DY. DIRECTOR OF INCOME TAX, NEW DELHI vs. CORNING SAS- INDIA BRANCH OFFICE, GURGAON

The grounds of appeals are as under:-

Corning S.A.S., France has established a branch office in India in the name of Corning SAS – India Branch Office. Corning France is a subsidiary of Corning International Corporation, USA. Corning Incorporated, USA is the ultimate holding company for all Corning group entities. The Assessee’s business activities primarily comprise of import, warehousing and sale of rough ophthalmic blanks in Indian markets which includes providing sales/administrative support function and providing marketing services for non-ophthalmic products such as optical fibre, optical fibre cable, telecommunication equipments, ceramic substrates, etc. The Assessee’s business was set up in India in the year 1997 after obtaining the approval from the Reserve Bank of India. During the year under consideration the assessee was engaged in the following business activities: a) Trading/distribution activities: The assessee imported rough ophthalmic products from Corning France/Corning Brazil, warehoused these imports and sold them to customers in India. During the year the sales made through this activity was shown at Rs.36,72,26,311/- against which the cost of traded goods was booked at Rs. 30,18,36,779/-. b) Agency functions with respect to direct sales made by Corning France: The Assessee provided sales representation functions to Corning France so as to enable it to make direct sales to Indian customers in terms of the Global Sales Commission Agreement executed by the Corning group. For the aforesaid agency services, the assessee earned a commission at the rate of 3% shown at Rs.90,19,934/- on total direct sales of Euro 52,48,30,067/-. c) Market Support activities: The assessee provided marketing support services to Corning Inc. USA for sale of non-ophthalmic products in the South Asian region in terms of Global Marketing Services Agreement. In lieu of such services the assessee is reimbursed all the cost incurred by it along with a mark-up of 5.06%. Income from this activity was shown at Rs.4,43,13,628/- for the year.

Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee. The assessee as well as the Revenue is before us challenging the grounds mentioned hereinabove. First we are taking up the appeal filed by the Assessee.

The Ld. AR submitted that commission earned @ 3% by the assessee on agency function was accepted by the Assessing Officer in all other assessment years, preceding as well as succeeding years, and in none of the other assessments, further profits have been attributed by the Assessing Officer to the assessee in respect of direct sales made by Corning SAS France in India, even though the assessee has undertaken same functions, assumed identical risks and employed similar assets in all Assessment Years. During the course of assessment proceedings for Assessment Year 2003-04, the TPO rejected the combined evaluation of agency services and distribution activity, and segregated the aforesaid activities for the purpose of benchmarking analysis. The TPO, further aggregated the agency services activity with the marketing support service activity and benchmarked the operating results of such combined activity, applying TNMM. For carrying out the aforesaid analysis, the TPO determined the income from agency services function by allocating expenses relating to the distribution and agency segment in proportion of distribution sales and sales made by the Corning SAS, France on which the assessee earned agency commission @ 3%. Accordingly, the TPO, in the transfer pricing order made a transfer pricing adjustment on account of the difference in the arm’s length price of the international transactions of receipt of agency commission and marketing support service fee. On further appeal, the CIT(A) deleted the transfer pricing adjustment made by the TPO holding that the common expenses relating to the distribution function and agency function ought to be allocated in proportion of the gross profit margin, which was thereafter upheld by the Tribunal vide order dated 28.08.2015. The TPO, while giving effect to the order of the Tribunal, vide appeal effect order dated 29.11.2016, accepted the international transaction of receipt of agency commission @ 3% of the direct sales made by Corning SAS France in India, to be at arm’s length price. Following the order of the Assessment Year 2003-04, the Tribunal remanded the matter to the TPO for the Assessment Years 2004- 05, 2006-07, 2008-09 and 2009-10. While giving effect to the order of the Tribunal, the TPO accepted the international transaction of receipt of agency commission to be at arm’s length in the said Assessment Years (except Assessment Year 2008-09 which is pending before the TPO). In view of this the Ld. AR submitted that since the rate at which commission income earned by the assessee is held to be at arm’s length in the preceding as well as subsequent assessment years by the TPO, no further attribution of profit is required to be made to the PE in respect of such function, during the year under consideration, taking into consideration the fact that there is no change in facts of the relevant financial year vis-à-vis the other financial years. The Ld. AR relied upon the decision of the Hon’ble Supreme Court in case of Radhasoami Satsang vs. CIT 193 ITR 321 (SC), wherein, the Court held that where a fundamental aspect permeating through the different Assessment Years is accepted one way or the other, a different view in the matter is not warranted, unless there be any material change in facts. The Ld. AR further submitted that the Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd. 358 ITR 295 (SC), similarly held that the Revenue cannot be allowed to flip-flop on any issue which has been accepted by the revenue and the revenue ought to let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sale of it.

The Ld. AR further submitted that it is well accepted principle that in case the transaction undertaken with the PE is accepted to be at arm’s length, no additional profit is liable to be attributed to the PE in India. The Ld. AR relied upon the decision of the Hon’ble Supreme Court in case of DIT (International Transaction) vs. Morgan Stanley and Co. Inc. 292 ITR 416 (SC), wherein the Court held that once that permanent establishment has been remunerated on an arm’s length basis, taking into account all the functions, assets and risks, no further allocation of profit is required. The Ld. AR also relied on following decisions: i. ADIT vs. E-Funds IT Solutions Inc 399 ITR 34 (SC) ii. Set Satellite (Singapore) Pte Ltd. vs. DDIT (Intl Taxation) 307 ITR 205 (Bom)

The Ld. AR further submitted that the Assessing Officer, in the impugned Assessment Order, assigned ad-hoc weightage to the various functions performed, assets used and risk undertaken by the assessee and Corning SAS, France. The Ld. AR submitted that the functions considered by the Assessing Officer for the purpose of assigning weights mainly relates to the marketing functions performed by the assessee in relation to direct sales made by Corning SAS France to customers in India. Functions in relation to research and development of the product, inventory, management, logistics/ warehousing, manufacturing activities, etc. that constitute substantial part of any manufacturing and distribution business model have not been considered by the Assessing Officer while assigning weightage to the functions being performed by the Assessee and Corning SAS, France. The Ld. AR further submitted that the Assessing Officer also failed to recognize the risks involved in the business model of the assessee and Corning SAS, France. As per the business risk analysis undertaken by the Assessing Officer, 30% of the risk is borne by the assessee as against nil or minimal risks actually undertaken by the Assessee. In fact, the assessee receives commission, once the goods are dispatched to customers irrespective of the realization of sales consideration by Corning SAS, France. The Ld. AR further pointed out that as regards the sales representation services, the assessee does not bear any risks such as inventory risk, credit risk, contract risk, quality risk, competition risk, etc. The Assessing Officer has, without providing any rational basis, assigned a relative weightage of 60% to the assets utilized by the assessee. The Ld. AR submitted that the assessee is engaged in providing only sales representation services in India and therefore, it would be appreciated that the same prima facie does not involve utilization of assets. In the Transfer Pricing Documentation, it has categorically been stated that the assessee does not deploy any specific personnel or assets for providing sales representations services to Corning SAS France. The Ld. AR further submitted that the sales made by Corning SAS France to the Indian customers are wholly channeled through the assessee by reasons of which the assessee is remunerated with commission @ 3%, for rendering agency services. The assessee is only responsible to render sales representation / agency services and has no role in concluding such sales contracts. Thus, the Ld. AR submitted that since no substantial functions are performed, risks undertaken or assets employed by the assessee in India in relation to the direct sales made by Corning SAS France in India, no additional profit in addition to the 3% commission income earned, is required to be attributed.

The Ld. AR further submitted that without prejudice to the other submission, no further profit could be attributed as Corning SAS France incurred net loss for the present Assessment Year. Vide reply dated 26.12.2008, the assessee had submitted the global audited accounts of Corning SAS France for the calendar years 2004 and 2005. As per the said global accounts, Corning SAS France had incurred loss of 3.53% during the Calendar year 2004 and profit of 1.69% for the Calendar year 2005. Thus, considering 9 months of 2004 and 3 months of 2005, in effect, during the Financial Year 2004-05, Corning SAS France had suffered net loss from its activities. The Ld. AR submitted that the Assessing Officer has erroneously applied the attribution ratio arrived by him to the gross profit from direct sales made in India, that was in turn calculated by applying the gross profit percentage of the trading activity undertaken by the assessee. The income earned by the assessee has already been explained to be at arm’s length. However, even if there was a need for further attribution, the Assessing Officer could not have arbitrarily taken the trading profit of the Assessee as a parameter to arrive at the profits of Corning SAS France, both being separate entities. In doing so reference should have been made to Corning SAS France’s own results, which in the present case, is a loss situation.

The Ld. DR submitted that the assessee is making sales of ophthalmic products in India through two channels vis. – (i) through Branch Office/Permanent Establishment (BO/PE) and (ii) through Direct sales to customers. During the year, the sales through BO/PE are Rs. 36.72 crores and Direct Sales are Rs. 30.06 crores. The Ld. DR further submitted that the gross profit on BO/PE sales is 17.81% and the Net Profit is around 13%. In respect of Direct sales, the assessee is receiving commission of only 3% from HO in France amounting to Rs. 90.19 lakhs. The Assessing Officer has attributed profit to the BO/PE in respect of direct sales made in India. The attribution is at the rate of 50% of GP with deduction of commission amount. The Assessing Officer has allowed deduction/adjustment of commission of Rs.90.10 lakhs. The net profit attribution to BO/PE is Rs. 1.77 crores only in respect of direct sales of Rs. 30.06 crores in India. The CIT(A) has upheld profit attribution at the rate of 40% in respect of direct sales made by head office in India. The Ld. DR further submitted that the assessee BO/PE is carrying out following major functions in respect of direct sales being made by the HO: a. Identification of customers in India; b. Understanding the requirements of the customers in respect of their preference for material. Quality, location etc; c. Solicitation of orders and sending them for approval; d. Holding price negotiations e. Market information and technical support to the customers and addressing their queries and concerns; f. Communication of requirements of the customers of supplier; g. Formulation of marketing strategy and business decisions for the transactions; h. Handing of customers complaints; i. Maintaining a relationship with the customers on regular basis and the function performed by Corning SAS France.

The Ld. DR further submitted that in view of the above important functions being performed by the assessee for the head office, in respect of direct sales, the order of the AO and the CIT(A) confirming the attribution of profit, may be upheld. The Ld. DR submitted that the principle of Full Force of Attraction is the underlying principle of India-France DTAA which is relevant in this case. The India-France DTAA is based on UN Model Convention which incorporates the principle of full force of attraction. Indirectly attributable profits of an enterprise are to be taxed in India as per Article 7(1) of India- France DTAA and para 2 and 3 of the Protocol. Even the India-UK and India- Germany DTAA also include the concept of taxation of indirectly attributable profits, in the other contracting state (i.e., India here). The Assessing Officer has carried out the detailed FAR analysis including risk analysis as detailed in the Assessment Order. The actual gross profit and profit margin in respect of direct sales by head office (HO) in France is actually much more than the GP/NP of BO/PE in India because the BO/PE gives discounts to customers to the tune of 22-35%. Such discount is not given to the customers to whom direct sales are made by HO France. Therefore, there is a case of avoidance of taxes on properly attributed profits for BO/PE. The Ld. DR relied upon the decision of the Hon’ble Supreme Court in case of DIT vs. Morgan Stanley (2007) 292 ITR 416 (SC). The Ld. DR further submitted that in case of ADIT vs. E- Funds IT Solutions Inc. (2017) 399 ITR 34 (SC), the customers receiving service were outside India. Therefore, facts of this case are different. Moreover, the India-USA DTAA was involved in the case of E-Funds IT Solutions Inc., which has fundamentally different provisions as compared to India-France DTAA, which is applicable in the present case. The Ld. DR also relied on the decision of the Tribunal, Delhi in case of Linmark International Hongkong Pvt. Ltd. vs. DDIT (2011) 10 Taxamann.com 184 (Delhi), wherein attribution of 50% was upheld by the Tribunal. Thus, the Ld. DR prayed that the order of the Assessing Officer/CIT(A) be upheld.

We have heard both the parties and perused all the relevant materials available on the record. It is pertinent to note that the Hon’ble Apex Court in case of Morgan Stanley & Co. (Supra) held that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case that data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. The Economic Nexus is an important feature for Attribution of Profits (profits attributable to the PE) in Corporate World. In present case commission earned @ 3% by the assessee on agency function was accepted by the Assessing Officer in all other Assessment Years, preceding as well as succeeding. In none of the other Assessment Years, profits have been attributed by the Assessing Officer to the assessee in respect of direct sales made by Corning SAS France in India, even though the assessee has undertaken same functions, assumed identical risks and employed similar assets in all Assessment Years. As per the business risk analysis undertaken by the Assessing Officer, 30% of the risk is borne by the assessee as against nil or minimal risks actually undertaken by the Assessee. In fact, the assessee receives commission, once the goods are dispatched to customers irrespective of the realization of sales consideration by Corning SAS, France. The Ld. AR further pointed out that as regards the sales representation services, the assessee does not bear any risks such as inventory risk, credit risk, contract risk, quality risk, competition risk, etc. Indeed, there is substance in the submission made by the Ld. AR that the Assessing Officer has, without providing any rational basis, assigned a relative weightage of 60% to the assets utilized by the assessee. The assessee is engaged in providing only sales representation services in India and therefore, it would be appreciated that the same prima facie does not involve utilization of assets. In the Transfer Pricing Documentation, it has categorically been stated that the assessee does not deploy any specific personnel or assets for providing sales representations services to Corning SAS France. The sales made by Corning SAS France to the Indian customers are wholly channeled through the assessee by reasons of which the assessee is remunerated with commission @ 3%, for rendering agency services. The assessee is only responsible to render sales representation / agency services and has no role in concluding such sales contracts. Since no substantial functions are performed, risks undertaken or assets employed by the assessee in India in relation to the direct sales made by Corning SAS France in India, no additional profit in addition to the 3% commission income earned, is required to be attributed. Thus, the ratio laid down by the decision of the Apex Court in case of Morgan Stanley is applicable in present case as there is no direct economic nexus between the assessee company and the Corning SAS, France in respect of the transaction in dispute. Therefore, the order of the CIT(A) is set aside and the appeal of the Assessee is allowed. As regards, the Revenue’s appeal is concerned, the same is dismissed in respect of the above observations and findings given in assessee’s appeal.

In result, appeal of the Revenue is dismissed and appeal of the Assessee is allowed.