AI Insights
The case involves appeals by the Deputy Commissioner of Income-tax against Best Oasis Limited concerning the assessment years 2012-13 and 2016-17. The core issue was whether the income of Best Oasis Limited, a foreign company with a business connection in India through its subsidiary Priya Blue Industries Pvt. Ltd. (PBIPL), was liable to tax in India. The AO had attributed profit to the PE in India based on the provisions of Section 9(1)(i) of the Income Tax Act and Rule 10 of the IT Rules, following a search operation that revealed significant business activities conducted in India. The CIT(A) had earlier deleted the additions made by the AO, leading to the Revenue's appeal. The Tribunal found that the AO's method of profit attribution was not in accordance with the rules as the proposed modifications were not finalized and could not be applied retrospectively.
Appeal Details
Counselvise Citation
[2025] 140 COUNSELVISE.COM (IT) 313944 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Appellant
Respondent
Appeal Type
Income Tax (Search & Seizure) Appeal
Pronouncement Date
05-05-2025
Appeal Filed By
Department
Order Result
Allowed
Bench Allotted
A
Assessment Year
2012-2013
Judgement Text
" IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE Ms. SUCHITRA KAMBLE, JUDICIAL MEMBER & SHRI NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER आयकर अपील (एस.एस.) सं./I.T(SS).A. Nos. 48 & 49/Ahd/2024 (Ǔनधा[रण वष[ / Assessment Years : 2012-13 & 2016-17) Deputy Commissioner of Income-tax Central Circle-1(1), Ahmedabad बनाम/ Vs. Best Oasis Limited Kesar Orion Hindu Colony Lane Nos. Dadar East, Mumbai 400014, Maharashtra èथायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAICB9490J (Appellant) .. (Respondent) Assessee by : Shri Tushar Hemani, Sr. Advocate & Shri Parimalsinh B. Parmar, A.R. Revenue by : Shri Abhay Thakur, CIT. DR & Shri B. P. Srivastava, Sr. DR Date of Hearing 02/04/2025 Date of Pronouncement 05/05/2025 O R D E R PER SHRI NARENDRA PRASAD SINHA, AM: These two appeals are filed by the Revenue against the combined order of the Commissioner of Income-Tax (Appeals)- 11, Ahmedabad, (in short ‘the CIT(A)’), dated 28.03.2024 for the A.Ys. 2012-13 & 2016-17, respectively. 2. Since, facts of the two cases are identical, both the matters were heard together and are being disposed of vide this common order for the sake of convenience. 3. The brief facts of the case are that the assessee is a foreign company registered in Hong Kong since 2010 and wholly owned IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 2 – subsidiary of Priya Blue Industries Pvt. Ltd. (PBIPL). A search under Section 132 of the Income Tax Act, 1961 (in short ‘the Act’) was conducted on Priya Blue group on 19.11.2019 and it transpired that the assessee company was carrying out its business operation in India through the employees of PBIPL. In the course of search at Mumbai Office of PBIPL, it was found that the said office was also functioning as the key office of Best Oasis Ltd. (Hong Kong) and a number of important functions of assessee company were being carried out from Mumbai office premises. The activities of the assessee company being carried out in India from the office of PBIPL constituted a business connection in India and the income of the assessee was deemed to accrue or arise out of such business connection and was liable to be taxed in India. It further transpired that the assessee company had entered into various international transactions with its associated/related enterprise (AEs) which included sale, securing guarantee and getting managerial/office services from its AEs. The international transaction entered into by the assessee company with its AEs in India in respect of sale of vessels in different years was found to be as under: IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 3 – 4. In the course of assessment proceedings, the AO had referred the matter to the Transfer Pricing Officer (TPO) to compute the Arm’s Length Price (ALP) in relation to international transactions carried out by the assessee with its AEs. The TPO after making detailed enquiries had passed order u/s.92CA(3) of the Act dated 28.01.2022, wherein it was found that the transaction of the assessee with its AEs in respect of receipt of services and corporate guarantee was not at ALP. However, as the revision of ALP had impact of reducing the income of the assessee, no adjustment was proposed by the TPO in accordance with the provision of Section 92(3) of the Act. The AO held that the assessee had a permanent establishment (PE) in India and that it was carrying on business in India through its PE. Accordingly, the AO applied “Profit Attribution Theory” and quantified deemed taxable income from source in India. The AO had passed the final assessment order u/s.153A/143(3) of the Act on 31.03.2022 and incomes of Rs.4,98,11,358/- and Rs.1,57,90,918/- were quantified for the A.Y. 2012-13 & 2016- 17 respectively. The AO had computed the income of the assessee by net profit attribution in accordance with the Proviso to Section 9(1)(i) of the Act read with Rule 10 of IT Rules. 5. Aggrieved with the order of the AO, the assessee had filed an appeal before the First Appellate Authority, which was decided by the Ld. CIT(A) vide the impugned order. The Ld. CIT(A) had deleted the additions on the ground that the international transactions made by the assessee were referred to the TPO for determination of the ALP and the TPO in the order IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 4 – u/s.92CA(3) of the Act did not make any upward adjustment. The Ld. CIT(A) had further held that once the ALP of the transactions with the AEs was determined, there cannot be any profit attribution in case of any foreign company, even if it was assumed that such foreign company had a PE in India. 6. Now, the Revenue is in second appeal before us. The ground of appeal taken by the Revenue in IT(SS)A No.48/Ahd/2024 for A.Y. 2012-13 is as under: 1). \"In the facts and on the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 4,98,11,358/- on account of deemed income of the assessee, computed as per provision of section 9(1)(i) of the Act r.w.s. Rule 10.\" The ground in IT(SS)A No.49/Ahd/2024 is identical to the ground in IT(SS)A N.48/Ahd/2024, except the quantum of addition. 7. Shri Abhay Thakur, Ld. CIT.DR appearing for the Revenue had drawn our attention to provision of Section 9(1)(i) of the Act and submitted that the assessee had a business connection in India as the business of the assessee was being carried out through the employees of PBIPL. He submitted that in view of business connection of the assessee in India, all income accruing or arising through such business connection was liable for tax in India. In this regard, he has drawn our attention to the statement of key persons of PBIPL recorded during search, from which it was evident that the day-to-day business activity of the assessee company was being carried out through employees of PBIPL. He further submitted that the AO had worked out the income of the IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 5 – assessee arising out of the business connection in India by applying Rule 10 of the IT Rules and accordingly, profit was attributable to the assessee. The Ld. CIT-DR further submitted that the AO had allowed the set off of loss attributable by following the same methodology and taxed only the net profit attributed in the relevant years. He submitted that the profit estimated on account of business activity are correctly worked out in accordance with the methodology as provided under the Rules. The Ld. CIT.DR submitted that since the business connection of the assessee in India was not denied, the Ld. CIT(A) was not correct in deleting the addition as made by the AO. The ld. CIT.DR stressed that the ld. CIT(A) had upheld the findings of the AO that the assessee had a permanent establishment (PE) in India. Under the circumstances, he was not correct in deleting the addition for the reason that the income of the PE was liable to tax in India as per the provisions of the Act and also as per the provisions of India - Hong Kong Double Tax Avoidance Agreement (DTAA). 8. Per contra, Shri Tushar Hemani, Ld. Sr. Counsel submitted that the AO had referred the matter to the TPO for determining the ALP of the transactions carried out with the AEs. Further that the TPO did not recommend for any adjustment in the hands of the assessee on account of ALP of the international transactions. The Ld. Sr. Counsel submitted that it was a settled proposition that once ALP of transactions with AEs was determined, there cannot be any profit attribution in case of any foreign company, even if, it was assumed that such foreign IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 6 – company had a PE in India. In this regard, he placed reliance on the following decisions: ➤ Morgan Stanley & Co. (2007) 292 ITR 416 (SC); ➤ Celltick Technologies Ltd- (2019) 109 taxmann.com 334 (Mum); ➤ E-Funds IT Solution Inc.(2017) 399 ITR 34 (SC) ➤ Honda Motors Co. Ltd. (2021) 125 taxmann.com 350 (SC) ➤ Honda Motors Co. Ltd. (2020) 119 taxmann.com 400 (Delhi) ➤ Honda Motors Co. Ltd. - (2019) 108 taxmann.com 300 (SC); ➤ Honda Motor Co. Ltd. (2018) 92 taxmann.com 353 (SC) ➤ Celltick Technologies Ltd.- (2019) 107 taxmann.com 94 (Mumbai) ➤ ESPN Star Sports Mauritius-(2021) 123 taxmann.com 220 (Del); The Ld. Sr. Counsel submitted that the Ld. CIT(A) had correctly appreciated the facts of the case and rightly deleted the addition and that no interference was called for in the order of the Ld. CIT(A). 9. We have carefully considered the rival submissions. As per the provision of Section-9 of the Act, all income accruing or arising, whether directly or indirectly, through or from any business connection in India, is deemed to accrue or arise in India. The contention of the Revenue is that the assessee company, which is wholly owned subsidiary of PBIPL, was having a business connection in India through the employees of PBIPL. In the course of search conducted at the premises of PBIPL, statements of various employees of PBIPL, namely Shri Ravindra Jagade, Shri Bhavik Modi, Shri Viral Jitendra Shah, Shri Sanjay Mehta et al were recorded and it transpired from their statements that all the important business operations of the IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 7 – assessee were carried out from Mumbai Office since 2010 onwards. These key managerial persons had admitted that though they had worked for the assessee company, they had received salary from PBIPL only. On the other hand, the assessee had denied any business connection or existence of any permanent establishment (PE) in India. It was contended that the activities carried out by the employees of PBIPL were only back office operations and that the activities carried out were in the nature of preparatory or auxiliary character. 10. In order to adjudicate the ground as raised in this appeal, we have to decide the following two issues: (i) Whether the assessee was having a business connection in India or whether it was having a permanent establishment (PE) in India; (ii) If yes, whether any income can be attributed to the working of the Enterprise/PE. 11. The contention of the Revenue is that due to presence of its key managerial personnel in India and the key commercial decisions of the company being taken in India, the Place of Effective Management (POEM) of the assessee company was in India. At the outset, the concept of POEM was brought on statute in section 6 of the Act w.e.f. 1st April, 2017 and, therefore, this concept was not applicable to the assessment years involved in this appeal. Further, the collegium of three Commissioners had already examined this issue and given a finding that the assessee was not having any POEM in India for the A.Ys. 2017-18 to 2019- IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 8 – 20. Even if it is admitted that the concept of POEM was not applicable to the two concerned years involved in this appeal, we have to examine whether the assessee was having any business connection through a PE in India in these two years (i.e. A.Ys. 2012-13 & 2016-17). 12. As per Article 5(1) of India Hong Kong Double Tax Avoidance Agreement (‘DTAA’), there exists a PE, if there is a fixed place of business, through which the business of an enterprise is wholly or partly carried on. The contention of the Revenue is that the employees of PBIPL, who were working for the assessee company, constituted a PE under Para 1 of Article 5 of DTAA. The general definition of PE in Article 5(1) of DTAA postulates two conditions to be fulfilled: (i) existence of a fixed place of business; & (ii) the business of an enterprise is wholly or partly carried out in India through such fixed place. As already mentioned earlier, in the course of statement recorded during search, the key employees of PBIPL had admitted that they were carrying on the business activity of the assessee company as well. All the employees who were doing the work of assessee company, had a secured right to use their office space and in this sense, the assessee had a fixed place of business. Thus, the first requirement of PE that there should be a fixed place of business was fulfilled in this case, in the form of office place of the employees of PBIPL. However, this fixed place of business will result into PE only if it was used for carrying on the business of the assessee either wholly or partly. IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 9 – 13. The AO has reproduced the statements of the key employees, recorded in the course of search, in the assessment order. It is found there from that, all important business operations of the assessee - such as - sale and purchase of vessels, accounts writing, maintenance of books, maintenance of bills & vouchers, drafting and executing Power of Attorney, drafting- executing & maintaining Memorandum of Agreements and their addendums, conduct of Board meetings & drafting their Minutes, entire work of banking and insurance related operations etc. were being carried out from Mumbai Office of PBIPL only. Though the assessee had subsequently filed affidavit of the employees retracting their original statements made during the search, such affidavit was rejected by the Ld. CIT(A) as an afterthought and for which he has relied upon various judicial decisions. It is thus evident that the critical business operations of the assessee were carried out from Mumbai Office of PBIPL, which were not in the nature of preparatory or auxiliary character, and in that sense the assessee had a PE in India. The issue of PE was also examined by the Hon’ble Supreme Court in the case of Morgan Stanley & Co. (supra), on which reliance was placed by the assessee, and the Apex Court had held in that case as under: “15. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 10 – \"the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(1). We find no infirmity in the ruling of the AAR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed.” 14. The Apex Court had held in that case that the services performed by the deputationists deployed by the foreign company would constitute a service PE in India. Following the same analogy, the services rendered by the employees of the holding company would also constitute a PE in this case. The Ld. CIT(A) after carefully considering all the facts and circumstantial evidences had upheld that the assessee had a PE in India. The assessee has been unable to controvert this finding of the lower authorities. In fact, the assessee has not even challenged the finding that it was having a PE in India. Therefore, the finding of the Ld. CIT(A) that the assessee had a PE in India, is upheld. 15. The assessee had only challenged the profit attribution to the PE before the Ld. CIT(A). The international transaction carried out by the assessee were referred to TPO for benchmarking the same with the ALP. The Ld. CIT(A) had taken note of the fact that the TPO did not make any upward adjustment IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 11 – in respect of international transactions of the assessee company with its AEs. Accordingly, he held that once Arm’s Length Price of international transaction was determined, there cannot be any profit attribution in the case of the assessee company, even if it was having a PE in India. In this respect, the ld. CIT(A) has relied upon the decision of Hon’ble Supreme Court in the case of Morgan Stanley & Co. (supra) as well as other decisions. 16. The facts involved in the case of Morgan Stanley & Co. (supra) was that Morgan Stanley & Co. (‘MSC’), was a non- resident company incorporated in USA, which had entered into a service agreement with a group company MSAS (incorporated in India) for providing certain support services. MSC had filed an Advance Ruling application on the question whether MSC would be regarded as having a PE in India on account of services rendered by MSAS under the service agreement and if so, the amount of income attributable to such PE. The Authority for Advance Ruling (‘AAR’) had held that MSC cannot be regarded as having a fixed place of PE or an agency PE. However, MSC would be regarded as having a PE in India, if it were to send some of its employees to India as stewards or as deputationists, in the employment of MSAS. The AAR had further held that no further income would be attributable in the hands of its PE (i.e. MSAS) in India as long as MSAS was remunerated by MSC for its services at Arm’s Length Price. The Hon’ble Supreme Court had upheld the principle that if the PE was remunerated on Arm’s Length Basis taking into account all the risk-taking functions of the multinational enterprise, there would be IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 12 – nothing further left to be attributed to the PE. However, if the transfer pricing analysis doesn’t adequately reflect the functions performed and the risk assumed by the enterprise; in such a case, there would be need to attribute profits to the PE for those functions/risks that were not considered. 17. The above judgment of Hon’ble Supreme Court was delivered in the context that the PE of the foreign company in India was remunerated in accordance with the service contract and the income attributable to the PE was required to be ascertained. The Apex Court had held that if the international transaction was at ALP, there was no requirement for any further profit attribution. The judgment nowhere stipulates that under such circumstances the profit of PE will not be taxable in India. In fact, the question of taxability of the profit of the PE was not at all in dispute before the Hon’ble Supreme Court. It was only the attribution of the profit to the PE that was to be considered in that case. Therefore, the Ld. CIT(A) was not correct in holding that the PE of the assessee company will not be liable to tax in India, if the transaction was carried out at ALP and no adjustment was made by the TPO. This finding is based on incorrect appreciation of the facts and issue under consideration before the Hon’ble Supreme Court in the case of Morgan Stanley & Co. (supra). The profit arising to the PE where the international transaction was carried out at ALP, was never under dispute. This question was neither raised before the AAR nor adjudicated by the Hon’ble Supreme Court in the case of Morgan Stanley & Co. (supra), as it was a foregone conclusion. IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 13 – In fact, in the case of Morgan Stanley & Co (152 Taxmann 1), a specific question was raised in respect of profit attribution to the PE, in its application filed before the AAR, which was as under: 5. Based on the facts and in the circumstances of the case, in the event the applicant is deemed to have a PE in India as a result of sending employees to India or due to deputation of employees to MSAS, whether given the function which would be performed and risks that could be undertaken by such a PE, would a remuneration based on a margin on total operating cost of the PE be the appropriate profit attributable to such a PE ?\" No ruling was given on this question by the AAR, as it was found to be alternate formulation of question Nos. (2) and (3) and the question No. (2) was rejected and question No. (3) was dropped. The question No.-2 was whether Transactional Net Margin Method’ (\"TNMM\") was the most appropriate method for the determination of the arm’s length price in respect of transactions between the applicant and MSAS and question No.-3 was whether a mark-up of 29 per cent (using the TNMM for the benchmarking analysis) on the operating costs incurred by MSAS for providing services to the applicant would meet the arm’s length test. Be that as it may, it was acknowledged in the application that profit of the PE was taxable in India and accordingly profit had to be attributed to the PE by a suitable method. The question of taxability of profit arising to the PE, even where the international transaction was carried out at ALP, was never under dispute. 18. The finding of Ld. CIT(A) that the transaction of the assessee with its AE was at ALP, was also not correct. The TPO had held in his order u/s.92CA(3) of the Act dated 28.01.2022 that the transaction of the assessee with its AEs in respect of receipt of services and corporate guarantee was not at ALP. IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 14 – However, no adjustment was proposed by the TPO for the reason that the revision of ALP had impact of reducing the income of the assessee. In spite of no adjustment being proposed by TPO, the fact remains that the transaction of the present assessee in respect of receipt of services and corporate guarantee was not at ALP and for this reason also the decision of the Apex Court in the case of Morgan Stanley & Co. (supra) was not applicable. 19. The mechanism for taxability of profit of PE is prescribed in Article 7 of India Hong Kong DTAA, which is reproduced below: ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting Party shall be taxable only in that Party unless the enterprise carries on business in the other Contracting Party through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Party but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting Party carries on business in the other Contracting Party through a permanent establishment situated therein, there shall in each Contracting Party be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Party in which the permanent establishment is situated or elsewhere, in accordance with the provisions of the tax laws of that Party. 4. Insofar as it has been customary in a Contracting Party to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, or on the basis of such other method as may be prescribed by the laws of that Party, nothing in paragraph 2 shall preclude that Contracting Party from determining the profits to be taxed IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 15 – by such apportionment or other method; the method adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. 20. The Article-7 of the DTAA stipulates that where the business is carried on through a PE, the profit of the enterprise will be taxed only to the extent as attributable to the PE. It further stipulates that profit of PE will be worked out by considering that the PE was a distinct and separate enterprise. Further, the profit will be attributed to the PE on the basis of apportionment of the total profit of the enterprise. According to this guideline, the profit of PE in India was required to be worked out on the basis of apportionment of the total profit of the enterprise and such profit had to be attributed even in the case where the international transaction between the enterprise and its PE was at Arm’s Length Price. Therefore, the decision of ld. CIT(A) that the assessee was not liable to pay tax in respect of profit of its PE, as the transaction between the enterprise and its PE was at ALP, is not found correct and this finding is reversed. The assessee company was liable to pay tax on the profit of its PE in India, even if the international transactions were carried on at ALP. The profit of the PE, whether positive or negative, had to IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 16 – be worked out, even in the case, where the international transaction was on ALP basis. 21. The assessee has objected to the profit attribution as made by the AO and submitted that the AO had erred in applying the formula as proposed vide CBDT’s letter dated 18th August 2019, despite the fact that such formula had not been made effective and not incorporated in the provision of the IT Act and in Rule 10 of Income Tax Rules, 1962. It was contended that the AO had ignored the settled position of law that any Rule or prescribed formula therein can be applied only once it was finalized by CBDT and became effective. It was submitted that even if it is assumed that the proposed Rule 10 is approved on any future date, it had to be applied only prospectively. Therefore, the said rule comprising the formula for arriving at computation of profit attributable to activities in India cannot be made applicable retrospectively in the case of the assessee for A.Y. 2012-13 and A.Y.2016-17. The assessee has further submitted that profit attribution, if any, proposed to be made in India, should be based on the proportion of “cost incurred by the assessee for its Indian Operations”. In this respect the following submission and working was provided by the assessee: “8 Without prejudice to above submissions, assessee further submits that profit attribution if any proposed to be made in India, it should be based on the proportion of \"cost incurred by the assessee for its Indian Operations\". In case of TP assessment of holding company of assessee i.e. PBIPL, TPO has proposed certain cost allocation of assessee in the hands of PBIPL as such cost has been incurred by the assessee for its Indian Operations based on a Function Asset Risk Analysis (FAR). The cost allocated for AY 2012-13 is Rs.89,86,431/- and for AY 2016-17 of IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 17 – Rs.1,17,92,391/-. This costs also includes allocation of Corporate Guarantee Fees of Rs.63,59,537/- and Rs.82,81,937/-respectively for AY 2012-13 & AY 2016-17. Based on above discussion, assesse submits computation of profit attribution of the assesse in India based on its cost allocated to India, as under: ………….. Based on above facts, submissions and various decisions of Hon'ble the Apex Court as well as other judicial bodies, assessee submits that- - No further profit should be attributed in India as adjustment has already been made in AE's hand; - Profit attribution mechanism adopted by AO should not be accepted as same is based on draft rules which are not yet finalized. - Profit attribution, if any, proposed to be made, should be restricted to the employee cost of Indian AE allocated towards the business operations of assessee, working produce supra.” IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 18 – 22. The Ld. AR has submitted the following rejoinder in this respect vide letter dated 01.04.2015: “2. The Hon'ble bench vide order sheet entry dated 24.02.2025 had sought certain clarifications from the assessee. During the hearing on 24.03 2025, submissions from the department was also sought on the said point raised in the above mentioned order sheet. Accordingly, the submission is given as under: i) Best Oasis Limited (Assessee) is the wholly owned foreign subsidiary of Priya Blue Industries Private Limited. Vide para 4 of the assessment order, the AO had elaborated the provisions of section 9(1)(i) of the Act read with Rule 10. As the company during FY 2011-12 had carried out business operations through employees of Priya Blue Industries Private Limited (PBIPL) which is the holding company of the assessee. Hence, the assessee has been treated to have permanent establish in India and accordingly, profit earned by the company required attribution in India as per the above provisions. The AO had given elaborate justification in the assessment order and has also given the working of profits attributable to operation in India. Various statements of the employees of the PBIPL were also depicted in the assessment order and finally the AO had given elaborate rebuttal against the assessee's submission in Para 7 of the assessment order and has worked out profit attribution for the AY 2012-13 to AY 2019-20 in the light of CBDT discussion draft dated 18.08.2019. Considering the finding of the AO elaborated in the Para 7 of the assessment order, it is clearly evident that the net profit attribution for the AY 2012-13 worked out at Rs. 4,98,11,358/- is correct and justified and the same may kindly be upheld. ii) So far as the alternate working of profit or loss of PE, filed by the assessee is concerned, it is not transparent with regard to its working. It is not ascertainable as to how such alternative working has been arrived at and therefore, if the Hon'ble ITAT decides to take a call for the alternate working, it is humbly requested that such working may kindly be restored to AO for verification or for deriving alternate profit or loss of the PE in India. iii) The TPO noted certain discrepancies in the reported transactions with regard to corporate guarantee and issue elaborate show cause notice to the assessee as per page 22-30 of the TPO order. The TPO vide Para 6.9 of the order had not accepted the receipt of service and corporate guarantee by the PE at Arm's Length. However, since, the revision of ALP had an impact on reducing income of the assessee, the TPO did not propose any adjustment in view of the restrictions mentioned in the section 92(3) of the Act. Hence, considering the above constrain the AO did not make any TP adjustment. IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 19 – iv) Finally, it is humbly submitted that the profit attribution for the AY 2012- 13 worked out at Rs. 4,98,11,358/- by the AO may kindly be taken as correct and justified or the alternative working of profit or loss may kindly be restored to AO for verification and deriving the same. 23. We have carefully considered the rival submissions. It is found that the AO had attributed the profit to PE by applying the formula proposed by CBDT vide letter dated 18th August, 2019. The assessee, before the AO, had objected to work out the profit on the basis of the recommendation of the Expert Committee appointed by the CBDT, to the proposed amendment to Rule 10 r.w.s. 9(1)(i) of IT Act, for profit attribution in the case of the PE. Since, the proposed Rules were not finalized and incorporated in the statute/rules, the AO was not correct in working out of the profit of PE by adopting the formula suggested by the Expert Committee. Even if the proposed formula was approved by CBDT and incorporated in the Rules, the same could not have been applied retrospectively to work out the profit of the PE for the earlier years i.e. A.Ys. 2012-13 & 2016-17. It is a settled position of law that the Rule prescribing method of disallowance cannot be made applicable retrospectively. Therefore, the profit attribution of PE as made by the AO for A.Y. 2012-13 & A.Y. 2016-17 on the basis of proposed modification in the IT Rules at a future date and which has not yet been made part of the Rules, cannot be held as correct. 24. The assessee has submitted that the profit attribution of the assessee for the A.Ys. 2012-13 & 2016-17 should be done on the basis of “cost incurred by the assessee for its Indian operators” and a working in this respect has also been furnished. The Revenue has requested that the matter may be set aside to the file of the AO to verify the working or for deriving profit of the PE by any alternate method. Clause 7.4 of India - Hong Kong DTAA stipulates that the profit of PE can be attributed on the basis of an IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 20 – apportionment of the total profits of the enterprise to its various parts, or on the basis of such other method as may be prescribed by the laws of that party. Further, Rule-10 of the I T Rules provided for determining the income in the case of the non-residents in the following manner: Determination of income in the case of non-residents. 10. In any case in which the Assessing Officer is of opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated:— (i) at such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable, or (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or (iii) in such other manner as the Assessing Officer may deem suitable. 25. Since, the profit as attributed by the AO, was not in accordance with the method approved by the statute, we deem it proper to set aside the matter to the file of the AO with a direction to re-allocate the profit attributable to the PE in accordance of the Rules. The AO will be at liberty to apply one of the methodologies as prescribed in Rule-10, which is found to be most suitable for profit attribution to the PE for the A.Ys. 2012- 13 and 2016-17. While doing so, the AO will examine the methodology as suggested by the assessee before us for profit attribution on the basis of “cost incurred by the assessee for its Indian operators” and give his categorical finding in this respect, after allowing an opportunity of being heard to the assessee. It is made explicit that we have not examined the methodology as suggested by the assessee and refrain from making any comment on the IT(SS)A Nos. 48 & 49/Ahd/2024 [DCIT vs. Best Oasis Limited] A.Ys. 2012-13 & 2016-17 - 21 – suitability of this method. The assessee will be free to lead his arguments before the AO to justify as to how this method is the most appropriate method for profit attribution to the PE. 26. In the result, both the appeals filed by the Revenue are allowed for statistical purposes. This Order pronounced on 05/05/2025 Sd/- Sd/- (SUCHITRA KAMBLE) (NARENDRA PRASAD SINHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 05/05/2025 S. K. SINHA True Copy आदेश कȧ ĤǓतͧलͪप अĒेͪषत/Copy of the Order forwarded to : 1. अपीलाथȸ / The Appellant 2. Ĥ×यथȸ / The Respondent. 3. संबंͬधत आयकर आयुÈत / Concerned CIT 4. आयकर आयुÈत(अपील) / The CIT(A)- 5. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय अͬधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड[ फाईल / Guard file. आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलȣय अͬधकरण, अहमदाबाद / ITAT, Ahmedabad "
Other Referred Cases
Morgan Stanley & Co. (2007) 292 ITR 416 (SC), Celltick Technologies Ltd- (2019) 109 taxmann.com 334 (Mum), E-Funds IT Solution Inc.(2017) 399 ITR 34 (SC), Honda Motors Co. Ltd. (2021) 125 taxmann.com 350 (SC), Honda Motors Co. Ltd. (2020) 119 taxmann.com 400 (Delhi), Honda Motors Co. Ltd. - (2019) 108 taxmann.com 300 (SC), Honda Motor Co. Ltd. (2018) 92 taxmann.com 353 (SC), Celltick Technologies Ltd.- (2019) 107 taxmann.com 94 (Mumbai), ESPN Star Sports Mauritius-(2021) 123 taxmann.com 220 (Del)
Laws Referred To
Income Tax Act, 1961
Guide to Charitable Trusts: Formation, Benefits, and Compliance
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360 Brand Audit (30 mins)
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Object Clause - Merchant Banking Business
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Memorandum Amendment Resolution
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