THE LUBRIZOL CORPORATION, USA, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION), RANGE-3(1)(2), MUMBAI

ITA 4726/MUM/2017

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8519 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Assessment Year: 2013-2014
• Appeal Filed On: 04-07-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: FORUM MEHTA; ALIASGAR RAMPURWALLA
• Keywords: Business income; Transfer pricing; International transaction; Deemed to accrue or arise in india; Permanent establishment
• Section: 5(2); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L , MUMBAI BEFORE SHRI SHAMIM YAHYA , ACCOUNTANT MEMBER & SHRI SANDEEP GOSAIN , JUDICIAL M EMBER I TA NO. 47 26 / MUM/20 1 7 A SSESSMENT Y EAR : 201 3 - 1 4 THE LUBRIZOL CORPORATION, USA, C/O LUBRIZOL ADVANCED MATERIAL INDIA PVT. LTD., 6 TH & 7 TH FLOOR, JASWANTI LANDMARK, MEHRA INDUSTRIAL ESTATE, LBS MARG, VIKHROLI (W), MUMBAI 400 079 PAN AAACT2758F VS. DY. CIT (INTERNATIONAL TAXATION), RANGE 3(1)(2) MUMBAI ( APPELLANT) RESPONDENT) APPELLANT BY : SHRI ALIASGAR RAMPURWALLA & MS. FORUM MEHTA RE SPONDENT BY : S HRI SAMUEL DARSE DATE OF HEARING : 2 3 .10 .201 7 DATE OF PRONOUNCEMENT : 08 . 1 1 . 201 7 O R D E R PER SANDEEP GOSAIN , JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER OF THE DRP - 2, MUMBAI DATED 27.03.2017 FOR A.Y. 2013 - 14. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICER ('LD. AO') AND HON'BLE DISPUTE RESOLUTION PANEL (DR P) ERRED IN NOT FOLLOWING EARLIER YEARS ORDERS OF THE HON'BLE INCOME TAX APPELLATE TRIBUNAL, MUMBAI IN APPELLANT'S OWN CASE (FACTS OF CURRENT YEAR ARE SIMILAR TO THESE ASSESSMENT YEARS ('AYS'), WHEREIN IT HAS BEEN HELD THAT THE APPELLANT DOES NOT HAVE ANY PERMANENT ESTABLISHMENT I TA NO. 4726 /MUM/201 7 THE LUBRIZOL CORPORATION, USA 2 ('PE') IN INDIA AND THEREFORE ITS INCOME FROM INDIAN SALES ARE NOT TAXABLE IN INDIA. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HON'BLE DRP HAVE FAILED TO CONSIDER THE FACT THAT SALES MADE BY THE APPELLANT TO LUBRIZOL INDIA PRIVATE LIMITED ('LIPL') AND OTHER CUSTOMERS ARE NOT TAXABLE IN INDIA, AS: A) THE INCOME FROM SALES IS NOT RECEIVED, DEEMED TO BE RECEIVED, ACCRUES OR ARISES OR DEEMED TO ACCRUE OR ARISE IN INDIA UNDER SECTION 5(2) OF THE INCOM E - TAX ACT, 1961 ('IT ACT') B) THE APPELLANT DOES NOT HAVE A BUSINESS CONNECTION IN INDIA UNDER SECTION 9(I)(I) OF THE IT ACT 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HON'BLE DRP HAVE ERRED IN CONCLUDING THAT THE APPELLANT HAS A PE IN INDIA UNDER ARTICLE 5 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND USA ('TAX TREATY') AND HAVE THEREBY ERRED IN CHARGING TO TAX, THE BUSINESS PROFITS OF THE APPELLANT IN INDIA UNDER ARTICLE 7 OF THE TAX TREATY. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HON'BLE DRP HAVE ERRED IN CONCLUDING THAT LIPL IS A VIRTUAL PROJECTION OF THE APPELLANT IN INDIA. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND H ON'BLE DRP HAVE ERRED IN CONCLUDING THAT THE APPELLANT HAS A FIXED PLACE PE UNDER ARTICLE 5(1) AND 5(2) OF THE TAX TREATY IN INDIA EVEN WHEN THE APPELLANT DOES NOT HAVE ANY PLACE IN INDIA UNDER ITS CONTROL OR DISPOSAL FROM WHICH BUSINESS IS CARRIED ON. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HON'BLE DRP HAVE ERRED IN CONCLUDING THAT THE APPELLANT HAS A SERVICE PE UNDER ARTICLE 5(2)0) OF THE TAX TREATY EVEN THOUGH THE APPELLANT HAS NOT RENDERED ANY SERVICES TO LIPL O R OTHER CUSTOMERS IN INDIA. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HON'BLE DRP HAVE ERRED IN CONCLUDING THAT THE APPELLANT HAS AN AGENCY PE UNDER ARTICLE 5(4) OF THE TAX TREATY IN INDIA IN THE FORM OF LIPL EVEN WHEN LIPL HAS NO AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE APPELLANT IN INDIA. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HON'BLE DRP HAVE ERRED IN TAXING THE PROFITS EARNED FROM I TA NO. 4726 /MUM/201 7 THE LUBRIZOL CORPORATION, USA 3 SALES TO LIPL BY APPLYING FORCE OF ATTRACTION RULE UNDER ARTICLE 7(1) OF THE INDIA - USA TAX TREATY WITHOUT APPRECIATING THE FACT THAT SUCH SALES HAVE BEEN CONCLUDED OUTSIDE INDIA, THE TITLE TO THE GOODS HAVE PASSED OUTSIDE INDIA, PROFITS FROM SUCH SALES HAVE ACCRUED/ARISEN OUTSIDE INDIA A ND THEREFORE THE PROFIT FROM SUCH SALES ARE NOT TAXABLE IN INDIA UNDER SECTION 5 OF THE IT ACT. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HON'BLE DRP HAVE ERRED IN BRINGING TO TAX THE PROFITS OF THE APPELLANT, DESPIT E THE FACT THAT: (A) INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT HAD BEEN FOUND TO BE AT ARM'S LENGTH BY TBE TRANSFER PRICING OFFICER UNDER SECTION 92CA OF THE IT ACT AND HENCE, THERE AROSE NO OCCASION TO ATTRIBUTE ANY FURTHER INCOME TO INDIA AND (B) LIPL IS LIABLE TO TAX ON THE COMMISSION INCOME RECEIVED FROM THE APPELLANT, WHICH EXTINGUISHES THE TAX LIABILITY OF THE APPELLANT (PRINCIPAL). 10. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN ARBITRARILY COMPUTIN G AND HON'BLE DRP HAS ERRED IN CONFIRMING THE COMPUTATION OF TAXABLE INCOME (RS. 7,60,02,6707 - ) ON SUCH SALES (RS. 1,52,00,53,4107 - ) AT AN ADHOC PROFIT RATE OF 5%, WITHOUT CONSIDERING THE PROFIT ATTRIBUTION PRINCIPLES UNDER THE IT ACT AND THE TAX TREATY. 11. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HON'BLE DRP HAVE ERRED IN LEVYING CONSEQUENTIAL INTEREST UNDER SECTION 2346 OF THE IT ACT. 12. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE IT ACT. 3. AT THE OUTSET, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE A SSESSING O FFICER HAD MADE THE ADDITIONS TO THE INCOME RETURNED BY THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS GOT PERMANENT ESTABLISHMENT IN INDIA. HE FURTHER SUBMITTED THAT IDENTICAL ISSUE WAS CONSIDERED IN THE ASSESSEES OWN CASE FOR A.YS. 2005 - 06, 2006 - 07, 2008 - 0 9, 2010 - 11 AND 2012 - 13 AND THE CO - ORDINATE I TA NO. 4726 /MUM/201 7 THE LUBRIZOL CORPORATION, USA 4 BENCHES HAVE HELD THAT THE ASSESSEE DOES NOT HAVE PERMANENT ESTABLISHMENT I N INDIA. ACCORDINGLY, HE SUBMITTED THAT THE ADDITIONS MADE BY THE ASSESSING OFFICER FOR THE YEAR UNDER CONSIDERATION IS LIABLE TO THE DEL ETED. 4. THE LEARNED DR DID NOT OBJECT TO THE FACTUAL ASPECTS PRESENTED BY THE LEARNED AR. 5. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE IS A FOREIGN COMPANY INCORPORATED UNDER LAWS OF THE UNITED STATES OF AMERICA AND RESIDENT OF USA. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF SPECIALTY ADDITIVES USED IN TRANSPORTATION AND INDUSTRIAL LUBRICANTS. LUBRIZOL INDIA PVT. LTD. (LIPL) IS AN ASSOCIATE ENTERPRISE OF THE ASSESSEE, WHEREIN THE ASSESSEE HOLDS 50% OF SHARES AND THE REMAINING 50% OF SHARES ARE HELD BY INDIAN OIL CORPORATION. THE ASSESSING OFFICER NOTICED THAT THE ASSOCIATE ENTERPRISE, VIZ., LIPL IS NOT ONLY ENGAGED IN MANUFACTURING ACTIVITIES, BUT ALSO ENGAGED IN MARKETING OF PRODUCTS MANUFACTURED BY THE ASSESSEE. THE ASSESSING O FFICER NOTICED THAT THE ASSESSEE HAS MADE SALES AMOUNTING TO ` 1,52,00,53,410/ - IN INDIA DURING THE YEAR UNDER CONSIDERATION TO/THROUGH LIPL . THE ASSESSING OFFICER TREATED THE ASSOCIATE ENTERPRISE - LIPL AS PERMANENT ESTABLISHMENT OF THE ASSESSEE AND , ACCORDINGLY , ASSESSED A PROFIT OF ` 7,60,02,670/ - THE DRP HAS ALSO CONFIRMED THE SAME AND ACCORDINGLY THE ASSESSING OFFICER PASSED THE FINAL ASSESSMENT ORDER. HENCE THE ASSESSEE HAS FILED THESE APPEALS BEFORE US. I TA NO. 4726 /MUM/201 7 THE LUBRIZOL CORPORATION, USA 5 6. WE NOTICED THAT THE ISSUE AS TO WHETH ER THERE EXISTS ANY PERMANENT ESTABLISHMENT OF ASSESSEE IN INDIA OR NOT, WAS CONSIDERED BY THE COORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO. 7420/MUM/2010 RELATING TO A.Y. 2006 - 07, VIDE ITS ORDER DATED 3.6.2011. THE COORDINATE BENCH HELD THAT THE ASS ESSEE DID NOT HAVE PERMANENT ESTABLISHMENT IN INDIA IN THAT YEAR WITH THE FOLLOWING OBSERVATIONS: 21.THE MAIN ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US IS THAT THE ASSESSEE IS A TAX RESIDENT OF USA IT IS NEITHER HAVING ANY FIXED PLA CE OF BUSINESS IN INDIA NOR ANY BUSINESS CONNECTION IN INDIA. HE WAS CONTENDED THAT THE AO HAS WRONGLY INTERPRETED ARTICLE 5(1), 5(2) AND 5(4) OF THE INDIA - US TREATY. IT IS SUBMITTED THAT LIPL IS A JOINT VENTURE OF INDIAN OIL CORPORATION AND THE ASSESSEE, BOTH OWNING 50%, THEREFORE, THE ASSESSEE HAD NO CONTROLLING OWNERSHIP IN LIPL. IT IS FURTHER SUBMITTED THAT DURING THE YEAR UNDER C ONSIDERATION, THE ASSESS EE DID NOT CARRY OUT ANY BUSINESS ACTIVITIES IN INDIA AND IT DID NOT RENDER ANY SERVICES IN INDIA OR MADE ANY SALES IN INDIA AS ALL SUCH SALES WERE EXECUTED AND COMPLETED OUTSIDE INDIA, THE RISK AND TITLE IN SUCH GOODS ALSO PASSED TO THE CUSTOMERS OUTSIDE INDIA, AND SO THERE AROSE NO INCOME TAXABLE IN INDIA. IT IS ALSO SUBMITTED THAT THE AO HAS ALLEGED THAT THE SALES MADE BY THE ASSESSEE TO LIPL AND ALSO THOSE MADE TO THIRD PARTIES HAVE GIVEN RISE TO INCOME TAXABLE IN INDIA BY ALLEGING THAT THE ASSESSEE HAD A PE IN INDIA UNDER ARTICLE 5 OF THE INDIA - US TREATY. IT IS SUBMITTED THAT THE ON THE SALES MADE BY THE ASSESSEE TO LIPL AND THIRD PARTIES, THE AO COMPUTED A PROFIT MARGIN OF 5% AND MADE AN ADDITION OF RS . 2,29,26,152/ - TO THE INCOME OF THE ASSESSEE WH ICH IS NOT WARRANTED. 22.THE LEARNED COUNSEL TOOK US THROUGH VARIOUS ARTICLES OF INDIA - US TREATY, WHICH ARE MENTIONED ABOVE IN THE ARGUMENTS OF LEARNED AR TO ESTABLISH THAT THE ASSESSEE DOES NOT HAVE PE IN INDIA. AFTER CONSIDERING THE RELEVANT MATERIAL A ND THE RELEVANT ASPECTS, IT IS NOTED THAT THE LIPL HAS CARRIED OUT AN INDEPENDENT BUSINESS OF MANUFACTURE OF VARIOUS PRODUCTS UNDER TECHNOLOGY TRANSFER AGREEMENT WITH THE ASSESSEE IN INDIA. IT IS HAVING ITS OWN MARKETING NETWORK FOR SALE OF VARIOUS PRODUCT S MANUFACTURED BY IT IN INDIA. THE TOTAL SALES OF LIPL ARE RS. 408.84 CRORES AND COMMISSION RECEIVED FROM THE ASSESSEE IS RS. 0.756 CRORES WHICH CONSTITUTES ONLY 0.18% OF THE SALES. THE ASSESSEE ALSO SOLD PRODUCTS TO INDIAN CUSTOMERS FOR WHICH LIPL RENDERE D CERTAIN SERVICES. THE ASSESSEE SOLD THE PRODUCTS DIRECTLY TO THE INDIAN CUSTOMERS. CONTRACT OF SALE IS CONCLUDED ONCE THE PURCHASE ORDER IS ACCEPTED BY THE ASSESSEE IN USA. ON CONFIRMATION OF THE ORDER AND RECEIPT OF DIRECT PAYMENT FROM INDIAN CUSTOMER, THE ASSESSEE SENDS THE PRODUCTS IN THE NAME OF INDIAN I TA NO. 4726 /MUM/201 7 THE LUBRIZOL CORPORATION, USA 6 CUSTOMER WITH THE INVOICES RAISED BY THE ASSESSEE DIRECTLY ON INDIAN CUSTOMERS. THE LIPL ASSISTS THE ASSESSEE IN THE DIRECT SALE OF PRODUCTS TO INDIAN CUSTOMERS AND COMMUNICATES INFORMATION IN RELATION TO TENDERS AND COMPETITIVE BIDS FROM THE CUSTOMERS. THE LIPL DOES NOT HAVE AUTHORITY TO NEGOTIATE THE TERMS OF THE SALE OR CONCLUDE THE CONTRACT ON BEHALF OF THE ASSESSEE. THE FINAL DECISION REGARDING PRICE, TERMS AND CONDITIONS IS TAKEN BY THE ASSESSEE. THE ASSESSEE HAS NO OPERATION IN RESPECT OF MANUFACTURE OR SALE OF PRODUCT CARRIED OUT IN INDIA. SALES ARE MADE BY THE ASSESSEE TO LIPL ON PRINCIPAL TO PRINCIPAL BASIS. THE ASSESSEE ALSO DOES NOT HAVE A RIGHT TO USE LIPL PREMISES. HAVING REGARD TO ALL THES E FACTS OF THE CASE, WE ARE OF THE VIEW THAT THE LEARNED COUNSEL HAS DEMONSTRATED BY THE ASSESSEE DOES NOT HAVE A PE IN INDIA. FOR THIS CONCLUSION, WE DERIVE SUPPORT FROM THE DECISION OF ITAT, MUMBAI, C T HE CASE OF DDIT VS. DAIMLER CHRYSLER AG, GERMANY, 39 SOT 418 WHEREIN IT WAS HELD THAT 'THERE SHOULD BE SOME DEFINITE ACTIVITY OF THE PE TO WHICH PROFITS CAN BE ATTRIBUTED AND MERELY ACTING FOR A NON - RESIDENT PRINCIPAL WOULD NOT BY ITSELF RENDER AN AGENT TO BE CONSIDERED AS PE FOR THE PURPOSE OF ALLOCATING PROFITS TAXABLE IN THE HANDS OF THE PRINCIPAL. IT IS FURTHER HELD THAT MERELY CALLING A PERSON AS AGENT ACTING ON BEHALF OF FOREIGN NON - RESIDENT WOULD NOT BY ITSELF RENDER HIM TO BE CONSIDERED AS AN AGENCY PE AND PRO TANTO PART OF THE PROFITS OF THE NON RESIDENT IS LIABLE TO BE TAXED IN INDIA. 23. IN VIEW OF THE ABOVE DISCUSSION AND FOLLOWING THE RATIO LAID DOWN BY THE ITAT, MUMBAI IN THE CASE OF DAIMLER CHRYSLER (SUPRA), WE HOLD THAT THE ASSESSEE DID NOT HAVE PE IN INDIA IN THE YEAR UNDER CONSIDERATION IN TERMS OF ARTICLE 5(1), 5(2), 5(4) 86 5(5) OF THE INDO - US TR EATY AND THE ADDITION OF RS. 2,29,26,152/ - MADE BY THE AO BEING A PROFIT MARGIN OF 5% ON THE SALES MADE BY THE ASSESSEE, IS NOT SUSTAINABLE. THE SAID IS THEREFORE DELETED AND GROUND NOS. 1 TO 7 ARE ALLOWED. 7. WE FURTHER NOTICED THAT THE ABOVE SAID ORDER OF THE TRIBUNAL PASSED FOR A.Y. 2006 - 07 HAS BEEN FOLLOWED IN ASSESSEES OWN CASE FOR THE YEARS GIVEN BELOW : A) A.Y. 2004 - 05, 2005 - 06, 2008 - 09 (ITA NO.6443 TO 6445/MUM/2012, ORDER DATED 18.1.2013) B) A.Y. 2009 - 10 (ITA NO. 1247/MUM/2014, ORDER DATED 13.7.2016) C) A Y 2010 - 11 & 2012 - 13 (ITA NOS. 508 & 509/MUM/2017) ORDER DATED 06.03.2017 8. SINCE THE COORDINATE BENCHES HAVE TAKEN CONSISTENT VIEW ON THIS MATTER AND THERE BEING NO CHANGE IN FACTS, BY FOLLOWING ORDERS PASSED BY THE COORDINATE I TA NO. 4726 /MUM/201 7 THE LUBRIZOL CORPORATION, USA 7 BENCHES, WE HOLD THAT THE ASSESSEE DOES NOT HAVE PERMANENT ESTABLISHMENT IN INDIA AND ACCORDINGLY DIRE CT THE ASSESSING OFFICER TO DELETE THE ADDITION MADE BY HIM FOR THE YEAR UNDER CONSIDERA TION RELATING TO PROFIT ESTIMATED ON THE SALES MADE THE ASSESSEE IN INDIA. 9. THE REMAINING ISSUE RELATING TO THE LEVY OF INTEREST U/S. 234B IS CONSEQUENTIAL IN NATURE, THE AO IS DIRECTED TO FOLLOW THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF DIT (IT) VS. NGC NETWORK ASIA LLC (2009) [22 CTR 85 (BOM)] AND THE LEVY OF PENALTY U/S. 271(1)(C) BECOMES INFRUCTUOUS AS WE HAVE DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 10. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COU RT ON THIS DAY OF 8 TH NOVEMBER 2017 SD/ - SD/ - ( SHAMIM YAHYA ) ( SANDEEP GOSAIN ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED : 8 TH NOVEMBER , 2017 SA COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE C I T(A), MUMBAI. 4. THE C I T 5. THE DR, L BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ( ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, MUMBAI