Delhi High Court
Rolls Royce Singapore Pvt. Ltd. vs Assistant Director Of Income Tax on 30 August, 2011
Author: A.K.Sikri
REPORTABLE
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 1278/2010,ITA 1280/2010
ITA 1281/2010,ITA 1282/2010
ITA 1284/2010,ITA 249/2011
ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011
ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011
ITA 258/2011,ITA 259/2011
ITA 260/2011
% Judgment Reserved On: 19.7.2011
Judgment Delivered On: 30.8.2011
(1) ITA 1278/2010
ROLLS ROYCE SINGAPORE PVT. LTD. . . . APPELLANT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
VERSUS
ASSISTANT DIRECTOR OF INCOME TAX . ..RESPONDENT
Through: Mr. Sanjeev Sabharwal, Sr. Standing
Counsel.
(2) ITA 1280/2010
ROLLS ROYCE SINGAPORE PVT. LTD. . . . APPELLANT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
VERSUS
ASSISTANT DIRECTOR OF INCOME TAX . ..RESPONDENT
Through: Mr. Sanjeev Sabharwal, Sr. Standing
Counsel
ITA 1278/2010,ITA 1280/2010,ITA 1281/2010,ITA 1282/2010 Page 1 of 55
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
(3) ITA 1281/2010
ROLLS ROYCE SINGAPORE PVT. LTD. . . . APPELLANT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
VERSUS
ASSISTANT DIRECTOR OF INCOME TAX . ..RESPONDENT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
(4) ITA 1282/2010
ROLLS ROYCE SINGAPORE PVT. LTD. . . . APPELLANT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
VERSUS
ASSISTANT DIRECTOR OF INCOME TAX . ..RESPONDENT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
(5) ITA 1284/2010
ROLLS ROYCE SINGAPORE PVT. LTD. . . . APPELLANT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
VERSUS
ASSISTANT DIRECTOR OF INCOME TAX . ..RESPONDENT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
ITA 1278/2010,ITA 1280/2010,ITA 1281/2010,ITA 1282/2010 Page 2 of 55
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
(6)ITA 249/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 250/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 251/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 252/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
ITA 1278/2010,ITA 1280/2010,ITA 1281/2010,ITA 1282/2010 Page 3 of 55
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 253/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 254/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 255/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
ITA 1278/2010,ITA 1280/2010,ITA 1281/2010,ITA 1282/2010 Page 4 of 55
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad,Advocates.
(6)ITA 256/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates
(6)ITA 257/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 258/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 259/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
ITA 1278/2010,ITA 1280/2010,ITA 1281/2010,ITA 1282/2010 Page 5 of 55
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
(6)ITA 260/2011
ASSISTANT DIRECTOR OF INCOME TAX . . . APPELLANT
Through: Mr. Sanjeev Sabharwal, Sr.Standing
Counsel.
VERSUS
ROLLS ROYCE SINGAPORE PVT. LTD. . ..RESPONDENT
Through: Mr. S. Ganesh, Sr. Advocate with Mr.
Mukesh Butani, Mr. H. Raghavendra
Rao, Mr. Arjit Prasad, Advocates.
CORAM :-
HON‟BLE MR. JUSTICE A.K. SIKRI
HON‟BLE MR. JUSTICE M.L. MEHTA
1. Whether Reporters of Local newspapers may be allowed to see
the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J.
1. These 17 appeals arise out of the common order dated 19th March,
2010 passed by the Income-Tax appellate Tribunal (hereinafter referred
to as the ITAT), 5 appeals are filed by the assessee and 12 appeals are
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
filed by the Revenue. Particulars of the five appeals of the assessee are
as under:-
SL. NO. APPEAL NO. ASSESSMENT YEAR
1 ITA 1278/2010 2003-04
2. ITA 1280/2010 2000-01
3. ITA 1282/2010 2004-05
4. ITA 1284/2010 2001-02
5. ITA 1281/2010 2002-03
These appeals pertain to the assessment year 2000-01 to 2004-05.
2. Before coming to the respective grievances of the Assessee and the
Revenue, we would like to trace the genesis of the dispute and the nature
of impugned order passed by the Tribunal as narration thereof would
make it easier to understand the grounds on which the impugned orders
are challenged by both the parties.
3. The assessee viz Rolls Royce Singapore Ltd. (hereinafter referred
to as the „Singapore Company‟) is a company incorporated under the laws
of Singapore. The principal activities of the Singapore Company are sale
of spares parts for oil field equipment and engines and turbine
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
compressor systems and electronic retrofit projects and services rendered
in connection with repair and overhauling of such equipment. The
Singapore Company is a non-resident for the tax under the provisions of
Income-Tax Act, 1961.
4. The Singapore Company rendered repair and maintenance services
and supply spares to customer in India in the Oil and Gas industry. The
major clients of the Singapore Company in India include public sector
undertakings like ONGC, Gail etc. The largest customer of the Singapore
Company in India is ONGC. As per the standard practice adopted by
ONGC, before making remittance to foreign suppliers/service provides,
ONGC used to obtain a certificate from the tax authorities at Dehradun to
apply the appropriate withholding rate and thereafter obtained a „No
Objection Certificate‟, on the basis of which remittance is made outside
India. This practice continued for some time.
5. The assessee filed its return of income for the assessment years
2001-02, 2002-03 and 2003-04 on 31st December, 2003 voluntarily with
the Assistant Director of Income Tax, Circle 2 (1), International Taxation,
New Delhi. Likewise, for the assessment year 2004-05, the Singapore
Company filed return on 14th September, 2004.
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
6. For all these years in the voluntary Income Tax Return filed by the
Singapore Company, it had disclosed Fees for Technical Services
(hereinafter referred to as the FTS) income. The returns were processed
by issuing notice under Section 143 (2) of the Income-Tax Act (hereinafter
referred to as „the Act‟) and ultimately different assessment orders were
passed making various additions. Summary of the returns filed and
income assessed by the Assessing Officer for these years is as under:
Assessment Year Income declared by
the Income assessed by
Company the Assessing Officer
2001-02 ` 26,07,430/- Addition of `
2,36,15,935/- as
business income. FTS
income assessed at `
96,85,586/-
2002-03 FTS income of ` 92,35,097/- @ 20% under section
115A holding the
income at ` 33,46,
61,049/-.
2003-04 FTS income of ` 11,100,491/- Addition towards
business income at `
28,461,672/- and
assessing FTS at `
33,868,226/-
2004-05 FTS income of ` Addition towards
business income at `
17,522,950/- 86,059759/- assessing
FTS income at `
25,346,740/-.
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
7. As is clear from the above, the Singapore Company filed voluntary
return for the first time starting from assessment year 2001-02. According
to the Assessing officer, return for the previous years namely assessment
years, 1998-99,1999-2000, 2000-01 should also have been filed. Notices
under Section 148 of the Act for all these three years were accordingly
issued pursuant to which the Singapore Company filed its return declaring
„Nil‟ income for assessment year 1998-99 and 1999-2000. In respect of
assessment year 2000-01, return was filed declaring an income of
`280,00,213/-, the Assessing Officer had assessed the income for these
years. However, the contention of the Singapore Company was that
since it had acquired the energy business from M/s Cameroon Energies
Private Limited only in the financial year 1999-2000 (corresponding to
assessment year 2000-01), no income was earned by it in the assessment
year 1998-99 and 1999-2000. Though, the Assessing Officer did not
accept this plea and made the assessment, the CIT (A) granted the relief
agreeing with the contention of the Singapore Company and his order
has been affirmed by the ITAT as well. Insofar as assessment year 2000-
01 is concerned, against the declared income of Rs. 28,00,120/-, the
Assessing Officer made addition of Rs. 5,135,140/- towards business
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
income and accepting the FTS income as declared by the Singapore
Company.
8. With this, we revert back to the assessment years 2000-01 to 2004-
05 which are the subject matter of appeals filed by the Singapore
Company. It can be seen from the returns filed by the Company that
during this period, the Singapore Company has been offering its service
fee income on cash basis as "Fees for Technical Services" under Section 9
(1) (vii) read with Section 115A of the Act, Section 43 (2) and Section 145
of the Act. According to the Company, the income from supplies is not
taxable in India on the ground that it does not have any Permanent
Establishment in India. This plea was not accepted by the Assessing
Officer who held that the Singapore Company had Permanent
Establishment (PE) in India and for this purpose income from supplies
made by the company is taxed in India as business income. The
Assessing Officer while making additions on this account in respect of
these assessment years had returned the following findings:
(i) The appellant has a business connection/PE in
India.
(ii) The supplies and services are intricately and
inextricably linked with each other.
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
(iii) The AO taxed business profits from supplies
by attributing 100% of the profit (and 75% of
the profits in AY 2004-05) to the Business
connection/PE by applying profit earned by
M/s Rolls Royce Plc, an entity incorporated in
the UK. However, he accepted the position
taken by the appellant that service fees shall
be subject to tax at the rate of 20% plus
surcharge and cess even though he alleged
that services and supplies are inter-related
and they are effectively connected with the
business connection/PE.
It would also been seen that the Assessing Officer did not accept the
income from FTS as declared by the assessee and made additions
thereto. The reason, according to the Assessing Officer, was that the
Singapore Company was liable to pay tax from its income from services
and supplies on accrual basis.
9. The Singapore Company filed separate appeals for these years
which were disposed of by the CIT (A) vide consolidated orders dated 19 th
April, 2008. Vide this order, the CIT (A) granted partial relief to the
Singapore Company in the following manner:-
a) profits should be attributed to PE in India, for
the assessment years 2000-01 and 2001-02, at
10% of net profit, and for 2002-03, 2003-04 and
2004-05 at 25%.
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
b) No income is chargeable to tax in the hands of
the company during the assessment years 1998-99
and 1999-2000 since it did not earn any income
during these periods.
Against the above consolidated order of the Ld. CIT (A), the
appellant filed the appeals before the Tribunal. The revenue has also filed
appeals against the Ld. CIT (A)‟s order in reducing the rate of profit
attributable to PE in India in A.Y. 2000-1 to 2004-05.
10. In the appeals filed by the assessee before the Tribunal, the first
issue before the Tribunal was as to whether FTS was taxable on accrual
basis or on cash basis. The Singapore Company had offered the income
„receipt or cash basis‟ on the ground that this was the method of
accounting followed by it. The Assessing Officer had not accepted the
same in respect of assessment year 1998-99 and 1999-2000 holding that
the method of accounting of Singapore Company should have been
mercantile basis as per the Income Tax Law and the income of the
company was accordingly re-casted. Insofar as assessment year 2002-
03 and 2004-05 are concerned, the Singapore Company had declared the
receipts from Indian companies as FTS and subject it to tax under Section
115 A of the Act. Again, the Assessing Officer held that the Singapore
Company was supposed to maintain the accounts on accrual or
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
mercantile basis. This view of the Assessing Officer was affirmed by the
CIT (A) and the ITAT has also upheld the same in the impugned order. We
may add at this stage itself that this issue does not arise in the present
appeals as the decision of the ITAT in this aspect has been accepted by
the Singapore Company.
11. The second issue taken up by the ITAT pertained to the validity of
Assessing officer‟s action in initiating the proceedings under Section 147
of the Act in respect of assessment year 1998-99 to 2001-02. We have
already pointed out above that in respect of these three years, the
assessee /Singapore Company had not filed any return and the returns
were filed after the notices under Section 148 of the Act were issued.
The CIT (A) held that reopening of the assessment by invoking the
provisions of Section 147 of the Act was valid which is upheld by the ITAT
also. Again, this is not the subject matter of the present appeals.
12. The bone of contention in the appeals filed by the Singapore
Company are the findings returned by the ITAT on the questions as to
whether the Singapore Company had no business connection or
Permanent Establishment in India insofar as its business activity of
supplying the goods or spare parts to Indian customers is concerned. As
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
already indicated in brief above, the Assessing Officer had held that the
assessee is having PE in India and, therefore, the income earned by it
from supplying the goods or spare parts to Indian customers was taxable
in India. This view has been upheld by the CIT (A) as well as the ITAT.
We may now proceed to give some details for forming such a view.
13. As pointed out above, though in the income tax return filed by the
Singapore Company it had shown income from maintenance services as
Fee for Technical Services (FTS) and paid tax @ 20% thereupon as per the
provisions of the Income Tax Act, it had not declared any income for
supply of equipments made to the Indian clients on the ground that it had
no PE in India and, therefore, its business income from supply of spare
parts is not chargeable to tax in India.
14. The AO, on the other hand, was of the view that it was the
responsibility of the assessee company flowing from the supply of original
equipment supplied by the other companies belonging to Rolls Royce
Group, to supply spare parts to the Indian clients, whom the equipments
were supplied by the other companies of Rolls Royce Group. In other
words, the AO had taken a view that since the assessee company was
discharging the contractual obligation of the supplier of the original
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
equipment, providing maintenance services as well as making supply of
spares by the assessee company was incidental to the supply of original
equipment made by the other company of Rolls Royce Group. The AO
had also taken a view that such services and spares cannot be procured
by the India customer from any independent party, and it was only the
assessee, who could provide such services to the Indian clients. The AO,
therefore, had taken a view that the assessee company has business
connection and source of income in India in terms of Section 9 (1 (i) of the
Act. The A.O. has also taken a view that the assessee company has
permanent establishment in India as well. The AO, therefore, held that by
reason of existence of business connection and source of income and
permanent establishment in India, the assessee is liable to pay tax in
respect of income earned on supply of spares as business profit. It was
further observed by the AO that assessee has an executive agent in India
in the form of ANR, whose only source of income in India is from the
assessee, and M/s ANR was responsible to the assessee and was not
doing any activities other than what were directed by the assessee. The
AO, therefore, had taken a view that the assessee has a business
connection or PE in India in the form of ANR.
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
15. The AO further stated that the income of the assessee from
maintenance services accrues or arise in India by deploying engineers
and personnel for undertaking maintenance of the equipment at the sites
of the Indian clients located in India, and the maintenance activities
cannot be isolated from the supply of spares. He further observed that
supply of spares and services or maintenance of the equipments are
inextricably linked to each other as the service engineers would certainly
required spares parts to be replaced or overhauled.
16. The AO further stated that the assessee company has placed one
Mr. Venketaramana as Exclusive Regional Sales Manager in India and,
thus, income of the assessee from supply of spares accrue or arise in
India from the activities of its Sales manager as well.
17. The CIT (A) agreed with the A.O‟s view. In the light of various points
raised by the A.O. the CIT (A) held that the assessee company has a PE in
India on following counts:-
(i) That the assessee has a source of income in India;
(ii) That the assessee has established a complete set
up of facility for providing services to the
customers, during the whole year; and those
services and facilities were provided in respect
of the original equipment supplied by some
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
other who are related/associated concern of the
assessee for a period of more than 30 days.
(iii) That office of the ANR was used for receiving and
soliciting orders;
(iv) M/s ANR is a dependent agent permanent
establishment of assessee.
18. In other words, the CIT (A) took a view that the Singapore company
has a permanent establishment in India within the meaning of Article 5
(1), 5(2) (f), 5 (2) (i), 5 (5), 5(6) and 5(8) of the DTAA.
19. In the appeals filed by the Singapore Company against the aforesaid
findings of the CIT (A), it was submitted that ANR Associates private Ltd.
(ANR) was an independent entity and was not related to the Singapore
Company at all; ANR had various other clients from where it was earning
the revenue and the appellant was the sole customer; ANR did not have
the power to negotiate and conclude the contracts on behalf of the
Singapore Company and the transactions between the ANR and the
Singapore Company were on principal to principal basis. Therefore, ANR
could not be treated as an independent agent, or Permanent
Establishment of the Singapore Company. In any case, even if ANR
presumed to be the PE of the Singapore Company, fee of US $ 40,000/-
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
per annum paid by the Singapore Company to ANR was Arms Length
Price (ALP). The said fee was already taxed at the hands of the ANR and,
therefore, having regard to the provisions of the Double Taxation
Avoidance Agreement (DTAA), there was no question of taxing any
income at the hands of the Singapore Company in respect of supplies
made by it to Indian customers.
20. We would like to point out at this stage that on multiple grounds,
the Assessing Officer and the CIT (A) had held that the Singapore
Company had PE in India. Many of these grounds have not been
accepted by the Tribunal. It has given detailed reasons for knocking out
the various basis adopted by the Assessing Officer for forming the opinion
that the assessee had PE in India. For example, the ITAT has not
accepted that merely because the Singapore Company is a part of a
Group Company of Rolls Royce which has world vide operation, because
of other operations of the Group Companies, the Singapore Company
shall be deemed to have PE in India. According to ITAT the Singapore
Company, like each company belonging to Rolls Royce Group is a
separate entity and a separate tax assessee. Likewise, merely because
some income has accrued to the Singapore Company in India from
deployment of Engineers and personnel in undertaking the maintenance
ITA 1284/2010,ITA 249/2011,ITA 250/2011,ITA 251/2011
ITA 252/2011,ITA 253/2011,ITA 254/2011,ITA 255/2011
ITA 256/2011,ITA 257/2011,ITA 258/2011,ITA 259/2011, ITA 260/2011
and service of equipments at the sites of Indian clients located in India is
not ground to hold that it has PE in India. In the absence of any material
showing and indicating that the contract for providing service and
supplying spare parts are inter-connected and related. Similarly, findings
of the Assessing Officer that Singapore Company shall be deemed to
have Permanent Establishment in India to carry on the business through
PE as it has been providing service facility in India for a period of 183
days in a fiscal year to ONGC and GAIL in connection with their activity of
exploration, exploitation or extraction of material oil in India has been
upset and turned down by the Tribunal holding that no material has been
brought on record to prove and establish the same.
21. In fact, the only reason given by the Assessing Officer, accepted by
the CIT (A) and affirmed by the ITAT for holding that the Singapore
Company has PE in India is premised on the relationship between the
Singapore Company with ANR, which makes the ANR as the PE of
Singapore Company within the meaning of Article 5 (1) and 5 (2) of DTAA
between India and the Singapore, is that the said ANR is a dependent
agent of the Singapore Company within the meaning of Article 5 (8) read
with Article 8 and 9 of DTAA.
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22. We would like to point out here that the Assessing Officer as well as
the CIT (A) had inter alia, held that the activities of ANR are much more
than those provided for in the contract entered into between the
Singapore Company and ANR. The Assessing Officer had recorded in its
order that the Singapore Company had paid the commission of 5% of
the contract value to ANR over and above, the US$ 40,000/- per annum
payable under the written contract made with ANR. This finding has not
been accepted by the ITAT. It concluded that the Singapore Company
paid commission @ 5% of sales value to ANR before the written
agreement was entered into on and from 1.1.2002. From the date of
agreement, instead of paying commission @ 5% of the total invoice value,
a lump-sum commission of US$ 40,000/- was paid to ANR. There was no
evidence to hold that in addition to this US$ 40,000/- the Singapore
Company was paying commission @ 5% on sale as well and claim of the
Revenue that activities of ANR are much more than what is provided for in
the agreement has also held to be wrong and was rejected.
23. After holding so, the Tribunal proceeded to discuss the question as
to whether in the light of nature of activities carried out by the ANR as per
the agreement, the Singapore Company can be said to have a PE in India
in the form of ANR. The Tribunal after extracting the terms of the
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agreement as to the nature of the services to be provided by ANR to the
Singapore Company and terms relating to "Limitation and Restrictions",
"Representations and warranties of ANR", "Confidentiality" etc. in the
light of provisions of DTAA held that relationship between the Singapore
Company and ANR was not on principal to principal basis. Instead, the
ANR acted as a dependent agent of Singapore Company and its activities
were controlled by the Singapore Company. The ANR was, therefore,
could not be regarded as an agent of an independent status within the
meaning of Article 5 (9) of DTAA. For arriving at this conclusion, the
Tribunal has, inter alia, recorded the following findings:-
(1)Activity of ANR Associates during the period from
1.1.2002 was more or less similar what has
been stipulated in the written agreement dated
1.1.2002, except the amount and basis of
payment of commission/ remuneration to ANR.
(2)The purpose of entering into agreement or
understanding that ANR was the replacement of
Singapore Company to have certain in-country
support services in relation to the promotion and
supporting its project in India. ANR was chosen
since it has the infrastructure in India to provide
such services.
(3)ANR was to provide services in relation to
promoting and supporting the sale of „projects‟ in
India. The expression „products‟ has been
deleted in the Schedule A to the agreement
which has two sections. Section-I is with regard
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to new unit products used by oil and gas
industries and Section-2 is with regard to the
customers service products under oil and gas
industry.
(4)Clause 8.2 of the Agreement imposed certain
limitations and restrictions upon ANR with
stipulation that it shall Act exclusively for the
assessee in relation to the promotion of its
product and shall not directly or indirectly assist
any other person, the firm or company competing
with the assessee or shall not advice or represent
or be concerned with or interested in the
business of any such person, firm or any
company in India.
24. Thus, ANR was prohibited from promoting identical products of any
such person, firm or company competing with the firm of assessee.
These unusual restrictions imposed upon the ANR would suggest that ANR
never intended to work as an independent agent in its ordinary course of
business. Reading the agreement as a whole would suggest that ANR
was a Singapore Company exclusively in respect of nature of products
mention in Schedule A of the agreement. Thus, this would suggest that
ANR was not acting in the independent status and in the ordinary course
of their business while rendering to the assessee in-country support
services of the nature described in condition 3 of the agreement in
relation to promote and supporting the sale of products in India.
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25. As per Clause 5 of the agreement, ANR was supposed to take
instructions and advice from, and make the services available to the
Singapore Company through Mr. Sudhir Mayor for the products identified
in Section 1 of Schedule-A and Mr. Dave Klug for products identified in
Section-2 of Schedule A or other nominees. Agreement also provided that
Mr. Robert Turner will only liaison on behalf of the Singapore Company.
26. Thus, the ANR‟s activities was subject to close supervision of the
Singapore Company as it was to report to take instructions and advice
from and make the services available to Singapore Company through Mr.
Sudhir, Mr. Dave and Mr.Robert Turner. Consequently, ANR has to
perform its services under the exclusive control and detail instructions of
the Singapore Company which goes to suggest lack of legal independents
on the part of ANR.
27. According to the ITAT, the ANR was the sole agent of the Singapore
Company and it was "almost wholly" earning from Singapore Company.
Likewise, the Singapore Company was the client of ANR. This conclusion
was drawn from the circumstances that though it was stated that the ANR
was providing services to other companies and was earning commission
from them, the extent of service rendered by ANR and the amount of
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commission had not been disclosed. Only a certificate was given by ANR
by rendering services and earnings commission from other companies
which were not sufficient to prove and establish that ANR was not getting
"almost wholly" on behalf of the Singapore Company. The effect and
difficulties about the services rendered and commission earned from
other companies was within the knowledge of the ANR but the Singapore
Company has chosen not to collect this information and given to the
authorities, therefore, adverse inference was to be necessarily drawn
when Singapore Company has failed to furnish any such documents as
requested by the Assessing Officer.
28. Even the commission of US$ 40,000 per annum paid by the
Singapore Company to ANR was not at arm‟s length payable to the
agent had not termed with reference to the value of foreign products sold
in the relevant year. Prior to 1.1.2002, commission was being paid @ 5%
of invoice value, which had now been changed to lump-sum amount of
US$ 40,000/- payable annually. This sort fixation of remuneration is
usually not done between two independent parties in any uncontrolled
transaction. The remuneration payable, therefore, seems to be in the
nature of transaction controlled by the Singapore Company and cannot be
considered to be made on arm‟s length. More so, when Singapore
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Company had not furnished any instance of transaction entered into
between the two independent parties in uncontrolled manner in support
of its contention that remuneration of lump-sum amount of US$ 40,000/-
was determined at arm‟s length.
29. On the basis of the aforesaid findings the ITAT has summarised the
activities of ANR in connection with the Singapore Company as under:
"(i) That ANR is maintaining premises in India to
carry out its obligation as an agent of the assessee
company.
(ii) ANR exclusively or almost wholly carries out
the business on behalf of the assessee at their
premises in India.
(iii) The activities of ANHR includes promotion of
products of the assessee, maintaining relationship
with customers and potential customers of the
assessee with regard to their equipments need.
(iv) Making liaison with operators of equipments,
which has been sold to oil and gas industry.
(v) Making customers aware of suitable products
sold by the assessee company.
(vi) Arrangements of sales presentation and
demonstration for assessee‟s customers.
(vii) Assisting assessee in creating technical and
commercial environment about its products
required in oil and gas industry in India.
(viii) Providing logistic services to the assessee.
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All these activities have been provided by ANR to
the assessee in India from its fixed place of
business maintained in India. This makes it clear
that ANR or its offices are used by the assessee
company for soliciting order by performing the
activities or services mentioned in para 3 and 4 of
the agreement. It also makes it clear that ANR is
acting almost exclusively for assessee in relation
to promotion of assessee‟s products in India.
Therefore, in the light of the aforesaid
factors discussed and pointed out by us, that is, (i)
that ANR was not acting in its ordinary course of
business while acting for the assessee to provide
services as per agreement dated 01.01.2002, and
(ii) an extensive control was being exercised by the
assessee upon, ANR who was bound to take
instructions and advice from the assessee or its
representative and (iii) that assessee has been
rendering services almost wholly for the assessee,
and (iv) and the transaction between them is not
at Arm‟s length, we hold that ANR is not an
independent agent within the meaning of para (9)
of the Article 5 of DTAA between India and
Singapore."
30. On this basis, the ITAT concluded that Singapore Company had
Permanent Establishment in India within the meaning of Article 5 (1) of
DTAA through its dependent agent ANR. The Tribunal has also held that
even in terms of Article 5 (8), Article 5 (9) of the DTAA, ANR would be
deemed to be the "Permanent Establishment" in India. This position is
discussed in para 98 of the impugned order which reads as under:
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"In the instant case, it is an admitted position that
clause (a) and (b) of para (8) of Article 5 does not
apply inasmuch as there is no material or evidence
brought on record to show and establish that the
ANR habitually exercised an authority to conclude
contracts on behalf of the assessee company in
India or ANR habitually maintained in India a stock
of goods or merchandise from which it regularly
delivers goods or merchandise on behalf of the
assessee company. However, having regard to the
fact that ANR has been rendering services to
negotiate and secured orders in India since long it
can be said that ANR associates habitually secured
orders in India wholly or almost wholly for the
assessee company. This would be established
from the very fact that prior to 01.01.2002, the
assessee used to get commission at the rate of 5%
of invoice value and that commission was
deducted by ONGC from invoice value payable to
assessee company and then paid to ANR. In other
words, a role played by ANR in securing orders
from ONGC on a consideration of % of invoice
value was even recognized by the assessee‟s
customer, namely, ONGC. The payment of 5% of
commission of sale value is substantial amount
having regard to the over all net profit of about 12
to 14% earned by the assessee from supply of
spares. The agent ANR had a relation or
connection with ONGC with regard to contract of
supply of spares by assessee company is well
established from the fact that even the
commission payable to ANR was directly deducted
by ONGC from sale value and then paid to ANR.
Further, the very fact that remuneration for the
services by ANR to assessee company in any year
has been fixed at an fixed fee of US$ 40000 from
01.01.2002 also suggest that ANR was dependent
agent as he agree to remuneration at a fix amount
of US$ 40000 as against earlier arrangement of
payment of specific percentage of sale value of
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items or products sold by assessee company to
Indian clients. The nature of overall services
rendered by ANR to assessee company as
described in clause 3, 4, and 5 read with clause 8,9
and 10 relating to limitations and restrictions,
representations and warrantees of ANR and
confidentiality would show that ANR was
instrumental in securing orders in India for the
assessee company and was acting at the
instructions of assessee company. Therefore, ANR
shall be deemed to be agency PE in India within
the meaning of para (8) and (9) of Article 5 of the
Treaty."
31. After giving the aforesaid findings, the Tribunal proceeded to
determine the income that would be chargeable to tax in the hands of
Singapore Company in India from the business activity of the sale of
spare parts in view of Article 7 of the DTAA which provides that "so much
of the profit as is attributable to PE in India can be taxed in India". As
lump-sum commission of US$ 40,000 was not treated at arm‟s length,
the Tribunal went into the issue of percentage of the income and arrived
at a conclusion that the amount of profit attributable to PE at 10%, as
determined by CIT (A) would be proper as against the Assessing Officer‟s
view that it should be 25%. As a result, the order of the CIT (A) on this
aspect has been sustained and appeals filed by the Revenue for increase
of the profits from 10% to 25% have been dismissed.
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32. In the appeals filed by the Singapore Company, the appellant has
confined its and challenge to the findings of the ITAT that ANR is a
Permanent Establishment of Singapore Company in India as per Article 5
(9) of the DTAA between India and Singapore.
33. In the alternative, it is also argued that order of the Tribunal is also
questioned where it is held that the lump-sum commission of US$
40,000 per annum is not at arm‟s length and fixing 10% of the profits on
sales of the spare parts made in India by the Singapore Company is to
be carried out by ANR in India and chargeable to tax in India.
34. These appeals were admitted on as many as seven substantial
questions of law reproduced below:-
"a. Whether in the facts and circumstances of
the case, the ITAT grossly erred in holding that the
appellant has a business connection in India?
b. Whether in the facts and circumstances of
the case, the ITAT grossly erred in holding that the
Appellant has a Permanent Establishment in India
as per Article 5 of the DTAA between India and
Singapore?
c. Whether in the facts and circumstances of
the case, the ITAT grossly erred in holding that the
appellant partly carried on a business in India
through the premises of ANR under Article 5 (1) of
the DTAA between India and Singapore?
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d. Whether in the facts and circumstances of
the case, the ITAT grossly erred in holding that the
appellant should be regarded as having a
permanent establishment by way of premises used
as a sales outlet or for soliciting and receiving
orders in India under Article 5 (2) (i) of the DTAA
between India and Singapore?
e. Whether in the facts and circumstances of
the case, the ITAT grossly erred in holding that
ANR should be regarded as a Dependent Agent
Permanent Establishment of the Appellant under
the Article 5 (8) of the DTAA between India and
Singapore on the premise that ANR habitually
secures orders wholly and mainly on behalf of the
appellant?
f. Whether in the facts and circumstances of
the case, the ITAT grossly erred in concluding that
ANR has not been compensated at arm‟s length
price, without adequate basis to arrive at such a
conclusion?
g. Whether in the facts and circumstances of
the case, the ITAT grossly erred in holding that 10
percent of the profits on sales of spare parts made
in India by the Appellant should be attributable to
the activities carried out by ANR in India and
should be chargeable to tax in India under the
Act?."
35. However, focus of learned counsel for the appellant remained on
the aforesaid two aspects viz question of law at „e‟ and „f‟. Infact, Mr.
Ganesh, learned Senior Counsel appearing for the appellant submitted
that the issue of arm‟s length price be decided first because of the reason
that if it is held that the payment of aforesaid commission to the ANR was
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at arm‟s length, the issue as to whether the Singapore Company acted
through ANR as its PE in India or not would be rendered academic. He
thus, opened his arguments on the alternate issue of ALP and in fact
entire emphasis of Mr. Ganesh was to convince this Court that the
commission payable was at ALP.
36. In view of the aforesaid approach of the learned counsel for the
appellant limiting scope of its challenge to the ITAT order, we proceed on
the basis that the assessee has business connection in India through ANR.
It is also an admitted fact that ANR is an agent of the assessee India. In
these circumstances, we answer questions of law no. „a‟ to „d‟ in favour of
the Revenue and against the assessee.
37. In this backdrop, the only two issues that need to be decided are:-
(i) Status of ANR - Whether dependent agent within the
meaning of Article 5 (8) of DTAA.
(ii) The payment of US$ 40,000 per annum made by the
assessee to the ANR can be treated as ALP.
38. On this, questions of law „e‟ and „f‟ are formulated. If answer to any
of these questions is in favour of the assessee, then no further discussion
is needed. However, if these questions are decided against the assessee
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then the last question would be as to whether 10% of the profits of
sales on spare parts made in India held as exigible to tax by the ITAT is
wrong. We may again point out here that the Assessing Officer had
attributed 25% of profits on sales of spare parts to the activities carried
out by the ANR as chargeable to tax which was reduced to 10% by the CIT
(A). The Revenue has also filed appeals challenging this part of the order
of the Tribunal as Revenue claims that order of the Assessing Officer
fixing 25% profits on sales on spare parts was proper and valid.
Therefore, while discussing the question of law no. „g‟, appeals of the
Revenue shall also be taken into consideration.
Question of Law-„e‟
"Whether in the facts and circumstances of the
case, the ITAT grossly erred in holding that ANR
should be regarded as a Dependent Agent
Permanent Establishment of the Appellant under
the Article 5 (8) of the DTAA between India and
Singapore on the premise that ANR habitually
secures orders wholly and mainly on behalf of the
appellant?
39. This question becomes relevant having regard to the provisions of
Article 5 of the DTAA between India and Singapore, the relevant
provisions of this Article is as under:-
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ARTICLE 5 - Permanent Establishment
1. For the purpose of this Agreement, the term
"permanent establishment" means a fixed place
of business through which the business of an
enterprise is wholly or partly carried on.
2. The term "permanent establishment" includes
especially:-
(a)......
(b)......
(c)......
(d)......
(e)......
(f)......
(g)......
(h)......
(i) A premises used as a sales outlet or for
soliciting and receiving orders;
(j)...
3......
4......
5.....
6....
7......
8. Notwithstanding the provisions of paragraph
1 and 2 , where a person - other than an agent of
an independent status to whom paragraph 9
applies - is acting in a Contracting State on behalf
of an enterprise of the other Contracting State,
that enterprise shall be deemed to have a
permanent establishment in the first-mentioned
State, if-
(a) he has and habitually exercises in that State an
authority to conclude contracts on behalf of the
enterprise, unless his activities are limited to the
purchase of goods or merchandise for the
enterprise;
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(b) he has no such authority but habitually
maintains in the first-mentioned State a Stock of
goods or merchandise from which he regularly
delivers goods or merchandise on behalf of the
enterprise; or
(c) he habitually secures orders in the first-
mentioned State, wholly or almost wholly for the
enterprise itself or for the enterprise and other
enterprise controlling, controlled by, or subject to
the same common control, as that enterprise,
9. An enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the
other Contracting State merely because it carries on
business in that other State through a broker,
general commission agent or any other agent of an
independent status, provided that such persons are
acting in the ordinary course of their business.
However, when the activities of such an agent are
devoted wholly or almost wholly on behalf of that
enterprise itself or on behalf of that enterprise and
other enterprises controlling, controlled by, or
subject to the same common control, as that
enterprise, he will not be considered an agent of an
independent status within the meaning of this
paragraph.
40. The endeavour of the assessee is to demonstrate that ANR is an
agent of an independent status and, therefore, paragraph-8 of this Article
have no application. Additionally, it was also argued that ANR had not
undertaken any of the activities specified in said paras 8 (a) to (c) of
para 8 of Article 5 and for this reason also, this para have no application.
It was further argued that the activities of ANR as an agent were not
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devoted wholly or almost wholly on behalf of the assessee and thus
conditions stipulated in para 9 of Article 5 are not fulfilled and on this
reckoning also ANR would not be considered as an agent of independent
status within the meaning of said para.
41. We have already taken note of the reasons which are given by the
Tribunal in support of its findings that provisions of para 8 & 9 of Article 5
stand attracted in the instant case.
42. His submission was that the Tribunal had given two reasons for
drawing the conclusion which were totally immaterial having regarding to
the provisions of Article 5 (9). In this behalf, he referred to the following
discussion in the Tribunal‟s order containing these reasons:
(1) The Tribunal had held that ANR was prohibited from
taking competitive products. In the agreement, certain
limitation and restriction has also been imposed upon ANR
vide condition 8.2 that ANR associates shall act
exclusively for assessee in relation to the promotion of its
product and shall not directly or indirectly assist any other
person, the firm or company competing with assessee or
shall not advice or represent or be concerned with or
interested in the business of any such person, firm or
company in India. In other words, in respect of the
products mentioned in Section1 and 2 of Schedule-A, ANR
was restricted to assist directly or indirectly any other
person, firm or company competing with the assessee or
directly or indirectly advice or represent or be concerned
with or interested in the business of any other person,
firm or company in India competing with assessee. It is,
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thus, clear that ANR was prohibiting from promoting the
identical products of any other person, firm, or company
competing with assessee. This unusual restriction
imposed upon ANR would suggest that ANR never
intended to act as an independent agent in the ordinary
course of its business. Reading the agreement as a whole
would suggest that ANR has been rendering services to
assessee company exclusively in respect of the nature of
the products mentioned in Schedule A of the agreement,
and has been restrained or prohibited from assisting,
advising or representing any other person, firm or
company competing with the assessee in the same line of
business. This short of restriction and limitation imposed
upon ANR associates would suggest that ANR associates
was not acting in the independent status and in the
ordinary course of their business while rendering to the
assessee in-country support services of the nature
described in condition No.3 and 4 of the agreement in
relation to promote and supporting the sale of products in
India, details of products being described in Schedule-A of
the agreement. Therefore, on this count, ANR cannot be
regarded as an agent of an independent status within the
meaning of para (9) of Article 5 of DTAA between India
and the Singapore. Further, para (9) of Article 5 provides
that when the activities of an agent of an independent
status acting in the ordinary course of his business are
devoted wholly or almost wholly on behalf of the
enterprise itself or on behalf of that enterprise and other
enterprises controlling, controlled, by, or subject same
control, as that enterprise, he will not be considered an
agent of an independent status within the meaning of
para (9) of Article 5 of DTAA.
(2) The Tribunal also held that the assessee exercised
extensive control over ANR as for various actions, the ANR
was supposed to take instructions and advise from the
representatives of the assessee. The discussion of the
Tribunal in this behalf is reproduced as under:-
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"It is pertinent to note that Clause-5 of the
agreement dated 01.01.2002 between the
assessee and ANR provides that ANR shall
report to, take instructions and advice from,
and make the services available to the
assessee through Mr. Sudhir Mayor for the
products identified in section 1 of Schedule A
and Mr. Dave Klug for the products identified
n section 2 of Schedule A, or their nominees.
Mr. Robert Turner will handle liaison on all
administrative aspects of this agreement on
behalf of company. The assessee may
change the person or persons nominated
under this clause at any time by notice in
writing to ANR. Further clause 8.2 of the said
agreement provides that ANR shall act
exclusively for the assessee in relation to the
promotion of its products and shall not
directly or indirectly assist any other person,
firm or company competing with the
assessee company or advice or represent or
be concerned with or interested I the
business of any such person, firm or
company in India. This clause makes it clear
that ANR is prohibited and restrained from
handling identical products or goods for
principal. As per the condition enumerated in
clause -5 of the agreement, it is clear that his
activities are subject to close supervision of
the assessee company as in the said clause it
has been provided that ANR shall report to,
take instructions and advice from, and make
the services available to the assessee
through Mr. Sudhir Mayor for the products
identified n section 1 of Schedule A and Mr.
Dave Klug for the products identified in
Section 2 of Schedule A, or their nominees,
and Mr. Robert Truner will handle liaison on
all administrative aspects of this agreement
on behalf of company. The assessee may
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change the person or persons nominated
under this clause at any time by notice in
writing to ANR. This makes it clear that ANR
has to perform his services under the
extensive control and detailed instructions of
the assessee company, which goes to
suggest a lack of legal independence on the
part of the ANR. Furthermore, the
stipulations about representations and
warranties of ANR and confidentiality, which
has already been reproduced above, also
indicate an extensive control exercised by
the assessee company over ANR while ANR
was acting for the assessee."
43. Mr. Ganesh, learned Senior Counsel appearing for the assessee
rebutted those reasons by arguing that ANR was already an existing
company and was not created by the assessee. The said ANR had its
own infrastructure and its own business etc. before it entered into the
agreement with the assessee. He submitted that Article 5 (9) was self-
working and highly evolved provision and only those conditions
mentioned therein was to be seen. According to him, the Tribunal
committed fundamental error of law by giving its own reasons which
were irrelevant in the context of Article 5 (9).
44. We are not impressed by that part of the submission of Mr. Ganesh
where he argues that the Tribunal has taken into consideration those
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aspects which are not relevant for the purposes of Article 5 (9). As is
clear from the extracted portion of the Tribunal‟s order, that the focus of
the Tribunal was entirely on Article 5 (9) and it was discussing as to
whether the activities of ANR was devoted wholly or almost wholly on
behalf of the assessee and further as to whether the assessee was
exercising extensive control over the ANR. These very criteria are laid
down in Article 5 (9) for the purposes of determining as to whether such
an agent of independent status or not.
45. It would, however, be a different question as to whether the reasons
given by the Tribunal are sufficient to hold that the criteria stipulated in
Article 5 (9) treating ANR as dependent agent are satisfied. Coming to
this aspect, the argument of Mr. Ganesh was that merely because ANR
was prohibited from taking a competitive products would not mean that
it was an agent of independent status. What was to be seen was that the
„activities‟ of ANR are devoted wholly or almost wholly on behalf of the
assessee. According to Mr. Ganesh, ANR had many other activities and
was doing business for many other parties. Agency of the assessee held
by ANR was only one of those many activities. This contention of the
assessee is not accepted by the Tribunal as according to the Tribunal the
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assessee had not stated as to the extent of services rendered by ANR to
other companies as well as the amount of commission earned by ANR
from them. The particulars of other clients and commission earned by
ANR from them was within the knowledge of ANR but the assessee did
not chose to collect the same and provide it to the Assessing Officer.
The Tribunal further observed that the assessee failed to furnish all such
details on requisition by the Assessing Officer. It was disputed by the
learned counsel for the assessee that there was no such requisition
made and the assessee was never asked to furnish such information.
The fact remains that it was the contention of the assessee that the
assessee was not the sole client of ANR and that activities of ANR were
not devoted wholly or almost wholly on behalf of the assessee. The
assessee produced a communication dated 18th January, 2007 addressed
to it by ANR conforming that ANR had rendered services and had earned
commission from companies other than the assessee during the final
year 2003-04 and that the assessee was not the only source of income
during the year. After this letter was produced, the Assessing Officer did
not ask for further information. The learned counsel for the Revenue
could not show anything to the contrary or dispute the fact that the
Tribunal has gone on the wrong premise that the assessee failed to
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furnish all such details even after requisitioned by the Assessing Officer.
It could not be denied that there was no such requisition made and the
assessee was never asked to furnish any such information. On this
wrong premise, the Tribunal has arrived at wrong conclusion.
46. We may record here that Mr. Ganesh produced the Income-
Tax Returns of M/s ANR for certain relevant years which show that ANR
had been rendering services to other companies as well from where it
had been earning commission and the commission earned from the
assessee was not the only source of income during the year. We do not
want to comment more. The question whether ANR has income from
other clients as well and the extent of such income is very relevant to
decide as to whether the criteria stipulated in Article 5(9) is satisfied or
not. Since the Assessing Officer did not look into the matter from this
angle and the ITAT also disposed of the issue deciding against the
assessee on wrong premise, we are of the opinion that for this limited
issue matter needs to be remanded back to the Assessing Officer. The
Assessing Officer shall decide the question of applicability of Article 5 (9)
as to whether the ANR was providing services t companies other than
the assessee as well and had substantial income from those other
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companies and whether the company stipulated in Article 5 (9) namely
ANR was wholly or almost wholly working on behalf of the assessee will
have to be determined afresh by the Assessing Officer.
47. The assessee is permitted to file the evidence in the form of Income
Tax Return or otherwise on this issue. We may, however, make it clear
that onus would be on the assessee to show that ANR had been
rendering services and earning commission from other companies on the
basis of which it cannot be said that the ANR devoted wholly or almost
wholly on behalf of the assessee. These matters are thus remanded
back to the Assessing Officer for fresh adjudication.
Question of Law - „f‟
Whether in the facts and circumstances of the
case, the ITAT grossly erred in concluding that ANR
has not been compensated at arm‟s length price,
without adequate basis to arrive at such a
conclusion?
48. The submission of the assessee in this behalf is that even if the
ANR is to be treated as PE of the assessee company in India as per
Article 7 (2), only that income is to be treated as business profits which
is reasonably attributed to the Permanent Establishment namely the
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profits which Permanent Establishment might be accepted to make if it
were a distinct and separate enterprise. It was argued that the
remuneration of US$40,000 per annum paid by the assessee to ANR could
be treated as the profit on reasonable basis. It was argued that the
question of ALP could arise only there was a connection between the two.
Even if the ANR was PE of the assessee as that had no bearing o the
fixation of the price i.e. commission agreed to between the parties.
Stress was laid down to the fact that there was no way the assessee could
dictate the commission to be charged by ANR. ANR was negotiating at
third party in the market place and, therefore, sum of US$ 40,000
agreed to between the parties which was payable by the assessee to
ANRT was at arm‟s length and could be treated as reasonable. In
support of his submission, he relied upon the judgment of the Supreme
Court in the case of DIT (International Taxation) Vs. Morgan Stanley and
Co. Inc. (2007) 292 ITR 416 (SC) and specifically referred to paras 29,31
and 32 of the said judgment which reads as under:
"29. As regards determination of profits
attributable to a PE in India (MSAS) is
concerned on the basis of arm's length
principle we have quoted Article 7(2) of the
DTAA. According to the AAR where there is an
international transaction under which a non-
resident compensates a PE at arm's length
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price, no further profits would be attributable
in India. In this connection, the AAR has relied
upon Circular No. 23 of 1969 issued by CBDT
as well as Circular No. 5 of 2004 also issued
by CBDT. This is the key question which arises
for determination in these civil appeals.
31. Article 7 of the U.N. Model Convention
inter alia provides that only that portion of
business profits is taxable in the source
country which is attributable to the PE. It
specifies how such business profits should be
ascertained. Under the said Article, a PE is
treated as if it is an independent enterprise
(profit center) dehors the head office and
which deals with the head office at arm's
length. Therefore, its profits are determined
on the basis as if it is an independent
enterprise. The profits of the PE are
determined on the basis of what an
independent enterprise under similar
circumstances might be expected to derive on
its own. Article 7(2) of the U.N. Model
Convention advocates the arm's length
approach for attribution of profits to a PE.
32. The object behind enactment of transfer
pricing regulations is to prevent shifting of
profits outside India. Under Article 7(2) not all
profits of MSCO would be taxable in India but
only those which have economic nexus with
PE in India. A foreign enterprise is liable to be
taxed in India on so much of its business
profit as is attributable to the PE in India. The
quantum of taxable income is to be
determined in accordance with the provisions
of I.T. Act. All provisions of I.T. Act are
applicable, including provisions relating to
depreciation, investment losses, deductible
expenses, carry-forward and set-off losses
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etc. However, deviations are made by DTAA in
cases of royalty, interest etc. Such deviations
are also made under the I.T. Act (for example:
Sections 44BB, 44BBA etc.). Under the
impugned ruling delivered by the AAR,
remuneration to MSAS was justified by a
transfer pricing analysis and, therefore, no
further income could be attributed to the PE
(MSAS). In other words, the said ruling
equates an arm's length analysis (ALA) with
attribution of profits. It holds that once a
transfer pricing analysis is undertaken; there
is no further need to attribute profits to a PE.
The impugned ruling is correct in principle
insofar as an associated enterprise, that also
constitutes a PE, has been remunerated on an
arm's length basis taking into account all the
risk-taking functions of the enterprise. In such
cases nothing further would be left to be
attributed to the 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 the 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. Lastly, it may be
added that taxing corporate on the basis of
the concept of Economic Nexus is an
important feature of Attributable Profits
(profits attributable to the PE)."
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49. He also referred to the judgment of the Bombay High Court in Set
Sattellite (Singapore) PTE Ltd. Vs. Deputy Director if Income-Tax,
International Taxation and another (2008) 307 ITR 205 (Bom) wherein the
Court held that when an agent in India was taxed on the fare value of
activities in India, the same could not be taxed all over again in the
hands of the assessee as being income attributable to deem permanent
establishment. This very Treaty between Singapore and India was
interpreted in the following manner:
"From a reading of Article 7(1) of the DTAA it
is clear that the profits of an enterprise of a
Contracting State shall be taxable only in that
State unless the enterprise carries on
business in the other Contracting State
through a permanent establishment situated
therein. The profits of the enterprise may be
taxed in the other State but only so much of
them as is directly or indirectly attributable to
that permanent establishment. In para.2 while
determining the profits attributable to the
permanent establishment the expression used
is "estimated on a reasonable basis". The
DTAA does not refer to arms length payment.
The principles contained in the matter of
income from international transaction on an
arms length price are contained in Section 92
of the Income Tax Act. The principles have
been clarified by the Finance Act, 2001 as
also Finance Act, 2002. From the order of the
C.I.T. which has been accepted it is clear that
the Appellant herein has paid to its P.E. on
arms length principle."
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50. There is no quarrel if it is a fair price paid by the assessee to ANR for
the activities of the assessee in India through its PE namely ANR and the
said price i.e. US$ 40,000 per annum has already been taxed in India at
the hands of ANR, then no question of taxing the assessee again would
arise. However, on the facts of this case, we are of the opinion that Mr.
Sabharwal, learned counsel for the Revenue rightly argued that the
judgment of Supreme Court in Morgan Stanley & Co. and Bombay High
Court in Set Satellite (Singapore) PTE Ltd. Vs. Deputy Director of Income-
Tax, International Taxation and another (supra) would not apply to the
facts of this case. In Morgan Stanley, the Supreme Court accepted the
payment as reasonable and fulfilling the ALP criteria only because the
remuneration paid to the agent in India was justified by a Transfer Pricing
Analysis. This Transfer Prices Analysis (TPA) is to be under take4n by
invoking the provisions of Section 92 of the Act. Similar was the position
in Set Satellite (supra) No such exercise is done in the instant case. The
entire thrust of Mr. Ganesh was that ANR was a third party and had
negotiating and could not be dictated by the assessee insofar as
commission paid by the assessee to ANR is concerned. This argument
may look attractive when considered in isolation. However, the
surrounding facts and circumstances under which the aforesaid
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commission came to be fixed would negative the submission of Mr.
Ganesh. The agreement in question under which aforesaid commission of
US$ 40,000 per annum was fixed, was dated 1st January, 2002 made
effective from that date. Prior to this agreement executed between the
parties in writing, the arrangement between the assessee and ANR profit
for 5% commission of invoice value by the assessee to ANR on the sales.
The Tribunal thus held that this sort fixation of remuneration is usually not
done between two independent parties in any uncontrolled transaction.
The remuneration payable, therefore, seems to be in the nature of
transaction controlled by the Singapore Company and cannot be
considered to be made on arm‟s length. More so, when Singapore
Company had not furnished any instance of transaction entered into
between the two independent parties in uncontrolled manner in support
of its contention that remuneration of lump-sum amount of US$ 40,000/-
was determined at arm‟s length.
51. From the aforesaid it is clear that the assessee could dictate the
terms of the payment by altering the same and reducing it to the US$
40,000 per annum from 5% of invoice value when assessee found that on
the basis of 5% total commission payable could be much higher. This
clearly leads to the inference that the assessee was in a position to
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dictate the terms and in the absence of any Transfer Pricing Analysis by
the Transfer Pricing Officer in the instant case, it cannot be said that such
commission could fit the description of "reasonable profits" within the
meaning of Article 7 (2) of DTAA.
52. FAR formally takes into consideration the Functions, Assets used
and Risk involved. Thus to find out whether the agent is remunerative
at arm‟s length, it is necessary to take into account all the risk taking
function of the multi-national enterprise. If all the risk taking functions of
the enterprise have not been taken into account, there would be a need
to attribute profits to the PE for those functions/risks of the dependent
agent that have not been considered. In the absence of such an exercise
and any material on record on these aspects, we are of the opinion that
the assessee has not been able to establish that the remuneration paid to
ANR was equal to arm‟s length remuneration. We are of the opinion that
the Assessing Officer in his order has rightly pointed out that the Supreme
Court has referred to the "functions performed only the risk assumed by
the enterprise" as distinguished from the functions performed and the
risk assumed by the agent (who may constitute a dependent agent PE).
The Assessing Officer has also quoted Rule 10B (2) of the Income-Tax Act
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which provides that uncontrolled transaction shall be judged with
reference to following:-
(a)....
(b) the functions performed, taking into account
assets employed or to be Employed and the risk
assumed, by the respective parties to the
transactions;
(c) the contractual terms (whether or not such
terms are formal or in writing) of the transaction
which lay down explicitly or implicitly how the
responsibility, risks are benefits are to be divided
between the respective parties to the transactions:
(d).....
53. No such exercise is undertaken in the present case. Further, it also
needs to be highlighted that no plausible or justifiable reason is coming
forthwith for changing the commission from 5% of the invoice value to
US$40,000 per annum.
54. We thus, are quite in agreement with the conclusion of the Tribunal
on this aspect and answer this question in the negative i.e. in favour of
the Revenue and against the assessee.
Question of Law ‟g‟
"Whether in the facts and circumstances of the
case, the ITAT grossly erred in holding that 10
percent of the profits on sales of spare parts made
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in India by the Appellant should be attributable to
the activities carried out by ANR in India and
should be chargeable to tax in India under the
Act?."
55. Once we hold that commission of US$40,000 per annum does not
represent the ALP, it is difficult to find fault in the order of the CIT (A) as
well as ITAT fixing 10% of the invoice value for the purpose of taxation,
inasmuch as the test is "profits accepted to make". The CIT (A) has
pointed out in this behalf that the performance of ANR is to render
support service in relation to promotion of sale and the products of the
assessee in India and it has no authority negotiate, accept any order or
make or vary any contract or to make any warranty or representation in
terms of paragraph 8.1 of the Agreement. Therefore, the risk assumed
by the ANR is limited. Even otherwise, it has not come on record that
ANR has performed or assumed responsibility for anything beyond what
is written in the agreement. ANR is performing the functions of
promoting the sale, soliciting orders and those proceed relatable to
market activity within India has to be attributable to the part played by
the PE. On this account, very significant aspect noted by the two
authorities below is that details of business transactions obtained from
ONGC under Section 131 of the Act, in the form of various documents
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supplied by ONGC revealed that supplies constitute the major part of the
business. Therefore, the income with respect to the supplies was to be
computed in terms of Article 7 of DTAA and not under Article 12. This was
the reason that the CIT (A) reduced the percentage from 25% to 10%. For
this purpose, the CIT (A) referred to the judgment of Bombay Tribunal in
the case of Ingersoll Rand Company Vs. ITO 4 ITD 654 (Bom.) The ITAT
while agreeing with the aforesaid view of CIT (A) additionally referred to
the judgment of the Supreme Court in Annamali timber Trust Co. Vs. CIT
41 ITR 781 (SC) wherein it is held that there was justification only of
apportionment of 10% of assessee‟s share of profit of the trading
operations carried out in India when except entering into contract in
taxable territory all other operations were carried out outside taxable
territory. The CIT (A), however, held the view that attribution of income
at the rate of 10% will not represent adequate attribution to all activities
including services being performed in India by ANR. Thus, while restricting
the attribution to 10% in respect of supplies, insofar as assessment year
2002-03,2003-04 and 2004-05 are concerned, the CIT (A) maintained
the attribution of income @ 25% of the profits.
56. We are agree with the following conclusion of the ITAT:-
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"The order of the CIT (A) in applying the rate of
10% of the profit attributable to PE in India is,
thus, upheld, which would be applied for all the
assessment years under consideration. In other
words, the CIT (A)‟s order in applying the rate of
25% of the profit being allocated to PE in India in
assessment years 2002-03, 2003-04 and 2004-
05 has been reduced to 10% and the AO is,
therefore, directed to compute the profit
accordingly."
57. The issue is accordingly answered and, therefore, on this point,
while rejecting the plea of the assessee, we also reject the appeals of the
Revenue for taxing 25% of the invoice value.
58. As a result, the appeals of the assessee are partly allowed to the
extent indicated while answering Question No. „e‟ referring the matters
back to the Assessing Officer for the limited purpose.
59. In the appeals preferred by the Revenue only the extent of income
attributable to the PE is questioned. The case of the Revenue is that it
should not have been restricted as done by the CIT (A) and modified by
the ITAT. The submission is that the order of the Assessing Officer be
maintained.
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60. Since we have upheld the order of the ITAT in its entirety including
on this aspect while discussing the appeals of the assessee, as a
consequence, all the appeals of the Revenue on this aspect are also
dismissed.
(A.K. SIKRI)
JUDGE
(M.L. MEHTA)
JUDGE
AUGUST 30, 2011
skb
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