to have been applied and paid, nothing more would be left to be taxable in India by attributing further income to the PE of the foreign enterprise. The aforesaid proposition, in our view, is fully attracted in the present case having regard to the fact that for the instant assessment year, the commission has been found to be at arm’s length price in the hands of the recipient Indian subsidiary, i.e. Hempel India in view of the assessment order dated 27.10.2017 (supra).
Before parting, we may also refer to the judgment of the Hon'ble Delhi High Court in the case of DIT vs BBC Worldwise Ltd., of 2010 & ors. dated 30.09.2011, which has been relied upon by the assessee before us. In the said case also, the aforesaid proposition was sought to be canvassed on behalf of the assessee therein. The Revenue opposed the same by pointing out that the relevant transfer pricing reference was not in the case of the non-resident assessee therein, but in the case of the Indian recipient. The Hon'ble ITAs No. 6601/Mum/2018 High Court specifically repudiated the aforesaid plea and held that once it was treated as arm’s length price in the hands of the recipient, a different view cannot be taken in the case of assessee nonresident who had paid the same commission to its agent. The Hon'ble High Court deemed it fit to apply the proposition approved in the case of M/s. Morgan Stanley & Co. Inc (supra) as well as in the case of SET Satellite Singapore Pte Ltd. (supra) even in a situation where the transfer pricing reference was in the context of Indian recipient of income. In our considered opinion, the ratio of the judgment of the Hon'ble Delhi High Court in the case of BBC Worldwise Ltd. (supra) is fully attracted in the present case and, therefore, the addition of `5,15,05,000/- to the returned income is clearly untenable in the facts of the instant case. We hold so.
Since we have deleted the addition on the aforesaid short point, which is covered by Ground of appeal no. 1 read with Ground of appeal no. 4, the other Grounds raised are rendered academic and there is no necessity to adjudicate the same.”