M/s DDIT Intl. Taxation, New Delhi V. M/s Consulting Engineers Corporation (India Branch Office), New Delhi

ITA 5404/DEL/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3284 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 27-04-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 03-10-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B RAMANJANEYULU
• Keywords: Transfer pricing; Double taxation relief; International transaction; Rule of consistency; Permanent establishment; Bad and doubtful debts
• Section: 92C; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI S.V. MEHROTRA, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.5102/DEL/2013 ASSESSMENT YEAR : 2007-08 CONSULTING ENGINEERS CORPORATION, C/O S. RAMANAND AIYAR & CO, CA, 708, SURYA KIRAN BUILDING, 19, KASTURBA GANDHI MARG, NEW DELHI. PAN: AAAAC1196J VS. ADIT, CIRCLE-1(1), INTERNATIONAL TAXATION, NEW DELHI. ITA NO.5404/DEL/2013 ASSESSMENT YEAR : 2007-08 DDIT, CIRCLE-1(1), INTERNATIONAL TAXATION, NEW DELHI. VS. CONSULTING ENGINEERS CORPORATION, C/O S. RAMANAND AIYAR & CO, CA, 708, SURYA KIRAN BUILDING, 19, KASTURBA GANDHI MARG, NEW DELHI. PAN: AAAAC1196J (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI M.P. RASTOGI, ADVOCATE & SMT. LALITA KRISHNAMURTHY, CA DEPARTMENT BY : SHRI B. RAMANJANEYULU, SR. DR ITA NOS.5102 &5404/DEL/2013 2 DATE OF HEARING : 27.04.2017 DATE OF PRONOUNCEMENT : 05.05.2017 ORDER PER S.V. MEHROTRA, VP: THESE CROSS APPEALS ARE FILED BY THE ASSESSEE AND THE REVENUE AGAINST THE ORDER PASSED BY THE CIT(A) DATED 01.07. 2013 FOR ASSESSMENT YEAR 2007-08. 2. FIRST WE TAKE UP THE ASSESSEES APPEAL. THE ASSE SSEE HAS RAISED THE FOLLOWING GROUNDS:- 1. THAT IN THE ABSENCE OF A PE IN INDIA IN TERMS O F DTAA (DOUBLE TAXATION AVOIDANCE AGREEMENT WITH THE US, NO BUSINE SS PROFIT CAN BE SAID TO HAVE ACCRUED IN INDIA, ACCORDINGLY THE APPE LLANT IS NOT LIABLE TO BE TAXED IN INDIA. 2. THAT AS THE ACTIVITIES OF BRANCH IN INDIA ARE ON LY PREPARATORY AND AUXILIARY SERVICES RENDERED TO HEAD OFFICE IN THE U S AND CONSEQUENTLY THERE IS NO PE, HENCE IN THE ABSENCE OF PE NO INCOM E IS LIABLE TO BE TAXED IN INDIA. 3. THAT THERE IS NO INTERNATIONAL TRANSACTION WITH AN ASSOCIATED ENTERPRISE (AE) AS CONTEMPLATED UNDER SECTION 92C O F THE INCOME TAX ACT, 1961 HENCE NO INCOME OUGHT TO HAVE BEEN DEEMED UNDER SECTION 92C OF THE INCOME TAX ACT, 1961. 4. THAT THE PROVISIONS OF SECTION 92C IN TERMS ARE NOT APPLICABLE AND CONSEQUENTLY THE INCOME ATTRIBUTED OF RS.20,86, 409 / - IS ARBITRARY, UNJUST AND AT ANY RATE VERY EXCESSIVE. 5. THAT THE APPELLANT FUNCTIONS AS A BRANCH OF THE US NONRESIDENT INVOLVING ONLY IN PREPARATORY AND AUXILIARY ACTIVIT IES FOR US ITA NOS.5102 &5404/DEL/2013 3 NONRESIDENT, THE COST WHEREOF IS REIMBURSED BY US, HENCE THERE COULD BE NO INCOME ACCRUED TO THE APPELLANT AND CONSEQUENTLY THE ATTRIBUTION OF INCOME AT A FIGURE OF RS.20,86,409 / - IS ARBITRARY , UNJUST AND BAD IN LAW. 6. THAT IN THE ABSENCE OF ANY INCOME EMBEDDED IN TH E AMOUNT REIMBURSED BY US NONRESIDENT TO ITS BRANCH (APPELLA NT), ACTING AS A PURE COST CENTRE, THE INCOME ATTRIBUTED AT A FIGURE OF R S.20,86,409 / - IS BAD IN LAW. 7. WITHOUT PREJUDICE TO ABOVE GROUNDS THE CIT(APPE ALS), AFTER ASSESSING THE PROFIT ATTRIBUTABLE AT A FIGURE OF RS .20,86,409 / - TO THE BRANCH IN INDIA, OUGHT TO HAVE SUBJECTED IT TO A FU RTHER DOWNWARD ADJUSTMENT FOR FUNCTIONS PERFORMED, ASSETS EMPLOYED , WORKING CAPITAL AVAILABLE AND RISKS ASSUMED. 8. WITHOUT PREJUDICE TO ABOVE GROUNDS THE AUTHORITI ES ERRED IN CHARGING INTEREST UNDER, SECTION 234B OF THE INCOME TAX ACT. 9. WITHOUT PREJUDICE TO ABOVE GROUNDS THE AUTHORITI ES OUGHT TO HAVE ADOPTED THE STATUS OF THE APPELLANT AS INDIVIDUAL I NSTEAD OF FOREIGN COMPANY. 10. THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. 11. YOUR APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEN D OR WITHDRAW ANY OF THE GROUNDS OF APPEAL AT THE TIME OF HEARING. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, A PREMIER ENGINEERING CONSULTANCY COMPANY WAS ESTABLISHED IN 1986 BY MAHA RAJ JALLA, A LICENSED PROFESSIONAL ENGINEER TO PROVIDE QUALITY S TRUCTURAL, CIVIL AND GEOTECHNICAL ENGINEERING CONSULTING SERVICES. THE MISSION OF THE CORPORATION WAS TO DELIVER TO ITS CLIENTS THE BEST QUALITY SERVICE WITH THE LEAST TURNAROUND TIME IN THE MOST ECONOMICAL WAY. TO TAKE ADVANTAGE OF ITA NOS.5102 &5404/DEL/2013 4 THE GROWING TREND IN GLOBALIZATION AND TO ARBITRAGE COST DIFFERENCES CEC ESTABLISHED A SOFTWARE DEVELOPMENT UNIT AT DELHI IN 1991. THE INDIAN BRANCH HAD FILED RETURN OF INCOME DECLARING TAXABLE INCOME OF RS.20,86,609/-. A REFERENCE WAS MADE TO THE TRANSF ER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTION RELATING TO IT ENABLED BA CK OFFICE SERVICES RELATING TO ENGINEERING CONSULTANCY. THE ASSESSEE S MAIN PLANK OF ARGUMENT WAS THAT BRANCH OFFICE IN INDIA PROVIDED B ACK OFFICE SUPPORT IN STRUCTURAL ENGINEERING DESIGN AND WAS MERELY A COST CENTRE AND GOT REIMBURSED FOR ITS EXPENSES FROM HEAD OFFICE. ALL RISKS WERE BORNE BY THE HEAD OFFICE IN USA. INTELLECTUAL PROPERTY RIGHT S VESTED WITH THE HEAD OFFICE ONLY. IT DOES NOT HAVE BUSINESS DEALINGS WI TH ANY ONE EXCEPT THE HEAD OFFICE. THUS, IT WAS THE ASSESSEES PLEA THAT THERE WAS NO FIXED PLACE OF BUSINESS IN INDIA. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT IN ASSESSMENT YEARS 2003-04, 2 004-05 AND 2006-07 (ITA NOS.1597/DEL/2009, 1598/DEL/2009 & 1613/DEL/20 11) IT HAS THROUGHOUT BEEN HELD THAT THE ASSESSEE IS HAVING A PE IN INDIA. WE FIND THAT IN ASSESSMENT YEAR 2003-04, IN PARA 23, THE TR IBUNAL HAS, INTER ALIA, ITA NOS.5102 &5404/DEL/2013 5 HELD THAT THE ASSESSEE HAS A PE IN INDIA AS PER THE PROVISIONS OF ARTICLE 5(2)(B) AND (C) OF INDO-US DTAA. THEREFORE, GROUND NOS.1 TO 6 ARE DISMISSED. 4. AS FAR AS PROFITS ATTRIBUTABLE TO THE BRANCH IN INDIA ARE CONCERNED, WHICH ISSUE HAS BEEN RAISED IN GROUND NO.7, WE FIND THAT IN ASSESSMENT YEAR 2002-03 AND 2004-05, THE TRIBUNAL, IN PARA 33 AND 34, HAS OBSERVED AS UNDER:- 33. ON CAREFUL CONSIDERATION OF ABOVE RIVAL SUBMIS SIONS, FROM THE RELEVANT PART OF THE IMPUGNED ORDER, WE OBSERVE THA T THE AO HAS NOT BROUGHT OUT ANY FACT OR MATERIAL INTO EXISTENCE THA T THE RISK OF MARKETING AND QUALITY CONTROL ACTIVITY HAVE TAKEN PLACE AND A LL DEVELOPMENTAL ACTIVITIES HAVE TAKEN PLACE IN INDIA. IN THIS SITUA TION, IT CANNOT BE SAID THAT RISK IS INVOLVED EXCLUSIVELY EITHER ON THE HEAD OFF ICE OR ON THE PE BRANCH OFFICE IN INDIA. OBVIOUSLY, FROM STAGE OF DISCUSSIO N AND OBTAINING THE CONTRACT TILL ITS FINAL MARKETING TO THE RESPECTIVE CLIENT HAVE BEEN UNDERTAKEN BY THE US HEAD OFFICE BUT AT THE SAME TI ME THIS FACT CANNOT BE IGNORED THAT THE PE BRANCH OFFICE IN INDIA CONTR IBUTED TOWARDS ALL DEVELOPMENT ACTIVITIES AT THE CHEAPER COST OF SERVI CE AND HUMAN RESOURCES IN COMPARISON TO USA, THEREFORE, WE ARE O F THE VIEW THAT FOR EARNING HIGHER PROFIT IN COMPARISON TO USA, COMPARA BLE COMPANIES AS ADOPTED IN TRANSFER PRICING STUDY, THE US HEAD OFFI CE EARNED HIGHER PROFIT DUE TO LOW COST OF SERVICES AND HUMAN INPUT BY INDIAN PE. AT THE SAME TIME, ALTHOUGH WE NOTE THAT THE RISK FACTOR WA S ALSO BORNE BY THE INDIAN PE BRANCH, WE ALSO NOTE THIS FACT THAT CERTA IN RISK IN REGARD TO CAPITAL INVESTMENT, BAD DEBTS AND OTHER LEGAL OBLIG ATIONS WERE ITA NO.1597,1598,1275,1172/D/2009 ASSTT.YEARS: 2003-04, 2004-05 30 BORNE BY THE US HEAD OFFICE, THEREFORE, THE AO RIGH TLY ADOPTED THE GLOBAL PROFIT OF THE US HEAD OFFICE FOR BENCHMARKIN G THE PERCENTAGE OF PROFIT AND THE AO ATTRIBUTED 100% PROFIT TO THE IND IAN PE. AT THIS JUNCTURE, FROM THE IMPUGNED ORDER, WE ALSO OBSERVE THAT THE CIT(A) HAS ITA NOS.5102 &5404/DEL/2013 6 TAKEN INTO ACCOUNT THIS VERY FACT THAT THE INDIAN B RANCH TAKES SOME RISK AS THE IMPORTANT DRAWING AND DESIGNING CALCULATIONS AR E CARRIED OUT BY THE INDIAN COMPANY AND IMPLIEDLY OTHER RISKS AS STATED ABOVE WERE TAKEN BY THE US HEAD OFFICE AND, THEREFORE, IN THE TOTALITY OF THESE FACTS AND CIRCUMSTANCES, THE CIT(A) WAS JUSTIFIED IN HOLDING THAT 50% OF THE PROFITS DETERMINED BY THE AO AFTER APPLYING RULE 10 WERE TO BE ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT BY THE P E IN INDIA. 34. ON THE BASIS OF FOREGOING DISCUSSION, WE ARE IN AGREEMENT WITH THE ACTION OF THE CIT(A) THAT HE DIRECTED THE AO TO CALCULATE ATTRIBU TABLE PROFIT @50% OF THE FIGURE ARRIVED AFTER APPLYING PROFIT RATE OF 8. 5% FOR AY 2003-04 AND 10.6% FOR AY 2004-05. FINALLY, WE REACH TO A CONCLU SION THAT THE CONTENTIONS OF THE ASSESSEE FOR WRONG ADOPTION OF G LOBAL PROFIT OF THE US HEAD OFFICE ARE NOT SUSTAINABLE. AT THE SAME TIME, WE ALSO OBSERVE THAT THE CIT(A) WAS REASONABLE AND JUSTIFIED IN DIRECTIN G THE AO TO CALCULATE THE ATTRIBUTABLE PROFIT AT 50% OF THE FIGURE ARRIVE D BY THE AO AFTER APPLYING GLOBAL PROFIT RATE OF US HEAD OFFICE FOR T HE RESPECTIVE ASSESSMENT YEARS UNDER CONSIDERATION IN THESE APPEA LS. ACCORDINGLY, GROUND NO. 11 & 12 FOR AY 2003-04 AND GROUND NO. 6 & 7 FOR AY ITA NO.1597,1598,1275,1172/D/2009 ASSTT.YEARS: 2003-04, 2004-05 31 2004-05 OF THE ASSESSEE AS WELL AS GROUND NO. 1 TO 4 OF THE REVENUE IN BOTH THE APPEALS FOR AY 2003-04 AND 2004-05 ARE DIS MISSED. 5. IN ASSESSMENT YEAR 2006-07, THE TRIBUNAL HAS DIR ECTED THE ASSESSING OFFICER TO RECOMPUTE THE INCOME OF THE AS SESSEE IN THE LIGHT OF THE DECISION OF ITAT IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003-04 AND 2004-05. WE ACCORDINGLY, SET ASIDE THE IMPUGNED ORDER AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO RECOMPUTE THE INCOME OF THE ASSESSEE IN THE LIGH T OF THE DECISIONS OF THE ITAT IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2003-04, 2004-05 AND 2006-07. ITA NOS.5102 &5404/DEL/2013 7 6. GROUND NO.8 IS CONSEQUENTIAL. 7. GROUND NO.9 WAS NOT PRESSED EVEN BEFORE THE CIT( A). HENCE, DISMISSED. 8. THE DEPARTMENT HAS RAISED THE FOLLOWING TWO GROU NDS:- 1. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CAS E, THE HOLDING OF LD CLT(A) THAT MOST OF THE COMPARABLES ADOPTED BY T PO ARE HAVING BUSINESS PROFILE DIFFERENT FROM THAT OF THE ASSESSE E IS WRONG AND INCORRECT AS THE LD CIT (A) HAS BEEN FAILED TO PROVIDE THE RE ASON AS TO HOW AND UPTO WHAT EXTENT THE COMPARABLES ADOPTED BY TPO ARE HAVING DIFFERENT BUSINESS PROFILE FROM THAT OF THE ASSESSEE COMPANY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN HOLDING THAT THE PROFIT RETURNED BY THE AS SESSEE EXCEED THE PROFIT COMPUTABLE AS PER FORMULA DIRECTED BY CIT(A) IN EAR LIER YEARS AND THEREFORE THE CONSISTENCY RULE SHOULD BE FOLLOWED, AS THE PE ALSO ASSUMES RISKS IN RESPECT OF WORK DONE BY IT AND THE HQ EARNS ITS OWN PROFIT IN RESPECT OF EXPENSES NOT ATTRIBUTABLE TO P E AND SO THE A.O HAS CORRECTLY DETERMINED THE TAXABLE PROFIT AS THE INCO ME OF THE ASSESSEE 3. THE APPELLANT CRAVES TO ADD, AMEND, MODIFY, OR ALTER ANY GROUNDS OF APPEAL AT THE TIME OR BEFORE THE HEARING OF THE APPEAL. 9. BOTH THESE GROUNDS ARE WITH REFERENCE TO PROFITS ATTRIBUTABLE TO THE PE AND, THEREFORE, SINCE WE HAVE RESTORED THE MATTE R TO THE FILE OF THE ASSESSING OFFICER ON THIS GROUND, BOTH THE GROUNDS RAISED BY THE DEPARTMENT ARE ALSO ALLOWED FOR STATISTICAL PURPOSE S. ITA NOS.5102 &5404/DEL/2013 8 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AND THAT OF THE DEPARTMENT IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 05.05.201 7. SD/- SD/- [SUDHANSHU SRIVASTAVA] [S.V. MEHROTRA] JUDICIAL MEMBER VICE PRESIDENT DATED, 05 TH MAY, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.