HEMPEL SINGAPOE PTE LTD., MUMBAI V. THE DY CIT (INTERNATIONAL TAXATION)-2(2)(2), MUMBAI

ITA 1205/MUM/2021

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 1194 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2017-2018
• Appeal Filed On: 16-06-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K.C. SELVAMINI
• Keywords: Transfer pricing; International transaction; Permanent establishment
• Section: 143(3); 5(2); 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA No.1205/Mum./2021 (Assessment Year : 2017–18) Hempel Singpore Pte. Ltd. Unit no.2, “B” Wing, 4 th Floor Art Guild House, Phoenix Market City LBS Marg, Kurla (West), Mumbai 400 070 PAN – AADCH3737M ................ Appellant v/s Dy. Commissioner of Income Tax International Taxation Circle–2(2)(2), Mumbai ................Respondent Assessee by : Shri Madhur Agarwal, Advocate Revenue by : Shri K.C. Selvamini, Addl. CIT Date of Hearing – 23/05/2022 Date of Order – 01/08/2022 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The present appeal has been filed by the assessee challenging the final assessment order dated 19/04/2021, passed by the Assessing Officer under section 143(3) read with section 144C(13) of the Income Tax Act („the Act‟), for the assessment year 2017–18. 2. In this appeal, assessee has raised following grounds: Hempel Singpore Pte. Ltd. ITA No.1205/Mum./2021 Page | 2 “Each of the grounds and/ or sub-grounds of the appeal are independent and without prejudice to one another. 1. On the facts and circumstances of the case and in law, the Hon'ble Dispute Resolution Panel (Hon'ble DRP)/Learned Assessing Officer (Ld. AO) erred in further attributing Rs.8,35,44,660, as income of the Permanent Establishment (PE) of the Appellant, taxable in India. 2. On the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO erred in not appreciating that the Appellant has attributed the appropriate profits having regard to the operations that are carried out in India as required under section 9 of the Income-tax Act, 1961 (TT Act). The Appellant prays that the income reported in the return of income of the Appellant be accepted. 3. On the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO erred in not appreciating that the Appellant has attributed the appropriate profits to its Permanent Establishment in India as per Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. The Appellant prays that the income reported in the return of income of the Appellant be accepted. 4. On the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO erred in attributing additional profits on ad-hoc basis to the PE of the Appellant, without considering the fact that the Appellate has paid an arm's length commission to the agent and such payment of extinguishes any further attribution of income to the PE of the Appellant in India. The Appellant prays that the income reported in the income reported in the return of income of the Appellant be accepted 5. On the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO further erred in: 5.1 not following the order of the Hon'ble ITAT for AY 2014-15 and AY 2015-16; 5.2 rejecting the transfer pricing study report without any basis; 5.3 alleging that the PE has not been compensated for market risk, product liability risk and credit risk attributable to it; 5.4 rejecting the comparable companies as functionally different; 5.5 not undertaking the facts finding exercise and failed to substantiate their assumption by not bringing anything on records; Hempel Singpore Pte. Ltd. ITA No.1205/Mum./2021 Page | 3 5.6 computing the arms length price of the transaction without referring the issue to the transfer pricing officer, which is in gross violation of Instruction No. 3 of 2016 issued by the CBDT; 5.7 determining an ad-hoc attribution of profits, without any basis / comparative study. 6. On the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO erred in: 6.1 not appreciating that no further attribution of income is warranted, once the international transaction has been accepted to be at arm's length in the assessment proceeding of the Indian agent i.e. Hempel Paints (India) Pvt. Ltd. (Hempel India') who is recipient of such commission income; 6.2 not considering the fact that for the same nature of transaction there could not be multiple arm's length price i.e. while performing the agency function the Ld. AO/Hon'ble DRP has determined 25% of the sales made in India on ad-hoc basis as income attributable to the PE, however while remunerating Hempel India for performing same function/agency services, the Ld. AO has concluded 8.17% commission on sales as expense deductible while computing the profits of PE. Thus, for the same nature of transaction the Ld. AO/ Hon'ble DRP has determined two different remuneration i.e. 25% of the sale for income side on ad hoc basis and 8.17% on sale for expense side; 6.3 not appreciating that there no 'significant people function were performed by the PE of the Appellant in India and thus, no further attribution was warranted. 7. On the facts and circumstances of the case and in law, the Ld. AO has erred in levying consequential interest u/s: 2348 of the IT Act. 8. On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating the penalty proceedings under section 270A of the IT Act for furnishing inaccurate particulars of income.” 3. The only grievance of the assessee in the present appeal is against attribution of additional profits on an ad hoc basis to the permanent establishment („PE‟) of the assessee in India, without considering that assessee had paid an arm‟s length commission to the said PE. 4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a non-resident company Hempel Singpore Pte. Ltd. ITA No.1205/Mum./2021 Page | 4 incorporated under the laws of Singapore and is a tax resident of Singapore. For the year under consideration, the assessee e-filed its return of income on 29/11/2017 declaring total income at Rs. Nil. The assessee is engaged in business of selling protective coating/paints including marine, protective, container, yacht coating. To cater to its business with Indian customers, assessee takes sales support of Hempel Paints (India) Private Ltd („Hempel India‟). The assessee has entered into an agreement with Hempel India for carrying all the sales support functions in India. In consideration of services rendered by Hempel India to assessee, the former charges commission to the latter. The rate of commission is not specified in the agreement and is proposed to be an arm‟s length compensation. It is an admitted position by the assessee that assessee is having a PE in India under Article 5(2) of the India Singapore Double Taxation Avoidance Agreement („DTAA‟). The assessee‟s PE has also filed return of Rs. Nil, during the year under consideration. The income attributable to PE has been shown as Rs. 4,05,56,141 and the entire amount has been claimed as expenditure paid to Hempel India. In order to verify the above, details were sought from the assessee. In reply, assessee furnished the transfer pricing study report, wherein the assessee claimed the transaction to be at arm‟s length. The assessee was further asked to show cause as to why the profits of the assessee be not attributed to India given the nature of business/transactions carried out in India. In reply, assessee submitted that the coordinate bench of Tribunal in assessee‟s own case has already Hempel Singpore Pte. Ltd. ITA No.1205/Mum./2021 Page | 5 reversed the orders of past assessment proceedings and have decided the matter in favour of the assessee for assessment years 2014–15 and 2015–16. The Assessing Officer vide draft assessment order dated 19/12/2019 passed under section 144C of the Act observed that the Revenue has preferred appeal before the Hon‟ble jurisdictional High Court against the aforesaid order passed by the coordinate bench of Tribunal. Further, the Assessing Officer, following the approach adopted in preceding assessment years, attributed additional profit at 25% of sale value to the assessee‟s PE. 5. The assessee filed detailed objections against the addition made by the Assessing Officer. Vide directions dated 15/03/2021, issued under section 144C (5) of the Act, learned Dispute Resolution Panel („DRP‟), though noted that identical issue in assessee‟s own case has been decided in its favour by the coordinate bench of the Tribunal, rejected the objections filed by the assessee in order to keep the issue alive and to protect the interest of the Revenue. 6. In conformity with the directions issued by the learned DRP, the Assessing Officer vide impugned final assessment order dated 19/04/2021, attributed additional profit at 25% of sales value to the assessee‟s PE in India. Being aggrieved, assessee is in appeal before us. 7. During the course of hearing, Shri Madhur Agarwal, learned counsel for the assessee submitted that similar issue has been decided in favour of the assessee by the decisions of coordinate bench of the Tribunal Hempel Singpore Pte. Ltd. ITA No.1205/Mum./2021 Page | 6 rendered in assessee‟s own case. The learned counsel further submitted that the learned DRP did not grant relief to the assessee merely to keep the issue alive. 8. On the other hand, Shri K.C. Selvamini, learned Departmental Representative vehemently relied upon the orders passed by the lower authorities. 9. We have considered the rival submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee‟s own case in Hempel Singapore Pte Ltd vs DCIT, in ITA No. 7296/Mum/2017, vide order dated 08/02/2019, for the assessment year 2014–15, while holding that when the commission has been found to be at arm‟s length price in the hands of the recipient Indian subsidiary i.e. Hempel India, nothing more would be left to be taxable in India by attributing further income to the PE of the foreign enterprise, observed as under: “7. We have carefully considered the rival submissions. The appellant before us is a resident of Singapore and has business activities in India. Admittedly, it has appointed its 100% owned subsidiary, Hempel India as a sales agent, who is rendering sales support services. It is compensating its Indian subsidiary at cost plus 8.17% mark-up as commission on sales effected through the agent in India. There is no dispute about the existence of assessee's agency PE in India. A foreign company is liable to be taxed in India on so much of its business profits as is attributable to its PE in India. In the present case, the point sought to be made by the assessee is that the commission payment to Hempel India by the assessee is adequate and justified on the basis of transfer pricing analysis, which has indeed been affirmed by the income-tax authorities in the case of Hempel India for the instant assessment year. Therefore, according to the assessee, no further income could Hempel Singpore Pte. Ltd. ITA No.1205/Mum./2021 Page | 7 be attributable to its agency PE again. In other words, as per the assessee, once transfer pricing analysis of the transaction between assessee and its agent in India has been undertaken, there is no further need to attribute profits to the agency PE so long as the remuneration to the Indian agent has been held to be at an arm's length price. Undoubtedly, the proposition sought to be canvassed by the assessee has the approval of Hon'ble Supreme Court in the case of M/s. Morgan Stanley & Co. Inc (supra). The judgment of the Hon'ble Bombay High Court in the case of SET Satellite Singapore Pte Ltd. (supra) is also on the same lines in terms of which it is safe to draw the premise that if appropriate arm's length price has been found to have been applied and paid, nothing more would be left to be taxable in India by attributing further income to the PE of the foreign enterprise. The aforesaid proposition, in our view, is fully attracted in the present case having regard to the fact that for the instant assessment year the commission has been found to be at arm's length price in the hands of the recipient Indian subsidiary, i.e. Hempel India in view of the assessment order dated 27.10.2017 (supra). 8. Before parting, we may also refer to the judgment of the Hon'ble Delhi High Court in the case of DIT vs BBC Worldwise Ltd., ITA Nos. 1341 of 2010 & ors. dated 30.09.2011, which has been relied upon by the assessee before us. In the said case also, the aforesaid proposition was sought to be canvassed on behalf of the assessee therein. The Revenue opposed the same by pointing out that the relevant transfer pricing reference was not in the case of the non- resident assessee therein, but in the case of the Indian recipient. The Hon'ble High Court specifically repudiated the aforesaid plea and held that once it was treated as arm's length price in the hands of the recipient, a different view cannot be taken in the case of assessee non resident who had paid the same commission to its agent. The Hon'ble High Court deemed it fit to apply the proposition approved in the case of M/s. Morgan Stanley & Co. Inc (supra) as well as in the case of SET Satellite Singapore Pte Ltd. (supra) even in a situation where the transfer pricing reference was in the context of Indian recipient of income. In our considered opinion, the ratio of the judgment of the Hon'ble Delhi High Court in the case of BBC Worldwise Ltd. (supra) is fully attracted in the present case and, therefore, the addition of ₹5,15,05,000/- to the returned income is clearly untenable in the facts of the instant case. We hold so.” 10. We further find that similar findings were also rendered by coordinate bench of the Tribunal in assessee‟s own case in Hempel Hempel Singpore Pte. Ltd. ITA No.1205/Mum./2021 Page | 8 Singapore Pte. Ltd. v/s DCIT, in ITA No. 6601/Mum./2018, vide order dated 03/04/2019, for the assessment year 2015–16. The learned Departmental Representative could not show us any reason to deviate from the aforesaid orders and no change in facts and law was alleged in the relevant assessment year. The issue arising in the present case is recurring in nature and has been decided in favour of the assessee by the decision of the coordinate bench of the Tribunal for preceding assessment years. Thus, respectfully following the orders passed by the coordinate bench of the Tribunal in assessee‟s own case cited (supra), we uphold the plea of the assessee and delete the impugned addition. Accordingly, ground no. 1 read with ground no. 4 raised in assessee‟s appeal are allowed. In view of the above, other grounds need no separate adjudication. 11. In the result, appeal by the assessee is allowed. Order pronounced in the open court on 01/08/2022 Sd/- PRAMOD KUMAR VICE PRESIDENT Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 01/08/2022 Hempel Singpore Pte. Ltd. ITA No.1205/Mum./2021 Page | 9 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai