Ricardo UK Ltd., New Delhi V. DCIT, Circle- 3(1)(1), International Taxation, New Delhi

ITA 4911/DEL/2018

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 2536 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2014-2015
• Appeal Filed On: 10-07-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY KUMAR SENIOR
• Assessee Lawyers: A JAY VOHRA SENIOR
• Keywords: Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Set aside
• Section: 205; 251; 9(1); 9(1); 9(1); 72; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D : NEW DELHI) BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCE) ITA NO.4909/DEL./2018 (ASSESSMENT YEAR : 2009-10) ITA NO.4910/DEL./2018 (ASSESSMENT YEAR : 2010-11) ITA NO.3967/DEL./2017 (ASSESSMENT YEAR : 2011-12) ITA NO.3968/DEL./2017 (ASSESSMENT YEAR : 2012-13) ITA NO.3969/DEL./2017 (ASSESSMENT YEAR : 2013-14) ITA NO.4911/DEL./2018 (ASSESSMENT YEAR : 2014-15) ITA NO.4756/DEL./2019 (ASSESSMENT YEAR : 2015-16) ITA NO.416/DEL./2020 (ASSESSMENT YEAR : 2016-17) M/S. RICARDO UK LIMITED, VS. DCIT, C/O BHATIA & BHATIA, CAS (INTERNATIONAL TAXATION) , FIRST FLOOR, 81, HEMKUNT COLONY, CIRCLE 3(1)(1), NEW DELHI 110 048. NEW DELHI. (PAN : AAECR4867R) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SENIOR ADVOCATE REVENUE BY : SHRI SANJAY KUMAR, SENIOR DR ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 2 DATE OF HEARING : 21.01.2021 DATE OF ORDER : 17.02.2021 O R D E R PER BENCH : SINCE COMMON QUESTIONS OF FACTS AND LAW HAVE BEEN R AISED IN THE INTER-CONNECTED APPEALS, THE SAME ARE BEING DISPOSED OFF BY WAY OF CONSOLIDATED ORDER TO AVOID REPETITION OF DI SCUSSION. 2. APPELLANT, RICARDO UK LIMITED (HEREINAFTER REFER RED TO AS THE ASSESSEE) BY FILING THE PRESENT APPEALS SOUGH T TO SET ASIDE THE IMPUGNED ORDERS DATED 28.02.2018, 28.02.2018, 04.05 .2016, 09.06.2016, 06.04.2017, 28.02.2018, 04.03.2019 & 27 .11.2019 PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS)- 43, NEW DELHI IN APPEALS CHALLENGING THE ORDERS PASSED BY T HE LD. ASSESSING OFFICER UNDER SECTION 147/143(3) READ WITH SECTION 144C(3) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEARS 2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 & 2016-17 RESPECTIVELY ON THE IDENTICAL GRO UNDS INTER ALIA THAT :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-43, NEW DELHI ('LD. CIT(A)') IS BAD IN LA W. 2. THAT THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS OF THE CASE IN UPHOLDING THE ERRONEOUS ORDER PASSED BY THE LD AO ASSESSING THE TOTAL INCOME OF THE APPELLA NT AT INR ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 3 14,624,822 AS AGAINST THE RETURNED INCOME OF NIL WI THOUT ANY PROPER BASIS AND APPRECIATION OF THE FACTS OF THE C ASE. 3. THAT THE LD CLT (A) HAS DISREGARDED THE PROVISIO NS CONTAINED IN SECTION 9(1) (I) OF THE ACT READ WITH THE RELEVANT EXPLANATION THAT A FOREIGN ENTITY HAVING A PERMANEN T ESTABLISHMENT IN INDIA SHALL BE LIABLE TO INCOME TA X ONLY TO THE EXTENT AS IS REASONABLY ATTRIBUTABLE TO THE OPERATI ONS CARRIED OUT IN INDIA. 4. THAT IN ATTRIBUTING THE BUSINESS PROFITS TO THE INDIAN OPERATIONS, THE LD CIT (A), WITHOUT APPRECIATING TH E FUNCTIONAL PROFILE OF THE APPELLANT AND ITS INDIAN PE, HAS INE XPLICABLY HELD THAT AN EXORBITANTLY HIGH PROPORTION OF 50% OF INDIA'S CENTRIC PROFITS WOULD BE ATTRIBUTABLE TO THE INDIAN PE OF THE APPELLANT. 5. THAT THE LD. CIT (A) HAS COMPLETELY FAILED TO AP PRECIATE THE PRINCIPLE LAID DOWN BY THE HON'BLE APEX COURT I N THE CASE OF MORGAN STANLEY AND CO. INC. [(292 ITR 416) (SC)] AND SET SATELLITE (SINGAPORE) [(307 ITR 205) (BOM)], THAT I N CASE THE COMMISSION PAID TO INDIAN AGENT CAN BE ESTABLISHED TO BE AT ARM'S LENGTH FROM AN INDIAN TRANSFER PRICING PERSPE CTIVE, NO FURTHER PROFITS SHALL BE DEEMED TO BE ATTRIBUTABLE TO THE INDIAN AGENT. 6. THAT THE LD. CIT (A) HAS COMPLETELY DISREGARDED THE PRINCIPLE PAID DOWN BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF ROLLS ROYCE SINGAPORE PTE LIMITED (2011) AN D HAS COMPLETELY RELIED UPON THE ERRONEOUS DECISION LAID DOWN BY HIS PREDECESSOR BY COMMENTING THAT 'HOWEVER MY PREDECES SOR CIT(A) HAD CONSIDERED THE ATTRIBUTION OF 50% TO BE MORE APPROPRIATE. THE APPEAL ORDER FOR AY 2012-13 INDICA TED THAT THERE WAS A VERY LOW COMPONENT OF THE PROFIT BEING SHOWN IN INDIA THEREBY JUSTIFYING PROPER ATTRIBUTION' 7. THAT THE LD. CIT (A) HAS ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW BY CONCLUDING THAT 'NO PRIOR EXERCISE SEEMS TO HAVE DONE TO REMUNERATE THE INDIAN SUBSIDIARY AT ARM'S LENGTH'. 3. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. RICARDO UK LIMITED, THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE LAWS OF THE UNITED KINGDOM (UK) AND IS A TAX RESIDENT OF THE UNITED KINGDOM AS PER ARTICLE 4 ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 4 OF THE INDIA AND UK DOUBLE TAXATION AVOIDANCE AGREE MENT (DTAA). THE ASSESSEE IS INTO PROVIDING TESTING, SE RVICES TO ITS CLIENTS AND PROVIDING ASSISTANCE TO ITS INDIAN CUST OMERS IN CONDUCTING THE FEASIBILITY ANALYSIS OF ITS TRANSMIS SION SYSTEMS DESIGNED FOR AUTOMOBILES FROM ITS TECHNICAL CENTERS IN UK. THE ASSESSEE IS INTO THIS BUSINESS SINCE 1915 AND HAS C URRENTLY EMPLOYED OVER 2700 ENGINEERS, SCIENTISTS AND CONSUL TANTS AROUND THE WORLD HAVING HIGH EFFICIENCY, LOW EMISSION AND CLASS LEADING PRODUCT INNOVATION ENABLING THE CLIENTS TO EMPLOY T HE MOST VIABLE TRANSMISSION SYSTEM. ASSESSEES CLIENTELE INCLUDES THE WORLDS MAJOR TRANSPORTATION, ORIGINAL EQUIPMENT MANUFACTUR ERS (OEM), SUPPLY CHAIN ORGANIZATIONS, ENERGY COMPANIES, FINAN CIAL INSTITUTIONS AND GOVERNMENTS. THE ASSESSEE IS HAVI NG PROFOUND TECHNICAL EXPERIENCE REQUIRED FOR THE SERVICES PROV IDED. 4. DURING THE YEAR UNDER CONSIDERATION, THE TAXPAYE R HAD FILED RETURN OF INCOME DECLARING NIL INCOME CLAIMING TH AT THE INCOME EARNED BY THE ASSESSEE WAS NOT TAXABLE IN INDIA. A SSESSING OFFICER (AO) PROCEEDED TO HELD THAT THE TAXPAYER HAS A PERM ANENT ESTABLISHMENT (PE) IN INDIA IN THE FORM OF DOMESTIC SUBSIDIARY COMPANY, NAMELY, RICARDO INDIA PVT. LTD. (RIPL) AND THEREBY COMPUTED THE INCOME OF THE TAXPAYER BY ADOPTING THE GLOBAL PROFIT ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 5 RATIO AND APPLYING THE SAME TO INDIA-CENTRIC REVENU ES TO ALLEGEDLY IMPUTE THE INDIA-CENTRIC PROFITABILITY. AO PROCEED ED TO ATTRIBUTE 50% OF THE BUSINESS PROFIT I.E. RS.1,46,24,821/-, R S.38,97,594/-, RS.63,30,619/-, RS.1,00,91,845/-, RS.1,21,89,053/-, RS.91,24,923/-, RS.90,02,297/- & RS.4,50,38,195/- FOR AYS 2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 & 2016- 17 RESPECTIVELY TO INDIAN PE AND CONSIDERED THE SAME A S TAXABLE INCOME OF THE ASSESSEE IN INDIA TO BE TAXED @ 40% P LUS APPLICABLE SURCHARGE AND EDUCATION CESS. 5. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT (A) BY WAY OF FILING THE APPEALS WHO HAS UPHELD THE ASSESS MENT FRAMED BY THE AO BY DISMISSING THE APPEALS. FEELING AGGRIEVED , THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING TH E PRESENT APPEALS. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 7. UNDISPUTEDLY, THE ASSESSEE HAS ACCEPTED THE EXIS TENCE OF PE IN INDIA IN ALL THE AFORESAID APPEALS. IT IS ALSO NOT IN DISPUTE THAT IN THE TRANSFER PRICING REPORT, PROFITS ATTRIBUTED TO THE PE AND AMOUNTS ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 6 OF COMMISSION/REMUNERATION ALREADY PAID TO ASSESSEE BENCHMARKED AND HELD TO BE AT ARMS LENGTH AND THEREBY NO ADJUS TMENT HAS BEEN MADE. IT IS ALSO NOT IN DISPUTE THAT IN ALL THE AF ORESAID APPEALS COMMISSION/REMUNERATION PAID ON ARMS LENGTH BASIS IS MORE THAN THE PROFITS ATTRIBUTED TO THE PE. HOWEVER, ASSESSE E CHALLENGED THE ATTRIBUTION OF 50% OF INDIA-CENTRE PROFIT BEING HIG HLY UNREASONABLE AND EXCESSIVE. 8. IN THE BACKDROP OF THE AFORESAID FACTS AND CIRCU MSTANCES OF THE CASE, LD. AR FOR THE ASSESSEE WHILE KEEPING THI S CHALLENGE/ISSUES/GROUNDS QUA ATTRIBUTION OF INDIA-C ENTRIC PROFIT AT 50% BEING HIGHLY UNREASONABLE AND EXCESSIVE OPEN, C ONTENDED THAT SINCE ASSESSEE IS ADEQUATELY REMUNERATED AT ARMS L ENGTH BASIS AND COMMISSION/REMUNERATION PAID TO THE ASSESSEE SHALL BE REDUCED FROM THE PROFITS ATTRIBUTED TO THE PE, NO FURTHER A TTRIBUTION TO THE PE IS SUSTAINABLE IN VIEW OF THE LAW LAID DOWN BY HONBLE APEX COURT IN DIT VS. MORGAN STANLEY AND CO. INC. 292 IT R 416 (SC), E-FUNDS IT SOLUTION INC. VS. DIT 399 ITR 34 ( SC), DIT VS. HONDA MOTORS CO. LTD. 255 TAXMAN 72 (SC) AND TH E DECISIONS IN SET SATELLITE (SINGAPORE) 307 ITR 205 (BOM), AMADEUS IT GROUP SA VS. DCIT ITA NO.4906/DEL/2010 ( DE. TRIB) DATED 26.10.2020, DIT VS. GALILEO INTERNATION AL INC. 224 ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 7 CTR 251 (DE.), GALILEO NEDERLAND BV VS. ADIT 367 IT R 319 (DEL.). 9. LD. DR FOR THE REVENUE, ON THE OTHER HAND, RELIE D UPON THE ORDER PASSED BY THE LD. CIT (A) AND TERMED THE ARGU MENTS ADDRESSED BY THE LD. AR FOR THE ASSESSEE NOT SUSTAI NABLE. 10. TO CANVASS THE ISSUE IN CONTROVERSY, THE LD. AR FOR THE ASSESSEE CONTENDED THAT THE ASSESSEE HAS MERELY REC EIVED MARKETING ASSISTANCE FROM ITS INDIAN SUBSIDIARY, RIPL, WHICH DOES NOT OWN ANY TECHNICAL KNOW-HOW OR FACILITIES NOR EMPLOYED A NY TECHNICAL PERSONNEL REQUIRED FOR THE EXECUTION OF THE BUSINES S/PROJECTS OF THE ASSESSEE AND THE SCALE OF OPERATION OF RIPL IS INSI GNIFICANT AS COMPARED TO THE SIZE OF OPERATION OF THE ASSESSEE B ECAUSE RIPL HAS A MINISCULE SET UP OF 5 - 7 EMPLOYEES (INCLUDING AD MINISTRATION AND OTHER SUPPORT STAFF) AND HAS BEEN OPERATING OUT OF A SMALL PREMISES IN DELHI. IT IS FURTHER CONTENDED BY THE LD. AR FOR THE ASSESSEE THAT FOR THE MARKETING SERVICES RECEIVED FROM THE INDIAN SUBSIDIARY, RIPL, IT HAS BEEN ADEQUATELY REMUNERATED INASMUCH A S COMMISSION/REMUNERATION HAS BEEN PAID TO RIPL ON AN ARMS LENGTH BASIS. IT IS FURTHER CONTENDED BY THE LD. A R FOR THE ASSESSEE THAT TRANSFER PRICING ANALYSIS SHOWING TRANSACTION BETWEEN ASSESSEE AND RIPL AT ARMS LENGTH HAS NOT BEEN DISPUTED BY T HE AO/CIT(A). ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 8 11. AFORESAID CONTENTIONS RAISED BY THE LD. AR FOR THE ASSESSEE WHEN EXAMINED IN THE LIGHT OF THE PROFITS ATTRIBUTE D TO PE AND COMMISSION/REMUNERATION PAID ON ARMS LENGTH BASIS, COMMISSION/REMUNERATION PAID IN ALL THE CASES IS MO RE THAN PROFIT ATTRIBUTED TO THE PE, WHICH IS EXTRACTED FROM THE S YNOPSIS FILED BY THE LD. AR FOR THE ASSESSEE FOR READY PERUSAL AS UN DER :- ASSESSMENT YEAR PROFITS ATTRIBUTED TO PE (A) COMMISSION/ REMUNERATION PAID ON ARMS LENGTH BASIS (B) 2009-10 1,46,24,821/- 3,31,16,923 2010-11 38,97,594/- 3,36,21,632 2011-12 63,30,619/- 4,00,05,437 2012-13 1,00,91,845/- 4,09,81,100 2013-14 1,21,89,053/- 4,10,77,874 2014-15 91,24,923/- 4,28,58,978 2015-16 90,02,297/- 5,69,29,447 2016-17 4,50,38,195/- 6,80,06,297 12. IN THE BACKDROP OF THE AFORESAID FACTS AND CIRC UMSTANCES OF THE CASE, THE SOLE CONTENTION RAISED BY THE LD. AR FOR THE ASSESSEE THAT :- WHETHER WHEN RIPL HAS ALREADY BEEN REMUNERATED AT ARMS LENGTH, NO FURTHER ATTRIBUTION TO PE WOULD BE WARRANTED? AND RELIED UPON THE LAW OF THE LAND LAID DOWN BY HO NBLE SUPREME COURT IN CASES OF DIT VS. MORGAN STANLEY AND CO. INC., E-FUNDS IT SOLUTION INC., DIT VS. HONDA MOTORS CO. LTD. (SUPRA) AND THE ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 9 DECISIONS IN SET SATELLITE (SINGAPORE) AND AMADEUS IT GROUP SA VS. DCIT (SUPRA) . 13. HONBLE SUPREME COURT IN CASE OF DIT VS. MORGAN STANLEY AND CO. INC. (SUPRA) UPHELD THE ORDER PASSED BY THE LD. AAR REACHED THE CONCLUSION THAT WHEN TRANSACTION BETWEE N TWO PARTIES, PE ON THE ONE HAND AND DOMESTIC SUBSIDIARY COMPANY ON THE OTHER HAND, AS IN THE PRESENT CASE, IS REMUNERATED ON ARM S LENGTH BASIS TAKING INTO ACCOUNT ALL THE RISK TAKING FUNCTIONS O F MULTI-NATIONAL ENTERPRISE, NOTHING WOULD BE LEFT TO ATTRIBUTE TO T HE PE. RELEVANT PART OF THE JUDGMENT IS EXTRACTED FOR READY PERUSAL AS UNDER :- 29. AS REGARDS DETERMINATION OF PROFITS ATTRIBUTAB LE TO A PE IN INDIA (MSAS) IS CONCERNED ON THE BASIS OF ARM'S LEN GTH PRINCIPLE WE HAVE QUOTED ARTICLE 7(2) OF THE DTAA. ACCORDING TO THE AAR WHERE THERE IS AN INTERNATIONAL TRANSACTION UNDER W HICH A NON- RESIDENT COMPENSATES A PE AT ARM'S LENGTH PRICE, NO FURTHER PROFITS WOULD BE ATTRIBUTABLE IN INDIA. IN THIS CON NECTION, THE AAR HAS RELIED UPON CIRCULAR NO.23 OF 1969 ISSUED B Y CBDT AS WELL AS CIRCULAR NO. 5 OF 2004 ALSO ISSUED BY CBDT. THIS IS THE KEY QUESTION WHICH ARISES FOR DETERMINATION IN THES E CIVIL APPEALS. 30. TO ANSWER THE ABOVE QUESTION WE QUOTE ARTICLE 7 OF THE U.N. MODEL CONVENTION WHICH READS AS UNDER : 'ARTICLE : ATTRIBUTION OF BUSINESS PROFITS ARTICLE 7 OF THE UN MODEL CONVENTION STATES AS UNDER BUSINESS PROFITS : 1. THE PROFITS OF AN ENTERPRISE OF A CONTRACTING S TATE SHALL BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTE RPRISE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUSINESS AS AFORESAID, TH E PROFITS OF THE ENTERPRISE MAY BE TAXED IN THE OTHER STATE B UT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE TO (A) THAT PERM ANENT ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 10 ESTABLISHMENT; (B) SALES IN THAT OTHER STATE OF GOO DS OR MERCHANDISE OF THE SAME OR SIMILAR KIND AS THOSE SO LD THROUGH THAT PERMANENT ESTABLISHMENT; OR (C) OTHER BUSINESS ACTIVITIES CARRIED ON IN THAT OTHER STATE OF THE SAME OR SIMILAR KIND AS THOSE EFFECTED THROUGH THAT PERMANENT ESTABLISHMENT. 2. SUBJECT TO THE PROVISIONS OF PARAGRAPH 3, WHERE EN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINE SS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING STATE BE ATTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROFITS WHICH IT MIGHT BE EXPECTE D 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 OR INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT . 3. IN THE DETERMINATION OF THE PROFITS OF A PERMAN ENT ESTABLISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PERMANENT ESTABLISHMENT INCLUDING EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES SO INCURRED, WHETHER IN THE STATE IN WHICH THE PERMANE NT ESTABLISHMENT IS SITUATED OR ELSEWHERE. HOWEVER, NO SUCH DEDUCTION SHALL BE ALLOWED IN RESPECT OF AMOUNTS, I F ANY, PAID (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUA L EXPENSES) BY THE PERMANENT ESTABLISHMENT TO THE HEA D OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICE S, BY WAY OF ROYALTIES, FEES OR OTHER SIMILAR PAYMENTS IN RET URN FOR THE USE OF PATENTS OR OTHER RIGHTS, OR BY WAY OF COMMISSION, FOR SPECIFIC SERVICES PERFORMED OR FOR MANAGEMENT, OR, EXCEPT IN THE CASE OF A BANKING ENTERPRISE, BY WAY OF INTEREST ON MONEYS LENT TO TH E PERMANENT ESTABLISHMENT. LIKEWISE, NO ACCOUNT SHALL BE TAKEN, IN THE DETERMINATION OF THE PROFITS OF A PER MANENT ESTABLISHMENT, FOR AMOUNTS CHARGED (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES), BY THE PERMANENT ESTABLISHMENT TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICES, BY WAY OF R OYALTIES, FEES OR OTHER SIMILAR PAYMENTS IN RETURN FOR THE US E OF PATENTS OR OTHER RIGHTS, OR BY WAY OF COMMISSION FO R SPECIFIC SERVICES PERFORMED OR FOR MANAGEMENT, OR, EXCEPT IN THE CASE OF A BANKING ENTERPRISE BY WAY OF INTER EST ON MONEYS LENT TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICES. 4. INSOFAR AS IT HAS BEEN CUSTOMARY IN A CONTRACTI NG STATE TO DETERMINE THE PROFITS TO BE ATTRIBUTED TO A ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 11 PERMANENT ESTABLISHMENT ON THE BASIS OF AN APPORTIONMENT OF THE TOTAL PROFITS OF THE ENTERPRIS E TO ITS VARIOUS PARTS, NOTHING IN PARAGRAPH 2 SHALL PRECLUD E THAT CONTRACTING STATE FROM DETERMINING THE PROFITS TO B E TAXED BY SUCH AN APPORTIONMENT AS MAY BE CUSTOMARY; THE METHOD OF APPORTIONMENT ADOPTED SHALL, HOWEVER, BE SUCH THAT THE RESULT SHALL BE IN ACCORDANCE WITH THE PRI NCIPLES CONTAINED IN THIS ARTICLE. 5. FOR THE PURPOSES OF THE PRECEDING PARAGRAPHS, T HE PROFITS TO BE ATTRIBUTED TO THE PERMANENT ESTABLISH MENT SHALL BE DETERMINED BY THE SAME METHOD YEAR-BY-YEAR UNLESS THERE IS GOOD AND SUFFICIENT REASON TO THE C ONTRARY. 6. WHERE PROFITS INCLUDE ITEMS OF INCOME WHICH ARE DEALT WITH SEPARATELY IN OTHER ARTICLES OF THIS CON VENTION, THEN THE PROVISIONS OF THOSE ARTICLES SHALL NOT BE AFFECTED BY THE PROVISIONS OF THIS ARTICLE. NOTE: THE QUESTION OR WHETHER PROFITS SHOULD BE ATTRIBUTED TO A PERMANENT ESTABLISHMENT BY REASON O F THE MERE PURCHASE BY THAT PERMANENT ESTABLISHMENT OF GO ODS AND MERCHANDISE FOR THE ENTERPRISE WAS NOT RESOLVED . IT SHOULD THEREFORE BE SETTLED IN BILATERAL NEGOTIATIO NS.' 31. ARTICLE 7 OF THE U.N. MODEL CONVENTION INTER AL IA PROVIDES THAT ONLY THAT PORTION OF BUSINESS PROFITS IS TAXAB LE IN THE SOURCE COUNTRY WHICH IS ATTRIBUTABLE TO THE PE. IT SPECIFI ES HOW SUCH BUSINESS PROFITS SHOULD BE ASCERTAINED. UNDER THE S AID ARTICLE, A PE IS TREATED AS IF IT IS AN INDEPENDENT ENTERPRISE (PROFIT CENTRE) DECORS THE HEAD OFFICE AND WHICH DEALS WITH THE HEA D OFFICE AT ARM'S LENGTH. THEREFORE, ITS PROFITS ARE DETERMINED ON THE BASIS AS IF IT IS AN INDEPENDENT ENTERPRISE. THE PROFITS OF THE PE ARE DETERMINED ON THE BASIS OF WHAT AN INDEPENDENT ENTE RPRISE UNDER SIMILAR CIRCUMSTANCES MIGHT BE EXPECTED TO DERIVE O N ITS OWN. ARTICLE 7(2) OF THE U.N. MODEL CONVENTION ADVOCATES THE ARM'S LENGTH APPROACH FOR ATTRIBUTION OF PROFITS TO A PE. 32. THE OBJECT BEHIND ENACTMENT OF TRANSFER PRICING REGULATIONS IS TO PREVENT SHIFTING OF PROFITS OUTSI DE INDIA. UNDER ARTICLE 7(2) NOT ALL PROFITS OF MSCO WOULD BE TAXAB LE IN INDIA BUT ONLY THOSE WHICH HAVE ECONOMIC NEXUS WITH PE IN IND IA. A FOREIGN ENTERPRISE IS LIABLE TO BE TAXED IN INDIA O N SO MUCH OF ITS BUSINESS PROFIT AS IS ATTRIBUTABLE TO THE PE IN IND IA. THE QUANTUM OF TAXABLE INCOME IS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF INCOME-TAX ACT. ALL PROVISIONS OF INC OME-TAX ACT ARE APPLICABLE, INCLUDING PROVISIONS RELATING TO DE PRECIATION, INVESTMENT LOSSES, DEDUCTIBLE EXPENSES, CARRY FORWA RD AND SET-OFF LOSSES ETC. HOWEVER, DEVIATIONS ARE MADE BY DTAA IN CASES OF ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 12 ROYALTY, INTEREST ETC. SUCH DEVIATIONS ARE ALSO MAD E UNDER THE INCOME-TAX ACT (FOR EXAMPLE: SECTIONS 44BB, 44BBA E TC.). UNDER THE IMPUGNED RULING DELIVERED BY THE AAR, REM UNERATION TO MSAS WAS JUSTIFIED BY A TRANSFER PRICING ANALYSI S AND, THEREFORE, NO FURTHER INCOME COULD BE ATTRIBUTED TO THE PE (MSAS). IN OTHER WORDS, THE SAID RULING EQUATES AN ARM'S LENGTH ANALYSIS (ALA) WITH ATTRIBUTION OF PROFITS. IT HOLD S THAT ONCE A TRANSFER PRICING ANALYSIS IS UNDERTAKEN; THERE IS N O FURTHER NEED TO ATTRIBUTE PROFITS TO A PE. THE IMPUGNED RULING I S CORRECT IN PRINCIPLE INSOFAR AS AN ASSOCIATED ENTERPRISE, THAT ALSO CONSTITUTES A PE, HAS BEEN REMUNERATED ON AN ARM'S LENGTH BASIS TAKING INTO ACCOUNT ALL THE RISK-TAKING FUNCTIONS OF THE ENTERP RISE. IN SUCH CASES NOTHING FURTHER WOULD BE LEFT TO BE ATTRIBUTE D TO THE PE. THE SITUATION WOULD BE DIFFERENT IF TRANSFER PRICIN G ANALYSIS DOES NOT ADEQUATELY REFLECT THE FUNCTIONS PERFORMED AND THE RISKS ASSUMED BY THE ENTERPRISE. IN SUCH A SITUATION, THE RE WOULD BE A NEED TO ATTRIBUTE PROFITS TO THE PE FOR THOSE FUNCT IONS/RISKS THAT HAVE NOT BEEN CONSIDERED. THEREFORE, IN EACH CASE T HE DATA PLACED BY THE TAXPAYER HAS TO BE EXAMINED AS TO WHE THER THE TRANSFER PRICING ANALYSIS PLACED BY THE TAXPAYER IS EXHAUSTIVE OF ATTRIBUTION OF PROFITS AND THAT WOULD DEPEND ON THE FUNCTIONAL AND FACTUAL ANALYSIS TO BE UNDERTAKEN IN EACH CASE. LASTLY, IT MAY BE ADDED THAT TAXING CORPORATES ON THE BASIS OF THE CONCEPT OF ECONOMIC NEXUS IS AN IMPORTANT FEATURE OF ATTRIBUTA BLE PROFITS (PROFITS ATTRIBUTABLE TO THE PE) CONCLUSION 33. TO CONCLUDE, WE HOLD THAT THE AAR WAS RIGHT IN RULING THAT MSAS WOULD BE A SERVICE PE IN INDIA UNDER ARTI CLE 5(2)(1), THOUGH ONLY ON ACCOUNT OF THE SERVICES TO BE PERFOR MED BY THE DEPUTATIONISTS DEPLOYED BY MSCO AND NOT ON ACCOUNT OF STEWARDSHIP ACTIVITIES. AS REGARDS INCOME ATTRIBUTA BLE TO THE PE (MSAS) WE HOLD THAT THE TRANSACTIONAL NET MARGIN ME THOD WAS THE APPROPRIATE METHOD FOR DETERMINATION OF THE ARM 'S LENGTH PRICE IN RESPECT OF TRANSACTION BETWEEN MSCO AND MS AS. WE ACCEPT AS CORRECT THE COMPUTATION OF THE REMUNERATI ON BASED ON COST PLUS MARK-UP WORKED OUT AT 29% ON THE OPERATIN G COSTS OF MSAS. THIS POSITION IS ALSO ACCEPTED BY THE ASSESSI NG OFFICER IN HIS ORDER DATED 29.12.06 (AFTER THE IMPUGNED RULING ) AND ALSO BY THE TRANSFER PRICING OFFICER VIDE ORDER DATED 22-9- 2006. AS REGARDS ATTRIBUTION OF FURTHER PROFITS TO THE PE OF MSCO WHERE THE TRANSACTION BETWEEN THE TWO ARE HELD TO BE AT A RM'S LENGTH, WE HOLD THAT THE RULING IS CORRECT IN PRINCIPLE PROVID ED THAT AN ASSOCIATED ENTERPRISE (THAT ALSO CONSTITUTES A PE} IS REMUNERATED ON ARM'S LENGTH BASIS TAKING INTO ACCOUNT ALL THE R ISK-TAKING FUNCTIONS OF THE MULTINATIONAL ENTERPRISE. IN SUCH A CASE NOTHING FURTHER WOULD BE LEFT TO ATTRIBUTE TO THE PE..... ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 13 14. EVEN OTHERWISE, WHEN WE EXAMINE THIS PROPOSITIO N ALTERNATIVELY BY REDUCING THE COMMISSION/REMUNERATI ON PAID TO RIPL FROM THE PROFITS ATTRIBUTED TO THE PE, DETAILE D IN THE TABLE EXTRACTED IN PRECEDING PARA 11 OF THE ORDER, NOTHIN G MORE WILL BE LEFT TO ATTRIBUTE TO THE PE. THIS PROPOSITION HAS BEEN HELD IN CASE OF AMADEUS GLOBAL TRAVEL DISTRIBUTION S.A. VS. DCIT 11 3 TTJ 767 (DEL.) BY THE COORDINATE BENCH OF THE TRIBUNAL WHICH HAS B EEN AFFIRMED BY THE HONBLE DELHI HIGH COURT IN ITA 689/2011 & 795-797/2011 BY RELYING UPON THE DECISION HELD IN CASE OF DIT VS. GALILEO INTERNATIONAL INC. 224 CTR 251 (DEL.) WHEREIN IT IS HELD AS UNDER :- READING THE ABOVE ARTICLE 7 OF THE TREATY IT IS CL EAR THAT THE PROFIT OF AN ENTERPRISE WILL BE TAXABLE ONLY TO THE EXTENT AS IS ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. THIS IS IN PARI MATER IA WITH CLAUSE (A) OF EXPLANATION 1 TO SECTION 9(1)(I) OF THE INCO ME-TAX ACT. THUS WHERE THE ENTIRE ACTIVITY OF AN ENTERPRISE ARE NOT CARRIED OUT IN A CONTRACTING STATE WHERE THE PE IS SITUATED, THAN ON LY SO MUCH OF THE PROFIT AS IS ATTRIBUTABLE TO THE FUNCTIONS CARR IED THROUGH THE PE CAN BE TAXABLE IN SUCH SOURCE STATE. WHILE DEALING WITH THE. QUESTION AS TO WHAT IS SUCH PART OF INCOME AS IS RE ASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA , WE HAVE HELD THAT ONLY 15% OF THE REVENUE GENERATED FROM THE BOOKINGS MADE WITHIN INDIA IS TAXABLE IN INDIA. THE SAME PROPORTION HAS TO BE ADOPTED HERE WHILE COMPUTING PROFIT ATTRIBUTABLE TO THE PE. WE HAVE ALSO HELD THAT SINCE THE PAYMENT TO THE AGENT IN INDIA I S MORE THAN WHAT IS THE INCOME ATTRIBUTABLE TO THE PE IN INDIA, IT E XTINGUISH THE ASSESSMENT AS NO FURTHER INCOME IS TAXABLE IN INDIA ., IT IS TO BE NOTED THAT EVEN IN THE FIRST ASSESSMENT FRAMED BY T HE ASSESSING OFFICER, THE ENTIRE EXPENSES IN THE FORM OF REMUNER ATION PAID TO AIPL WAS HELD AS ALLOWABLE DEDUCTION AND WAS REDUCE D WHILE COMPUTING THE INCOME OF APPELLANT IF THAT BE THE CA SE, THE INCOME ATTRIBUTABLE TO PE IN INDIA BEING LESS THAN THE REM UNERATION PAID TO THE DEPENDENT AGENT, IT EXTINGUISHES THE ASSESSMENT AND REQUIRES NO FURTHER EXERCISE FOR COMPUTATION OF INCOME. WE ACCO RDINGLY HOLD SO ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 14 AND IN VIEW OF THE SAME THE INCOME OF THE APPELLANT FOR ASSESSMENT YEARS 1997-98 AND 1998-99 WILL BE 'NIL'.' 15. SO, WE ARE OF THE CONSIDERED VIEW THAT WHEN WE DEDUCT COMMISSION/REMUNERATION FROM THE RIPL FROM THE PROF ITS ATTRIBUTED TO THE PE, NO TAXABLE INCOME LEFT IN THE HANDS OF PE. CONSEQUENTLY, ADDITION MADE BY THE AO/CIT (A) IS NO T SUSTAINABLE IN THE EYES OF LAW. 16. DECISION RENDERED BY THE COORDINATE BENCH OF TH E TRIBUNAL IN CASE OF AMADEUS GLOBAL TRAVEL DISTRIBUTION S.A. (SUPRA), AFFIRMED BY THE HONBLE DELHI HIGH COURT, BY RELYIN G UPON THE DECISION IN CASE OF DIT VS. GALILEO INTERNATIONAL INC. (SUPRA) HAS BEEN FURTHER FOLLOWED BY THE COORDINATE BENCH OF TH E TRIBUNAL IN ASSESSEES OWN CASE BEARING ITA NO.4906/DEL/2010 FO R AY 2007-08 VIDE ORDER DATED 26.10.2020 . 17. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT WHEN RIPL, A DOMESTIC SUBSIDIA RY COMPANY, HAS ALREADY BEEN REMUNERATED AT ARMS LENGTH, NO FU RTHER ATTRIBUTION OF PROFIT TO PE WOULD BE WARRANTED. EVEN OTHERWISE , BY FOLLOWING THE ORDER PASSED BY THE COORDINATE BENCH OF THE TRI BUNAL IN ASSESSEES OWN CASE FOR AY 2007-08 (SUPRA), WHEN WE DEDUCT THE REMUNERATION/COMMISSION PAID TO RIPL FROM THE AMOUN TS OF PROFIT ATTRIBUTED TO THE PE AS DETAILED IN PARA 11 OF THIS ORDER, NO TAXABLE ITA NOS.3967, 3968 & 3969/DEL./2017 ITA NOS.4909, 4910 & 4911/DEL./2018 ITA NO.4756/DEL./2019 ITA NO.416/DEL./2020 15 INCOME LEFT IN THE HANDS OF THE PE. CONSEQUENTLY, ADDITIONS MADE BY THE AO AND CONFIRMED BY LD. CIT (A) ARE ORDERED TO BE DELETED BEING NOT SUSTAINABLE IN THE EYES OF LAW. CONSEQUEN TLY, ALL THE APPEALS FILED BY THE ASSESSEE ARE HEREBY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 17 TH DAY OF FEBRUARY , 2021. SD/- SD/- (ANIL CHATURVEDI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 17 TH DAY OF FEBRUARY, 2021 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.