Corning SAS-India Branch Office, Gurgaon V. DDIT, New Delhi

ITA 4795/DEL/2010

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5883 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 17-05-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 02-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Avoidance of tax
• Section: 143(3)

Judgement Text

1ITA NO. 4678/DEL/2010 & ORS IN THE INCOME TAX APPELLA TE TRIBUNAL DELHI BENCH: B NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT ME MBER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A .NO. 4678/DEL/20 10 (A.Y 2005-06) DIRECTOR OF INCOME TAX CIRCLE-3(2), INTERNATIONAL TAXATION ROOM NO. 411, 4 TH FLOOR, DRUM SHAPE BUILDING, I. P. ESTATE NEW DELHI (APPELLANT) VS CORNING SAS - INDIA BRANCH OFFICE (FORMERLY KNOWN AS CORNING SA-INDIA BRANCH OFFICE) 3 RD FLOOR, DLF GATEWAY TOWERS, DLF CITY, PHASE-III GURGAON AAACC3889Q (RESPONDENT) I.T.A .NO. 4795/DEL/2 010 (A.Y 2005-06) CORNING SAS - INDIA BRANCH OFFICE (FORMERLY KNOWN AS CORNING SA-INDIA BRANCH OFFICE) 3 RD FLOOR, DLF GATEWAY TOWERS, DLF CITY, PHASE- III, GURGAON AAACC3889Q (APPELLANT) VS DDIT CIRCLE-3(2) NEW DELHI (RESPONDENT) APPELLANT BY SH. AJAY VOHRA, SR. ADV, SH. ADITYA VOHRA, ADV & MS. DEEPIKA AGARWAL, ADV RESPONDENT BY SH. SURENDER PAL, SR. DR ORDER PER SUCHITRA KAMBLE, JM THESE APPEALS ARE FILED BY THE REVENUE AND ASSESSEE AGAINST THE ORDER DATED 31/05/2016 PASSED BY THE CIT(A)- 2, NEW DEL HI FOR ASSESSMENT YEAR 2012-13. DATE OF HEARING 03.05.2018 DATE OF PRONOUNCEMENT 30.05.2018 2ITA NO. 4678/DEL/2010 & ORS 2. THE GROUNDS OF APPEALS ARE AS UNDER:- ITA NO. 4678/DEL/2010 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND LAW, THE LD.CIT(A) ERRED IN REDUCING THE PERCENTAGE OF ATTRIBUTION FRO M 50% TO 40% WHILE UPHOLDING THE BASIS OR ATTRIBUTION, WHICH WAS FAR ( FUNCTION ASSETS RISK) ANALYSIS. ITA NO. 4795/DEL/2010 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN N OT HOLDING THAT THE ASSESSMENT COMPLETED UNDER SECTION 143(3) OF THE IN COME-TAX ACT, 1961 (THE ACT), BEING BARRED BY LIMITATION WAS UNLAWFUL AND VOID AB INITIO. 2. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER I N MAKING ADDITION BY ATTRIBUTING INCOME TO THE EXTENT OF 40% OF THE ALLE GED PROFITS OF CORNING-FRANCE FROM DIRECT SALES TO CUSTOMERS IN INDIA TO THE APPE LLANT BRANCH IN INDIA. 2.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRE D ON FACTS AND IN LAW IN HOLDING THAT THE PROVISION OF FORCE OF ATTRACTIO N WAS APPLICABLE IN TERMS OF PARAGRAPH 2 OF THE PROTOCOL OF THE DOUBLE TAXATION AVOIDANCE TREATY WITH FRANCE (THE TREATY). 2.2 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRE D ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN TERMS OF PARAGRAPH 2 OF PROTOCOL TO THE TREATY, THE PROVISION OF FORCE OF ATTRACTION COULD BE APPLIED O NLY IF SUCH PROVISION IS INCLUDED / PRESENT IN THE DOUBLE TAXATION AVOIDANCE TREATIES BETWEEN INDIA AND UK AND ALSO INDIA AND GERMANY. 2.3 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRE D ON FACTS AND IN LAW IN NOT HOLDING THAT ACTIVITIES RELATING TO THE DIRE CT SALES BY CORNING-FRANCE WERE PERFORMED OUTSIDE INDIA AND NO INCOME IN RELAT ION THERETO WAS DIRECTLY OR INDIRECTLY ATTRIBUTED TO THE APPELLANT BRANCH IN INDIA, IN TERMS OF ARTICLE 7(1) AND ARTICLE 7(2) READ WITH THE PARAGRAPHS 2& 3 OF P ROTOCOL OF THE TREATY. 2.4. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN TERMS OF PARAGRAPH 2 OF THE PROTOCOL TO THE TREATY, THE PRINCIPLE OF FORCE OF ATTRACTION WOULD NOT APPLY IN ABSENCE OF THE SAME BEING PRESENT IN THE DOUBLE TAXATION AVOIDANCE TREATY BETWEEN INDIA AND UK AND INDIA AND GERMANY. 2.5. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN OTHERWISE NO I NCOME FROM SALE DIRECTLY 3ITA NO. 4678/DEL/2010 & ORS MADE TO THE CUSTOMERS BY CORNING-FRANCE FROM OUTSID E INDIA COULD BE ATTRIBUTED TO THE APPELLANT BRANCH IN INDIA SO AS T O BE SUBJECT TO TAX IN INDIA. 3. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN NOT HOLDING THAT EVEN IN TERMS OF SECTION 9(1 )( I) OF THE ACT, NO INCOME FROM SALE DIRECTLY MADE TO THE CUSTOMERS BY CORNING-FRAN CE FROM OUTSIDE INDIA , COULD BE ATTRIBUTED TO THE APPELLANT BRANCH IN INDI A SO AS TO BE SUBJECT TO TAX IN INDIA. 4. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING THAT THERE WAS AN ATTEMPT TO AVOID ATTRI BUTION OF PROFIT EARNED BY THE HEAD OFFICE, VIZ., CORNING-FRANCE TO THE APPELL ANT BRANCH IN RESPECT OF THE DIRECT SALE AND, THEREFORE, IN TERMS OF PARAGRAPH 1 (C) OF THE PROTOCOL, PROFITS FROM SUCH DIRECT SALE, TO THE EXTENT OF CONTRIBUTIO N OF THE PERMANENT ESTABLISHMENT, I.E., THE APPELLANT BRANCH IN INDIA, ARE ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT. 5. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE REMUNERATION BY WAY OF AGENCY COMMISSION @ 3% OF DIRECT SALE EARNED BY THE APPELLANT BRANCH IN IN DIA, HAVING BEEN ACCEPTED TO BE AT ARMS LENGTH, IN TERMS OF THE ORDERS PASSE D UNDER SECTION 92CA0X-OF THE ACT BY THE TRANSFER PRICING OFFICER {TPO), NO FURTHER INCOME COULD BE ATTRIBUTED TO THE APPELLANT BRANCH. 6. THAT THE COMMISSIONER OF INCOME-TAX (APP EALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT NO ADDITIONAL INCO ME / PROFITS WAS ATTRIBUTED TO THE APPELLANT BRANCH IN RESPECT OF DIRECT SALES MADE BY CORNING-FRANCE IN THE PRECEDING AS WELL AS SUCCEEDING ASSESSMENT YEAR S. 7. WITHOUT PREJUDICE THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING THAT 40% OF T HE PROFITS FROM DIRECT SALE IN INDIA WOULD BE ATTRIBUTED TO THE APPELLANT BRANCH IN INDIA . 8. WITHOUT PREJUDICE THAT THE COMMISSIONER OF INCOM E-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN ASSIGNING AD-HOC WEIGHTAGE TO V ARIOUS FUNCTIONS PERFORMED, ASSETS USED AND RISK UNDERTAKEN BY CORNI NG INDIA AND CORNING SAS, FRANCE WITHOUT GIVING A RATIONAL BASIS FOR THE SAME. 9. WITHOUT PREJUDICE THAT THE COMMISSIONER OF INCOM E-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN APPLYING THE ATTRIBUTION RATIO TO THE GROSS PROFIT PERCENTAGE OF THE TRADING ACTIVITY UNDERTAKEN BY THE APPELLANT AND IGNORING THAT CORNING SAS, FRANCE HAD INCURRED LOSSES IN THE SAID YEAR. 3. CORNING S.A.S., FRANCE HAS ESTABLISHED A BRANCH OFFICE IN INDIA IN THE NAME OF CORNING SAS INDIA BRANCH OFFICE. CORNING FRANCE IS A SUBSIDIARY OF 4ITA NO. 4678/DEL/2010 & ORS CORNING INTERNATIONAL CORPORATION, USA. CORNING INC ORPORATED, USA IS THE ULTIMATE HOLDING COMPANY FOR ALL CORNING GROUP ENTI TIES. THE ASSESSEES BUSINESS ACTIVITIES PRIMARILY COMPRISE OF IMPORT, W AREHOUSING AND SALE OF ROUGH OPHTHALMIC BLANKS IN INDIAN MARKETS WHICH INCLUDES PROVIDING SALES/ADMINISTRATIVE SUPPORT FUNCTION AND PROVIDING MARKETING SERVICES FOR NON-OPHTHALMIC PRODUCTS SUCH AS OPTICAL FIBRE, OPTI CAL FIBRE CABLE, TELECOMMUNICATION EQUIPMENTS, CERAMIC SUBSTRATES, E TC. THE ASSESSEES BUSINESS WAS SET UP IN INDIA IN THE YEAR 1997 AFTER OBTAINING THE APPROVAL FROM THE RESERVE BANK OF INDIA. DURING THE YEAR UNDER CO NSIDERATION THE ASSESSEE WAS ENGAGED IN THE FOLLOWING BUSINESS ACTIVITIES: A) TRADING/DISTRIBUTION ACTIVITIES: THE ASSESSEE IM PORTED ROUGH OPHTHALMIC PRODUCTS FROM CORNING FRANCE/CORNING BRAZIL, WAREHO USED THESE IMPORTS AND SOLD THEM TO CUSTOMERS IN INDIA. DURING THE YEAR TH E SALES MADE THROUGH THIS ACTIVITY WAS SHOWN AT RS.36,72,26,311/- AGAINST WHI CH THE COST OF TRADED GOODS WAS BOOKED AT RS. 30,18,36,779/-. B) AGENCY FUNCTIONS WITH RESPECT TO DIRECT SALES MA DE BY CORNING FRANCE: THE ASSESSEE PROVIDED SALES REPRESENTATION FUNCTION S TO CORNING FRANCE SO AS TO ENABLE IT TO MAKE DIRECT SALES TO INDIAN CUSTOME RS IN TERMS OF THE GLOBAL SALES COMMISSION AGREEMENT EXECUTED BY THE CORNING GROUP. FOR THE AFORESAID AGENCY SERVICES, THE ASSESSEE EARNED A COMMISSION A T THE RATE OF 3% SHOWN AT RS.90,19,934/- ON TOTAL DIRECT SALES OF EURO 52,48, 30,067/-. C) MARKET SUPPORT ACTIVITIES: THE ASSESSEE PROVIDED MARKETING SUPPORT SERVICES TO CORNING INC. USA FOR SALE OF NON-OPHTHA LMIC PRODUCTS IN THE SOUTH ASIAN REGION IN TERMS OF GLOBAL MARKETING SERVICES AGREEMENT. IN LIEU OF SUCH SERVICES THE ASSESSEE IS REIMBURSED ALL THE COST IN CURRED BY IT ALONG WITH A MARK-UP OF 5.06%. INCOME FROM THIS ACTIVITY WAS SHO WN AT RS.4,43,13,628/- FOR THE YEAR. 5ITA NO. 4678/DEL/2010 & ORS FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILE D ITS RETURN OF INCOME ON OCTOBER 30, 2005, DECLARING TOTAL INCOME OF RS. 5,1 0,47,560/-. IN THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE ACT, THE ASSESSING OFFICER DETERMINED THE TOTAL INCOME OF THE ASSESSEE AT RS.6 ,88,01,799/- AS AGAINST THE RETURN INCOME OF RS.5,10,47,560/-. IN THE ASSESSMEN T ORDER, THE ASSESSING OFFICER HELD THAT THE DOUBLE TAXATION AGREEMENT BET WEEN INDIA AND FRANCE HAS THE FULL FORCE OF ATTRACTION PRINCIPLE AND AS THE A SSESSEE HAD A PE IN INDIA, THE ASSESSEE WAS BROUGHT TO TAX THE DIRECT SALES MADE B Y CORNING FRANCE IN INDIA TO THIRD PARTY CUSTOMERS BY ATTRIBUTING 50% OF THE PROFITS OF CORNING FRANCE EARNED FROM SUCH DIRECT SALES MADE IN INDIA. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE AS SESSEE FILED APPEAL BEFORE THE CIT(A). THE CIT(A) DISMISSED THE APPEAL OF THE ASSESSEE. THE ASSESSEE AS WELL AS THE REVENUE IS BEFORE US CHALLE NGING THE GROUNDS MENTIONED HEREINABOVE. FIRST WE ARE TAKING UP THE A PPEAL FILED BY THE ASSESSEE. 5. THE LD. AR SUBMITTED THAT COMMISSION EARNED @ 3% BY THE ASSESSEE ON AGENCY FUNCTION WAS ACCEPTED BY THE ASSESSING OFFIC ER IN ALL OTHER ASSESSMENT YEARS, PRECEDING AS WELL AS SUCCEEDING YEARS, AND I N NONE OF THE OTHER ASSESSMENTS, FURTHER PROFITS HAVE BEEN ATTRIBUTED B Y THE ASSESSING OFFICER TO THE ASSESSEE IN RESPECT OF DIRECT SALES MADE BY COR NING SAS FRANCE IN INDIA, EVEN THOUGH THE ASSESSEE HAS UNDERTAKEN SAME FUNCTI ONS, ASSUMED IDENTICAL RISKS AND EMPLOYED SIMILAR ASSETS IN ALL ASSESSMENT YEARS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 2003- 04, THE TPO REJECTED THE COMBINED EVALUATION OF AGENCY SERVICES AND DISTRIBU TION ACTIVITY, AND SEGREGATED THE AFORESAID ACTIVITIES FOR THE PURPOSE OF BENCHMARKING ANALYSIS. THE TPO, FURTHER AGGREGATED THE AGENCY SERVICES ACT IVITY WITH THE MARKETING SUPPORT SERVICE ACTIVITY AND BENCHMARKED THE OPERAT ING RESULTS OF SUCH COMBINED ACTIVITY, APPLYING TNMM. FOR CARRYING OUT THE AFORESAID ANALYSIS, THE TPO DETERMINED THE INCOME FROM AGENCY SERVICES FUNC TION BY ALLOCATING 6ITA NO. 4678/DEL/2010 & ORS EXPENSES RELATING TO THE DISTRIBUTION AND AGENCY SE GMENT IN PROPORTION OF DISTRIBUTION SALES AND SALES MADE BY THE CORNING SA S, FRANCE ON WHICH THE ASSESSEE EARNED AGENCY COMMISSION @ 3%. ACCORDINGLY , THE TPO, IN THE TRANSFER PRICING ORDER MADE A TRANSFER PRICING ADJU STMENT ON ACCOUNT OF THE DIFFERENCE IN THE ARMS LENGTH PRICE OF THE INTERNA TIONAL TRANSACTIONS OF RECEIPT OF AGENCY COMMISSION AND MARKETING SUPPORT SERVICE FEE. ON FURTHER APPEAL, THE CIT(A) DELETED THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO HOLDING THAT THE COMMON EXPENSES RELATING TO THE DISTRIBUTI ON FUNCTION AND AGENCY FUNCTION OUGHT TO BE ALLOCATED IN PROPORTION OF THE GROSS PROFIT MARGIN, WHICH WAS THEREAFTER UPHELD BY THE TRIBUNAL VIDE ORDER DA TED 28.08.2015. THE TPO, WHILE GIVING EFFECT TO THE ORDER OF THE TRIBUNAL, V IDE APPEAL EFFECT ORDER DATED 29.11.2016, ACCEPTED THE INTERNATIONAL TRANSACTION OF RECEIPT OF AGENCY COMMISSION @ 3% OF THE DIRECT SALES MADE BY CORNING SAS FRANCE IN INDIA, TO BE AT ARMS LENGTH PRICE. FOLLOWING THE ORDER OF TH E ASSESSMENT YEAR 2003-04, THE TRIBUNAL REMANDED THE MATTER TO THE TPO FOR THE ASSESSMENT YEARS 2004- 05, 2006-07, 2008-09 AND 2009-10. WHILE GIVING EFFE CT TO THE ORDER OF THE TRIBUNAL, THE TPO ACCEPTED THE INTERNATIONAL TRANSA CTION OF RECEIPT OF AGENCY COMMISSION TO BE AT ARMS LENGTH IN THE SAID ASSESS MENT YEARS (EXCEPT ASSESSMENT YEAR 2008-09 WHICH IS PENDING BEFORE THE TPO). IN VIEW OF THIS THE LD. AR SUBMITTED THAT SINCE THE RATE AT WHICH COMMI SSION INCOME EARNED BY THE ASSESSEE IS HELD TO BE AT ARMS LENGTH IN THE P RECEDING AS WELL AS SUBSEQUENT ASSESSMENT YEARS BY THE TPO, NO FURTHER ATTRIBUTION OF PROFIT IS REQUIRED TO BE MADE TO THE PE IN RESPECT OF SUCH FU NCTION, DURING THE YEAR UNDER CONSIDERATION, TAKING INTO CONSIDERATION THE FACT THAT THERE IS NO CHANGE IN FACTS OF THE RELEVANT FINANCIAL YEAR VIS--VIS T HE OTHER FINANCIAL YEARS. THE LD. AR RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN CASE OF RADHASOAMI SATSANG VS. CIT 193 ITR 321 (SC), WHEREI N, THE COURT HELD THAT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE D IFFERENT ASSESSMENT YEARS IS ACCEPTED ONE WAY OR THE OTHER, A DIFFERENT VIEW IN THE MATTER IS NOT WARRANTED, UNLESS THERE BE ANY MATERIAL CHANGE IN F ACTS. THE LD. AR FURTHER SUBMITTED THAT THE HONBLE SUPREME COURT IN THE CAS E OF CIT VS. EXCEL 7ITA NO. 4678/DEL/2010 & ORS INDUSTRIES LTD. 358 ITR 295 (SC), SIMILARLY HELD TH AT THE REVENUE CANNOT BE ALLOWED TO FLIP-FLOP ON ANY ISSUE WHICH HAS BEEN AC CEPTED BY THE REVENUE AND THE REVENUE OUGHT TO LET THE MATTER REST RATHER THA N SPEND THE TAX PAYERS MONEY IN PURSUING LITIGATION FOR THE SALE OF IT. 6. THE LD. AR FURTHER SUBMITTED THAT IT IS WELL ACC EPTED PRINCIPLE THAT IN CASE THE TRANSACTION UNDERTAKEN WITH THE PE IS ACCE PTED TO BE AT ARMS LENGTH, NO ADDITIONAL PROFIT IS LIABLE TO BE ATTRIBUTED TO THE PE IN INDIA. THE LD. AR RELIED UPON THE DECISION OF THE HONBLE SUPREME COU RT IN CASE OF DIT (INTERNATIONAL TRANSACTION) VS. MORGAN STANLEY AND CO. INC. 292 ITR 416 (SC), WHEREIN THE COURT HELD THAT ONCE THAT PERMANENT EST ABLISHMENT HAS BEEN REMUNERATED ON AN ARMS LENGTH BASIS, TAKING INTO A CCOUNT ALL THE FUNCTIONS, ASSETS AND RISKS, NO FURTHER ALLOCATION OF PROFIT I S REQUIRED. THE LD. AR ALSO RELIED ON FOLLOWING DECISIONS: I. ADIT VS. E-FUNDS IT SOLUTIONS INC 399 ITR 34 (SC ) II. SET SATELLITE (SINGAPORE) PTE LTD. VS. DDIT (IN TL TAXATION) 307 ITR 205 (BOM) THUS, THE LD. AR SUBMITTED THAT THE ASSESSING OFFIC ER ERRED ON FACTS AND IN LAW IN ALLOCATING ADDITIONAL PROFIT TO THE ASSESSEE, BR ANCH OFFICE OF CORNING SAS, IN ADDITION TO THE COMMISSION INCOME EARNED @ 3% ON DI RECT SALES MADE BY CORNING SAS TO CUSTOMERS IN INDIA. 7. THE LD. AR FURTHER SUBMITTED THAT THE ASSESSING OFFICER, IN THE IMPUGNED ASSESSMENT ORDER, ASSIGNED AD-HOC WEIGHTAGE TO THE VARIOUS FUNCTIONS PERFORMED, ASSETS USED AND RISK UNDERTAKEN BY THE A SSESSEE AND CORNING SAS, FRANCE. THE LD. AR SUBMITTED THAT THE FUNCTIONS CON SIDERED BY THE ASSESSING OFFICER FOR THE PURPOSE OF ASSIGNING WEIGHTS MAINLY RELATES TO THE MARKETING FUNCTIONS PERFORMED BY THE ASSESSEE IN RELATION TO DIRECT SALES MADE BY CORNING SAS FRANCE TO CUSTOMERS IN INDIA. FUNCTIONS IN RELA TION TO RESEARCH AND 8ITA NO. 4678/DEL/2010 & ORS DEVELOPMENT OF THE PRODUCT, INVENTORY, MANAGEMENT, LOGISTICS/ WAREHOUSING, MANUFACTURING ACTIVITIES, ETC. THAT CONSTITUTE SUBS TANTIAL PART OF ANY MANUFACTURING AND DISTRIBUTION BUSINESS MODEL HAVE NOT BEEN CONSIDERED BY THE ASSESSING OFFICER WHILE ASSIGNING WEIGHTAGE TO THE FUNCTIONS BEING PERFORMED BY THE ASSESSEE AND CORNING SAS, FRANCE. THE LD. AR FURTHER SUBMITTED THAT THE ASSESSING OFFICER ALSO FAILED TO RECOGNIZE THE RISKS INVOLVED IN THE BUSINESS MODEL OF THE ASSESSEE AND CORNING S AS, FRANCE. AS PER THE BUSINESS RISK ANALYSIS UNDERTAKEN BY THE ASSESSING OFFICER, 30% OF THE RISK IS BORNE BY THE ASSESSEE AS AGAINST NIL OR MINIMAL RIS KS ACTUALLY UNDERTAKEN BY THE ASSESSEE. IN FACT, THE ASSESSEE RECEIVES COMMIS SION, ONCE THE GOODS ARE DISPATCHED TO CUSTOMERS IRRESPECTIVE OF THE REALIZA TION OF SALES CONSIDERATION BY CORNING SAS, FRANCE. THE LD. AR FURTHER POINTED OUT THAT AS REGARDS THE SALES REPRESENTATION SERVICES, THE ASSESSEE DOES NOT BEAR ANY RISKS SUCH AS INVENTORY RISK, CREDIT RISK, CONTRACT RISK, QUALITY RISK, COM PETITION RISK, ETC. THE ASSESSING OFFICER HAS, WITHOUT PROVIDING ANY RATIONAL BASIS, ASSIGNED A RELATIVE WEIGHTAGE OF 60% TO THE ASSETS UTILIZED BY THE ASSESSEE. THE LD. AR SUBMITTED THAT THE ASSESSEE IS ENGAGED IN PROVIDING ONLY SALES REPRESE NTATION SERVICES IN INDIA AND THEREFORE, IT WOULD BE APPRECIATED THAT THE SAME PR IMA FACIE DOES NOT INVOLVE UTILIZATION OF ASSETS. IN THE TRANSFER PRICING DOCU MENTATION, IT HAS CATEGORICALLY BEEN STATED THAT THE ASSESSEE DOES NOT DEPLOY ANY S PECIFIC PERSONNEL OR ASSETS FOR PROVIDING SALES REPRESENTATIONS SERVICES TO COR NING SAS FRANCE. THE LD. AR FURTHER SUBMITTED THAT THE SALES MADE BY CORNING SA S FRANCE TO THE INDIAN CUSTOMERS ARE WHOLLY CHANNELED THROUGH THE ASSESSEE BY REASONS OF WHICH THE ASSESSEE IS REMUNERATED WITH COMMISSION @ 3%, FOR R ENDERING AGENCY SERVICES. THE ASSESSEE IS ONLY RESPONSIBLE TO RENDER SALES RE PRESENTATION / AGENCY SERVICES AND HAS NO ROLE IN CONCLUDING SUCH SALES C ONTRACTS. THUS, THE LD. AR SUBMITTED THAT SINCE NO SUBSTANTIAL FUNCTIONS ARE P ERFORMED, RISKS UNDERTAKEN OR ASSETS EMPLOYED BY THE ASSESSEE IN INDIA IN RELA TION TO THE DIRECT SALES MADE BY CORNING SAS FRANCE IN INDIA, NO ADDITIONAL PROFI T IN ADDITION TO THE 3% COMMISSION INCOME EARNED, IS REQUIRED TO BE ATTRIBU TED. 9ITA NO. 4678/DEL/2010 & ORS 8. THE LD. AR FURTHER SUBMITTED THAT WITHOUT PREJUD ICE TO THE OTHER SUBMISSION, NO FURTHER PROFIT COULD BE ATTRIBUTED A S CORNING SAS FRANCE INCURRED NET LOSS FOR THE PRESENT ASSESSMENT YEAR. VIDE REPLY DATED 26.12.2008, THE ASSESSEE HAD SUBMITTED THE GLOBAL A UDITED ACCOUNTS OF CORNING SAS FRANCE FOR THE CALENDAR YEARS 2004 AND 2005. AS PER THE SAID GLOBAL ACCOUNTS, CORNING SAS FRANCE HAD INCURRED LO SS OF 3.53% DURING THE CALENDAR YEAR 2004 AND PROFIT OF 1.69% FOR THE CALE NDAR YEAR 2005. THUS, CONSIDERING 9 MONTHS OF 2004 AND 3 MONTHS OF 2005, IN EFFECT, DURING THE FINANCIAL YEAR 2004-05, CORNING SAS FRANCE HAD SUFF ERED NET LOSS FROM ITS ACTIVITIES. THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER HAS ERRONEOUSLY APPLIED THE ATTRIBUTION RATIO ARRIVED BY HIM TO THE GROSS PROFIT FROM DIRECT SALES MADE IN INDIA, THAT WAS IN TURN CALCULATED BY APPLY ING THE GROSS PROFIT PERCENTAGE OF THE TRADING ACTIVITY UNDERTAKEN BY TH E ASSESSEE. THE INCOME EARNED BY THE ASSESSEE HAS ALREADY BEEN EXPLAINED T O BE AT ARMS LENGTH. HOWEVER, EVEN IF THERE WAS A NEED FOR FURTHER ATTRI BUTION, THE ASSESSING OFFICER COULD NOT HAVE ARBITRARILY TAKEN THE TRADING PROFIT OF THE ASSESSEE AS A PARAMETER TO ARRIVE AT THE PROFITS OF CORNING SAS F RANCE, BOTH BEING SEPARATE ENTITIES. IN DOING SO REFERENCE SHOULD HAVE BEEN MA DE TO CORNING SAS FRANCES OWN RESULTS, WHICH IN THE PRESENT CASE, IS A LOSS S ITUATION. 9. THE LD. DR SUBMITTED THAT THE ASSESSEE IS MAKING SALES OF OPHTHALMIC PRODUCTS IN INDIA THROUGH TWO CHANNELS VIS. (I) T HROUGH BRANCH OFFICE/PERMANENT ESTABLISHMENT (BO/PE) AND (II) THR OUGH DIRECT SALES TO CUSTOMERS. DURING THE YEAR, THE SALES THROUGH BO/PE ARE RS. 36.72 CRORES AND DIRECT SALES ARE RS. 30.06 CRORES. THE LD. DR FURTH ER SUBMITTED THAT THE GROSS PROFIT ON BO/PE SALES IS 17.81% AND THE NET PROFIT IS AROUND 13%. IN RESPECT OF DIRECT SALES, THE ASSESSEE IS RECEIVING COMMISSION OF ONLY 3% FROM HO IN FRANCE AMOUNTING TO RS. 90.19 LAKHS. THE ASSESSING OFFICER HAS ATTRIBUTED PROFIT TO THE BO/PE IN RESPECT OF DIRECT SALES MADE IN INDIA. THE ATTRIBUTION IS AT THE RATE OF 50% OF GP WITH DEDUCTION OF COMMISSI ON AMOUNT. THE ASSESSING 10 ITA NO. 4678/DEL/2010 & ORS OFFICER HAS ALLOWED DEDUCTION/ADJUSTMENT OF COMMISS ION OF RS.90.10 LAKHS. THE NET PROFIT ATTRIBUTION TO BO/PE IS RS. 1.77 CRO RES ONLY IN RESPECT OF DIRECT SALES OF RS. 30.06 CRORES IN INDIA. THE CIT(A) HAS UPHELD PROFIT ATTRIBUTION AT THE RATE OF 40% IN RESPECT OF DIRECT SALES MADE BY HEAD OFFICE IN INDIA. THE LD. DR FURTHER SUBMITTED THAT THE ASSESSEE BO/PE IS CAR RYING OUT FOLLOWING MAJOR FUNCTIONS IN RESPECT OF DIRECT SALES BEING MADE BY THE HO: A. IDENTIFICATION OF CUSTOMERS IN INDIA; B. UNDERSTANDING THE REQUIREMENTS OF THE CUSTOMERS IN RESPECT OF THEIR PREFERENCE FOR MATERIAL. QUALITY, LOCATION ETC; C. SOLICITATION OF ORDERS AND SENDING THEM FOR APPR OVAL; D. HOLDING PRICE NEGOTIATIONS E. MARKET INFORMATION AND TECHNICAL SUPPORT TO THE CUSTOMERS AND ADDRESSING THEIR QUERIES AND CONCERNS; F. COMMUNICATION OF REQUIREMENTS OF THE CUSTOMERS O F SUPPLIER; G. FORMULATION OF MARKETING STRATEGY AND BUSINESS D ECISIONS FOR THE TRANSACTIONS; H. HANDING OF CUSTOMERS COMPLAINTS; I. MAINTAINING A RELATIONSHIP WITH THE CUSTOMERS ON REGULAR BASIS AND THE FUNCTION PERFORMED BY CORNING SAS FRANCE. 10. THE LD. DR FURTHER SUBMITTED THAT IN VIEW OF TH E ABOVE IMPORTANT FUNCTIONS BEING PERFORMED BY THE ASSESSEE FOR THE H EAD OFFICE, IN RESPECT OF DIRECT SALES, THE ORDER OF THE AO AND THE CIT(A) CO NFIRMING THE ATTRIBUTION OF PROFIT, MAY BE UPHELD. THE LD. DR SUBMITTED THAT TH E PRINCIPLE OF FULL FORCE OF ATTRACTION IS THE UNDERLYING PRINCIPLE OF INDIA-FRA NCE DTAA WHICH IS RELEVANT IN THIS CASE. THE INDIA-FRANCE DTAA IS BASED ON UN MOD EL CONVENTION WHICH INCORPORATES THE PRINCIPLE OF FULL FORCE OF ATTRACT ION. INDIRECTLY ATTRIBUTABLE PROFITS OF AN ENTERPRISE ARE TO BE TAXED IN INDIA A S PER ARTICLE 7(1) OF INDIA- FRANCE DTAA AND PARA 2 AND 3 OF THE PROTOCOL. EVEN THE INDIA-UK AND INDIA- GERMANY DTAA ALSO INCLUDE THE CONCEPT OF TAXATION O F INDIRECTLY ATTRIBUTABLE 11 ITA NO. 4678/DEL/2010 & ORS PROFITS, IN THE OTHER CONTRACTING STATE (I.E., INDI A HERE). THE ASSESSING OFFICER HAS CARRIED OUT THE DETAILED FAR ANALYSIS INCLUDING RISK ANALYSIS AS DETAILED IN THE ASSESSMENT ORDER. THE ACTUAL GROSS PROFIT AND P ROFIT MARGIN IN RESPECT OF DIRECT SALES BY HEAD OFFICE (HO) IN FRANCE IS ACTUA LLY MUCH MORE THAN THE GP/NP OF BO/PE IN INDIA BECAUSE THE BO/PE GIVES DIS COUNTS TO CUSTOMERS TO THE TUNE OF 22-35%. SUCH DISCOUNT IS NOT GIVEN TO T HE CUSTOMERS TO WHOM DIRECT SALES ARE MADE BY HO FRANCE. THEREFORE, THER E IS A CASE OF AVOIDANCE OF TAXES ON PROPERLY ATTRIBUTED PROFITS FOR BO/PE. THE LD. DR RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN CASE OF DI T VS. MORGAN STANLEY (2007) 292 ITR 416 (SC). THE LD. DR FURTHER SUBMITTED THAT IN CASE OF ADIT VS. E- FUNDS IT SOLUTIONS INC. (2017) 399 ITR 34 (SC), THE CUSTOMERS RECEIVING SERVICE WERE OUTSIDE INDIA. THEREFORE, FACTS OF THIS CASE A RE DIFFERENT. MOREOVER, THE INDIA-USA DTAA WAS INVOLVED IN THE CASE OF E-FUNDS IT SOLUTIONS INC., WHICH HAS FUNDAMENTALLY DIFFERENT PROVISIONS AS COMPARED TO INDIA-FRANCE DTAA, WHICH IS APPLICABLE IN THE PRESENT CASE. THE LD. DR ALSO RELIED ON THE DECISION OF THE TRIBUNAL, DELHI IN CASE OF LINMARK INTERNATI ONAL HONGKONG PVT. LTD. VS. DDIT (2011) 10 TAXAMANN.COM 184 (DELHI), WHEREIN AT TRIBUTION OF 50% WAS UPHELD BY THE TRIBUNAL. THUS, THE LD. DR PRAYED THA T THE ORDER OF THE ASSESSING OFFICER/CIT(A) BE UPHELD. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIALS AVAILABLE ON THE RECORD. IT IS PERTINENT TO NOTE TH AT THE HONBLE APEX COURT IN CASE OF MORGAN STANLEY & CO. (SUPRA) HELD THAT ONCE A TRANSFER PRICING ANALYSIS IS UNDERTAKEN; THERE IS NO FURTHER NEED TO ATTRIBUT E PROFITS TO A PE. THE SITUATION WOULD BE DIFFERENT IF TRANSFER PRICING AN ALYSIS DOES NOT ADEQUATELY REFLECT THE FUNCTIONS PERFORMED AND THE RISKS ASSUM ED BY THE ENTERPRISE. IN SUCH A SITUATION, THERE WOULD BE A NEED TO ATTRIBUT E PROFITS TO THE PE FOR THOSE FUNCTIONS/RISKS THAT HAVE NOT BEEN CONSIDERED. THER EFORE, IN EACH CASE THAT DATA PLACED BY THE TAXPAYER HAS TO BE EXAMINED AS T O WHETHER THE TRANSFER PRICING ANALYSIS PLACED BY THE TAXPAYER IS EXHAUSTI VE OF ATTRIBUTION OF PROFITS 12 ITA NO. 4678/DEL/2010 & ORS AND THAT WOULD DEPEND ON THE FUNCTIONAL AND FACTUAL ANALYSIS TO BE UNDERTAKEN IN EACH CASE. THE ECONOMIC NEXUS IS AN IMPORTANT FE ATURE FOR ATTRIBUTION OF PROFITS (PROFITS ATTRIBUTABLE TO THE PE) IN CORPORA TE WORLD. IN PRESENT CASE COMMISSION EARNED @ 3% BY THE ASSESSEE ON AGENCY FU NCTION WAS ACCEPTED BY THE ASSESSING OFFICER IN ALL OTHER ASSESSMENT YEARS , PRECEDING AS WELL AS SUCCEEDING. IN NONE OF THE OTHER ASSESSMENT YEARS, PROFITS HAVE BEEN ATTRIBUTED BY THE ASSESSING OFFICER TO THE ASSESSEE IN RESPECT OF DIRECT SALES MADE BY CORNING SAS FRANCE IN INDIA, EVEN THOUGH TH E ASSESSEE HAS UNDERTAKEN SAME FUNCTIONS, ASSUMED IDENTICAL RISKS AND EMPLOYED SIMILAR ASSETS IN ALL ASSESSMENT YEARS. AS PER THE BUSINESS RISK ANALYSIS UNDERTAKEN BY THE ASSESSING OFFICER, 30% OF THE RISK IS BORNE BY THE ASSESSEE AS AGAINST NIL OR MINIMAL RISKS ACTUALLY UNDERTAKEN BY THE ASSESSE E. IN FACT, THE ASSESSEE RECEIVES COMMISSION, ONCE THE GOODS ARE DISPATCHED TO CUSTOMERS IRRESPECTIVE OF THE REALIZATION OF SALES CONSIDERATION BY CORNIN G SAS, FRANCE. THE LD. AR FURTHER POINTED OUT THAT AS REGARDS THE SALES REPRE SENTATION SERVICES, THE ASSESSEE DOES NOT BEAR ANY RISKS SUCH AS INVENTORY RISK, CREDIT RISK, CONTRACT RISK, QUALITY RISK, COMPETITION RISK, ETC. INDEED, THERE IS SUBSTANCE IN THE SUBMISSION MADE BY THE LD. AR THAT THE ASSESSING OF FICER HAS, WITHOUT PROVIDING ANY RATIONAL BASIS, ASSIGNED A RELATIVE W EIGHTAGE OF 60% TO THE ASSETS UTILIZED BY THE ASSESSEE. THE ASSESSEE IS ENGAGED I N PROVIDING ONLY SALES REPRESENTATION SERVICES IN INDIA AND THEREFORE, IT WOULD BE APPRECIATED THAT THE SAME PRIMA FACIE DOES NOT INVOLVE UTILIZATION OF AS SETS. IN THE TRANSFER PRICING DOCUMENTATION, IT HAS CATEGORICALLY BEEN STATED THA T THE ASSESSEE DOES NOT DEPLOY ANY SPECIFIC PERSONNEL OR ASSETS FOR PROVIDI NG SALES REPRESENTATIONS SERVICES TO CORNING SAS FRANCE. THE SALES MADE BY C ORNING SAS FRANCE TO THE INDIAN CUSTOMERS ARE WHOLLY CHANNELED THROUGH THE A SSESSEE BY REASONS OF WHICH THE ASSESSEE IS REMUNERATED WITH COMMISSION @ 3%, FOR RENDERING AGENCY SERVICES. THE ASSESSEE IS ONLY RESPONSIBLE T O RENDER SALES REPRESENTATION / AGENCY SERVICES AND HAS NO ROLE IN CONCLUDING SUC H SALES CONTRACTS. SINCE NO SUBSTANTIAL FUNCTIONS ARE PERFORMED, RISKS UNDERTAK EN OR ASSETS EMPLOYED BY THE ASSESSEE IN INDIA IN RELATION TO THE DIRECT SAL ES MADE BY CORNING SAS 13 ITA NO. 4678/DEL/2010 & ORS FRANCE IN INDIA, NO ADDITIONAL PROFIT IN ADDITION T O THE 3% COMMISSION INCOME EARNED, IS REQUIRED TO BE ATTRIBUTED. THUS, THE RAT IO LAID DOWN BY THE DECISION OF THE APEX COURT IN CASE OF MORGAN STANLEY IS APPLICA BLE IN PRESENT CASE AS THERE IS NO DIRECT ECONOMIC NEXUS BETWEEN THE ASSESSEE CO MPANY AND THE CORNING SAS, FRANCE IN RESPECT OF THE TRANSACTION IN DISPUT E. THEREFORE, THE ORDER OF THE CIT(A) IS SET ASIDE AND THE APPEAL OF THE ASSESSEE IS ALLOWED. AS REGARDS, THE REVENUES APPEAL IS CONCERNED, THE SAME IS DISMISSE D IN RESPECT OF THE ABOVE OBSERVATIONS AND FINDINGS GIVEN IN ASSESSEES APPEA L. 12. IN RESULT, APPEAL OF THE REVENUE IS DISMISSED A ND APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30TH MAY, 201 8 . SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 30/05/2018 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 14 ITA NO. 4678/DEL/2010 & ORS DATE 1. DRAFT DICTATED ON 03/05/2018 PS 2. DRAFT PLACED BEFORE AUTHOR 03/05/2018 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2018 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 30.05.2018 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 3 0 .05.2018 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.