DCIT (IT) 3(1)(2), MUMBAI vs. LUBRIZOL CORPORATION USA, MUMBAI

The present appeal filed by the revenue is directed against the order passed by the A.O under Sec. 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 (for short ‘Act’), dated 21.01.2016. The revenue assailing the order passed by the A.O had raised before us the following grounds of appeal:-

Briefly stated, the facts of the case are that the assessee which is a foreign company incorporated under the laws of the United States of America (for short ‘USA’) and resident of USA, engaged in the business of manufacturing of high performance chemicals for use in transportation and industrial lubricants had e-filed its return of income for A.Y 2011-12 on 29.11.2011, declaring total income at Rs.27,21,59,236/-. The case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.

The associate enterprise (for short ‘AE’) of the assessee company, viz. Lubrizol India Pvt. Ltd. (for short ‘LIPL’) was a 50:50 joint venture (JV) between the assessee company and Indian Oil Corporation Ltd., a public sector undertaking. LIPL also provided marketing support services for various products manufactured by the assessee. The assessee had entered into following agreements with LIPL:-

During the course of the assessment proceedings, the A.O holding a conviction that the assessee company had a permanent establishment (for short ‘PE’) in the form of LIPL in India, therefore, called upon the assessee to explain as to why the profits made by it on sale of products in India should not be brought to tax in India. The submissions of the assessee that its associate enterprise, viz. LIPL could not held as an agency PE of the assessee, did not find favour with the A.O. The A.O observing that the assessee had carried out only sales and marketing activities through its PE in India, viz. LIPL, therefore, on an estimate basis attributed the profits of the assessee in India @ 5% of its total sales of Rs.1,208,506,194/- and made an addition of amount of Rs.60,425,310/- to its returned income. The A.O on the basis of his aforesaid deliberations proposed to assess the total income of the assessee vide his draft assessment order, dated 16.03.2015 at Rs.332,584,546/-.

The assessee objected to the variations proposed by the A.O in the draft assessment order before the Dispute Resolution Panel-2, Mumbai (for short ‘DRP’). The DRP taking cognizance of the fact that in the assessee’s own case for the earlier years, viz. A.Y 2004-05, 2005-06 and 2008-09, on the basis of the same facts as were involved in the year under consideration, it was observed by the DRP that the assessee did not have a PE in India in terms of Article 5(1) and 5(5) of India-USA Tax Treaty. Keeping in view the judicial precedence and finding no reason to deviate from its earlier decisions for the aforementioned preceding years, the DRP adopted a consistent view and concluded that during the year under consideration also the assessee did not have a PE in India. On the basis of its aforesaid deliberations, the addition of Rs.6,04,25,310/- made by the A.O was held by the DRP as not sustainable and was directed to be deleted.

The revenue being aggrieved with the order passed by the A.O under Sec. 144C(1) r.w.s. 143(3) had carried the matter in appeal before us. At the very outset of the hearing of the appeal, it was submitted by the ld. Authorized Representative (for short ‘A.R’) for the assessee that the issue that the assessee did not have a PE in India, had been deliberated at length and decided in favour of the assessee by the coordinate benches of the Tribunal in the assessee’s own case for A.Y. 2006-07 (ITA No. 7420/Mum/2010, dated 03.06.2011); A.Ys 2004-05, 2005-06 and 2008-09 (ITA Nos. 6443 to 6445/Mum/2012, dated 18.01.2013); A.Y 2009-10, (ITA No. 1247/Mum/2014, dated 13.07.2016); A.Y 2010-11 and 2012-13 (ITA Nos. 508-509/Mum/2017, dated 06.03.2017); and A.Y 2013-14 (ITA No. 4726/Mum/2017, dated 08.11.2017). It was submitted by the ld. A.R that in all the aforementioned appeals the Tribunal has held that the assessee company did not have a PE in India. Per contra, the ld. Departmental Representative (for short ‘D.R’) did not controvert the aforesaid factual position.

We have deliberated on the facts of the case, and after perusing the respective orders of the coordinate benches of the Tribunal are persuaded to be in agreement with the claim of the ld. A.R that the issue that the assessee does not have a PE in India, is covered by the aforesaid orders of the Tribunal. We may herein observe that the Tribunal in the case of the assessee i.e. Lubrizol Corporation USA Vs. Addl. Director of Income Tax (ITA No. 7420/Mum/2010; dated 03.06.2011) for AY. 2006-07, while concluding that the assessee did not have a PE in India, had observed as under:- “19. We have heard learned representatives of the parties, perused the relevant record and gone through the order of the AO as well as decisions cited. The issue to be adjudicated in this appeal is whether the AO is right in holding that the assessee has PE in India and thereby taxing the prof its earned by the assessee P a g e | Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA in India. The assessee is a foreign company incorporated under the laws of United States of America and is engaged in the business of manufacture and sale of high performance chemicals, which are used in transportation and industrial lubricants. The assessee is a tax resident of the USA which is not disputed by the AO and hence it is entitled to the benef its under the India-USA Double Taxation Avoidance Agreemen t („India- US Treaty‟). The assessee filed its return of income declaring to ta l i n co me of Rs . 1 4 , 4 8 , 3 2 , 1 5 0 / -, ag a in s t wh i ch th e AO ma d e a ref erence to the TPO U/s 92CA of the Act f or compu tation of ar m's length price of the international transactions entered into by the assessee with its Associated Enterprise (AE), namely, Lubrizol India P v t. L td . ( L IP L ) . T h e a r m ' s l e n g th v a l u e of th e i n te r n a ti o n a l transactions entered into by the assessee with its AE were accepted by the TPO vide order dated 27, 2009 passed u/s 92CA(3) of the act and no adjustments were recommended by the 'FPO. Subsequently, a draft assessment order was issued by the AO u/s 144C(1) of the Act, proposing to make an addition of Rs. 2,29,26,152/- as attribution of profit on sales to customers in India on account of the marke ting efforts undertaken by UIPL, by holding that LIPL was a permanent establishment of the assessee being a virtual projectio n of the assessee in India. The AO also concluded that LTPL is a PE of the assessee in India in terms of Article 5(1), 5(2), and 5(4) of the India- US Treaty. The AO was of the opinion that since the assessee had assumed all the risks in respect of the sales made to India, as such the profits arising from such sales had to be taxed in India. Against the said draft order of AO, the assessee filed its objections before the Dispute Resolution Panel-II(DRP) and the DRP upheld the draf t assessment order of the AO in its entirety by observing as under:- “1.14 ...................... it is clear that so far as marketing of products is concerned, LJPL is virtual projection of the assessee in India. It has got full rights and responsibilities in respect of marketing an d s al es. T he provisi on, of maki ng or ders d irec tl y o n th e assessee in. th e agree me nt wil l no t s ave the assessee f rom taxability in India as while interpreting the agreement it has to be seen as a whole and all responsibilities and duties of the a g e n t a p p o i n t e d i n In d i a h av e t o b e s e e n . L I P L h as b e e n r e m u n e r a t e d b y way of c o m m i s s i o n o nl y f o r the f unc ti o n s performed by it. For determination of profits, three things namely functions performed, assets deployed and risk undertaken have to be seen. For the sales made in India, assessee has assumed all the risks. While the production, is taking place outside India, Still the risk undertaken by the assessee in sales and marketing of the p r o d u c ts i n In d i a e x i s ts and as s e s s e e ' s p r of i ts f o r the same is to be taxed in India. 1.15 As per the AO, profits arising on sales done in India, even directly by the assessee of the same or similar products as done By LIPL will also be taxable in India due to operation of force of Attraction rule LIPL, which is held to be PE of the assessee in India, is engaged in manufacturing of same or similar products und e r the sam e b r an d n am e u n d e r the te c hnol o gy tr ansf e r agreement. Further, it is an undisputed f act that L IPL al so promotes products of assessee and solicits order on behalf of assessee P a g e | Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA and is involved in marketing and sale from finding a customer up to finalization of sale. In view of these facts, profits earned and attributable to f unction, assets and risk in India undertaken by the assessee through its PE, is taxable in India. 1.16 Thus, after careful consideration of facts of case, we are of the view that no interference in the action of the AO is required a n d t h e A O i s d i r e c t e d t o p r o c e e d a s p r o p o s e d i n d r a f t assessment order. 2 . T h e A O s h al l gi v e ef f ec t to the ab o v e d i r e c t i o ns as p e r provisions of section 144C(3) of the Act.”

Consequent to the said directions of the DRP, the AO passed final assessment order determining the income of the assessee at Rs. 16,77,58,302/- as against the income returned by the assessee of Rs. 14,48,32,150/-, resulting into addition of Rs. 2,29,26,152/- being profit margin of 5% on the sales made by the assessee to LIPL arid third parties.

The main argument of the learned counsel f or the assessee before us is that the assessee is a tax resident of USA it is neither h av in g an y f ixed place of bus in es s in In d ia n or an y bus in e ss connection in India. He was contended that the AO has wrongly interpreted Article 5(1), 5(2) and 5(4) of the India-US Treaty. It is submitted that LIPL is a joint venture of Indian Oil Corporation and the assessee, both owning 50%, therefore, the assessee had no controlling ownership in LIPL. It is further submitted that during the Year under consideration, the assessee did not carry out any business activities in India and it did not render any services in India or made any sales in India as all such sales were executed and completed outside India, the risk and title in such goods also passed to the customers outside India, and so there arose no income taxable in India. It is also submitted that the AO has alleged that the sales made by the assessee to LIPL and also those made to third parties have given rise to income taxable in India by alleging that the assessee had a PE in India under Article 5 of the India-US Treaty. It is submitted :hat the on the sales made by the assessee to LIPL and third parties, the A.O computed a profit margin of 5% and made an addition of Rs.2,29,26,152/- to the income of the assessee which is not warranted.

The learned counsel took us through various Articles of India Treaty, which are mentioned above in the arguments of learned AR establish that the assessee does not have PE in India. Af ter considering the relevant material and the relevant aspects, it is noted that the LIPL has carried out an independent business of manufacture of various products under technology transfer agreement with the assessee in India. It is having its own marketing network for sale of various products manufactured by it in India. The total sales of LIPL are Rs. 408.84 crores and commission received from the assessee is 0.756 crores which constitutes only 0.18% of the sales. The assessee also sold products to Indian customers for which LIPL rendered certain services. The assessee sold the products directly to the Indian customers. Contract of sale is concluded once the purchase order is accepted by the assessee in USA. On confirmation of the order and receipt of direct payment from Indian customer, the assessee sends P a g e | Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA the products in the name of Indian customer with the invoices raised by the assessee directly on Indian customers. The LIPL assists the assessee in the direct sale of products to Indian customers and communicates information in relation to tenders and competitive bids from the customers. The LIPL does not have authority to negotiate the terms of the sale or conclude the contract on behalf of the assessee. The final decision regarding price, terms and conditions is taken by a s s e s s e e . T h e a s s e s s e e h a s n o o p e r a t i o n i n r e s p e c t o f m a n u facture or sale of product carried out in India. Sales are made by the assessee to LIPL on principal to principal basis. The assessee also does not have a right to use LIPL premises. Having regard to all these facts of the case, we are of the view that the learned counsel has demonstrated by the assessee does no t have a PE in Ind ia. For th is conclusion, we derive support from the decision of ITAT, Mumbai, in the case of DDIT Vs. Daimler Chrysler AG, Germany, 39 SOT 418 wherein it was held that “there should be some definite activity of the PE to which prof its can be attributed and merely acting for a non -resident principal would not by itself render an agent to be considered as PE for the purpose of allocating profits taxable in the hands of the principal, it is further held that merely calling a person as agent acting on behalf of foreign non-resident would not by itself render him to be considered as an agency PE and pro tanto part of the profits of the non-resident is liable to be taxed in India.

In view of the above discussion and following the ratio laid down by the ITAT, Mumbai in the case of Daimler Chrysler (supra), we held that the assessee did not have PE in India in the year under consideration in terms of Article 5(1), 5(2), 5(4) & 5(5) of the Indo-US Treaty and the addition of Rs. 2,29,26,152/- made by the AO being a prof it marg in of 5% on the sales made by the assessee, is no t sustainable. The said is therefore deleted and Ground Nos. 1 to 7 are allowed.” We find that the aforesaid order of the Tribunal had thereafter been followed by the Tribunal in the case of the assessee for AY’s 2004-05, 2005-06, 2008- 09, 2009-10, 2010-11, 2012-13 and 2013-14, as observed by us hereinabove. We are of the considered view that as the facts involved in the case before us remains the same, as were there before the Tribunal in the aforementioned cases, therefore, finding no reason to take a different view, respectfully follow the same. We thus, are of the considered view that as the facts of the case for the year under consideration remain the same, therefore, it can safely be concluded that the assessee does not have a PE in India during the year under consideration. We thus, in terms of our aforesaid observations uphold the order passed by the A.O under Sec.