HEMPEL SINGAPORE PTE LIMITED , MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAX) CIRCLE-2(2)(2), MUMBAI

ITA 7296/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4872 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Assessment Year: 2014-2015
• Appeal Filed On: 22-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Permanent establishment; Initiation of penalty proceedings
• Section: 143(3); 92B; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I, MUMBAI BEFORE SHRI G.S. PANNU, VICE PRESIDENT AND SHRI RAVISH SOOD, JUDICIAL MEMBER ITA NO. 7296/MUM/2017 : A.Y : 2014 - 15 HEMPEL SINGAPORE PTE LTD. C/O HEMPEL PAINTS (INDIA) PRIVATE LIMITED, UNIT NO. 801, 8 TH FLOOR, VIKAS CENTRE, NR. BASANT CINEMA, C. GIDWANI ROAD, CHEMBUR, MUMBAI 400 074. PAN : AADCH3737M (APPELLANT) VS. DCIT (IT), CIRCLE - 2(2)(2), MUMBAI. (RESPONDENT) APPELLANT BY : SHRI MADHUR AGRAWAL RESPONDENT BY : SHRI SAMUEL DARSE DATE OF HEARING : 16/11/2018 DATE OF PRONOUNCEMENT : 08 /02/2019 O R D E R PER G.S. PANNU , VICE PRESIDENT : THIS APPEAL IS DIRECTED AGAINST THE ORDER DATED 27. 1 0.2017 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INC OME TAX ACT, 1961 (IN SHORT THE ACT) GIVING EFFECT TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL - 1(WZ) , MUMBAI ( IN SHORT THE DRP ) DATED 2 2 .0 9 .2017. 2. IN THIS APPEAL, ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : - 2 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.5,15,05,000 AS INCOME OF THE PERMANENT ESTABLISHMENT (PE) OF THE APPELLANT IS 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 THE CARRIED OUT IN INDIA AS REQUIRED UNDER SECTION 9 OF THE INCOME - TAX ACT, 1961 (IT ACT). THE APPELLANT PRAYS THAT THE RETURN OF INCOME OF THE APPELLANT BE ACCEPTED. 3. 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 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 P RAYS THAT 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 OF THE PE OF THE APPELLANT, WITHOUT CONSIDERING THE FACT THAT THE APPELLA NT HAS PAID ARMS LENGTH COMMISSION TO THE AGENT AND SUCH PAYMENT OF COMMISSION EXTINGUISHES THE LIABILITY OF THE APPELLANT IN INDIA. THE APPELLANT PRAYS THAT THE RETURN OF INCOME OF THE APPELLANT BE ACCEPTED. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE HON'BLE DRP / LD. AO FURTHER ERRED IN: (I) REJECTING THE TRANSFER PRICING STUDY REPORT WITHOUT ANY BASIS; (II) ALLEGING THAT THE PE HAS NOT BEEN COMPENSATED FOR MARKET RISK, PRODUCT LIABILITY RISK AND CREDIT RISK ATTRIBUTABLE TO IT; (I II) REJECTING THE COMPARABLE COMPANIES AS FUNCTIONALLY DIFFERENT 3 (IV) 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 C BDT. THE APPELLANT THEREFORE PRAYS THAT THE PROFIT ATTRIBUTABLE TO THE PE BASED ON THE OPERATIONS CARRIED OUT IN INDIA AND ALSO, ATTRIBUTABLE TO THE RISKS UNDERTAKEN BY THE PE BE ACCEPTED. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HO N'BLE DRP / LD. AO ERRED IN REJECTING THE TRANSFER PRICING STUDY AND COMPUTATION OF ARM'S LENGTH PRICE IN THE HANDS OF HEMPEL PAINTS (INDIA) PVT. LTD. ('HEMPEL INDIA') WHEN THE SAME HAS BEEN ACCEPTED IN THE HANDS OF HEMPEL INDIA IN ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE IT ACT. THE APPELLANT THEREFORE PRAYS THAT THE LD. AO BE DIRECTED TO TREAT THE COMPENSATION RECEIVED BY HEMPEL SINGAPORE PE AS AT ARM'S LENGTH. 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN CONFIRMING THE ACTION OF THE LD. AO IN LEVYING INTEREST U/S. 234B OF THE ACT. THE APPELLANT THEREFORE PRAYS THAT THE LD. AO BE DIRECTED TO DELETE THE LEVY OF CONSEQUENTIAL INTEREST U/S. 234B OF THE ACT. 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HON'BLE DRP ERRED IN CONFIRMING THE ACTION OF THE LD. AO IN INITIATING THE PENALTY PROCEEDINGS UNDER SECTION 271(I)(C) OF THE ACT. THE APPELLANT THEREFORE PRAYS THAT THE INITIATION OF PENALTY PROCEEDINGS BE QUASHED. 3. ALTHOUGH ASSESSEE HAS RAISED MULTIPLE GROUNDS OF APPEAL, BUT THE SUBSTANTIVE DISPUTE ARISES FROM THE ACTION OF THE ASSESSING OFFICER IN MAKING AN ADDITION OF ` 5,15,05,000/ - TO THE RETURNED INCOME BY ATTRIBUTING THE 4 AFORESAID AS INCOME OF THE PERMANENT ESTA BLISHMENT (PE) OF THE ASSESSEE IN INDIA. 4. IN BRIEF, THE RELEVANT FACTS ARE THAT THE APPELLANT BEFORE US IS A FOREIGN COMPANY INCORPORATED UNDER THE LAWS OF SINGAPORE AND IS A TAX RESIDENT OF SINGAPORE. IT IS, INTER - ALIA , ENGAGED IN THE BUSINESS OF SELL ING PROTECTIVE COATINGS/PAINTS INCLUDING MARINE, PROTECTIVE, CONTAINER, YACHT AND DECORATIVE COATINGS. PARTICULARLY, FOR THE MARINE INDUSTRY, THE EXTENSIVE RANGE OF MARINE COATINGS OFFERED BY THE ASSESSEE PROVIDE PROTECTION OF ALL TYPES OF VESSELS, ETC. THE ASSESSEE HAS A 100% OWNED SUBSIDIARY IN INDIA, NAMELY, HEMPEL PAINTS (INDIA) PVT. LTD. (HEREINAFTER REFERRED TO AS HEMPEL INDIA). HEMPEL INDIA IS ALSO ENGAGED IN MANUFACTURING OF PAINTS AND COATINGS IN INDIA. ASSESSEE HAS AN AGENCY AGREEMENT WITH H EMPEL INDIA W.E.F. 01.04.2013 WHEREBY HEMPEL INDIA ASSISTS ASSESSEE IN SELLING OF PRODUCT S INTO INDIA TO THIRD PARTY CUSTOMERS. THE ASSESSEE EARNS SALES REVENUE FROM SALES MADE IN INDIA, AND IN CONSIDERATION OF SERVICES RENDERED BY HEMPEL INDIA, ASSESSEE PAYS COMMISSION TO THE INDIAN SUBSIDIARY . AS PER THE ASSESSEE, THE COMMISSION CHARGED BY HEMPEL INDIA IS UNDER THE ARMS LENGTH PRICE PRINCIPLE. IN TERMS OF THE AGENCY AGREEMENT, AND THE RIGHTS AND RESPONSIBILITY PROVIDED BY ASSESSEE TO HEMPEL INDIA, AN AGENCY PE OF THE ASSESSEE IN INDIA WAS CREATED IN TERMS OF ARTICLE 5(4) OF THE INDIA - SINGAPORE TAX TREATY. ASSESSEES STAND BEFORE THE ASSESSING OFFICER WAS THAT IT WAS COMPUTING INCOME ATTRIBUTABLE TO ITS AGENCY PE IN INDIA BY APPLYING TRANSFER PRICING P ROVISIONS OF CHAPTER X OF THE ACT AND AS THE COMMISSION PAID TO HEMPEL INDIA, ITS AGENT, WAS EQUAL TO THE INCOME ATTRIBUTABLE TO THE AGENCY PE, THE RESULTANT TAXABLE INCOME WAS NIL. FOR THE YEAR UNDER CONSIDERATION, IT WAS FOUND THAT ASSESSEE PAID COMMISS ION TO HEMPEL INDIA @ 8.17% OF THE 5 SALES MADE THROUGH THE INDIAN SUBSIDIARY. SUCH AMOUNT OF COMMISSION AMOUNTED TO ` 2,50,02,693/ - . THE INCOME ATTRIBUTABLE TO AGENCY PE WAS SHOWN AS ` 2,50,02,693/ - AND SINCE THE ENTIRE AMOUNT WAS PAID AS COMMISSION, IT WAS CLAIMED AS AN EXPENDITURE AND ACCORDINGLY, ASSESSEE PE FILED RETURN OF INCOME DECLARING NIL INCOME. THE ASSESSING OFFICER, HOWEVER, DID NOT CONCUR WITH THE ASSESSEE AND HE ESTIMATED PROFITS OF THE ASSESSEE PE AT AN AD - HOC RATE OF 25% OF THE SALES. THE A SSESSING OFFICER WORKED OUT THE SALES AT ` 30,60,30,500/ - , WHICH CORRESPONDED TO COMMISSION PAYMENT OF ` 2,50,02,693/ - , AND ACCORDINGLY ESTIMATED THE PROFIT AT ` 7,65,07,629/ - . THE PAYMENT OF COMMISSION TO HEMPEL INDIA OF ` 2,50,02,693/ - WAS ALLOWED AS AN EXP ENDITURE AND THE NET PROFIT ATTRIBUTABLE TO ASSESSEE PE IN INDIA WAS WORKED OUT AT ` 5,15,04,936/ - . ACCORDINGLY, AS AGAINST NIL INCOME RETURNED BY THE ASSESSEE, THE ASSESSING OFFICER HAS FINALISED THE ASSESSMENT AT ` 5,15,05,000/ - . NOTABLY, THE AFORESAID A CTION WAS PROPOSED BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER DATED 29.12.2016, WHICH HAS SINCE BEEN AFFIRMED BY THE DRP IN ITS ORDER DATED 22.09.2017 AND THEREAFTER, THE ASSESSING OFFICER HAS FINALISED THE ASSESSMENT UNDER SECTION 143(3) R.W.S . 144C(13) OF THE ACT DATED 27.10.2017. IN THIS BACKGROUND, ASSESSEE IS IN APPEAL BEFORE US. 5. BEFORE US, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE HAS ADVERTED TO A SHORT POINT BASED ON THE PROPOSITION UPHELD BY THE HON'BLE SUPREME COURT IN THE CASE OF M/S. MORGAN STANLEY & CO. INC IN CIVIL APPEAL NO. 2914 OF 2007 & ANR. DATED 09.07.2007 , AND WHICH HAS ALSO BEEN LATER APPLIED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SET SATELLITE SINGAPORE PTE LTD. VS DDIT IN ITA NO. 944 OF 2007 DATED 22.08.200 8 . THE PLEA OF THE ASSESSEE IS TO THE EFFECT THAT THE INDIAN SUBSIDIARY, I.E. HEMPEL INDIA, HAS BEEN 6 REMUNERATED BY THE ASSESSEE ON ACCOUNT OF COMMISSION PAYMENT AT ARMS LENGTH PRICE, THEREFORE NO FURTHER INCOME OR PROFITS COULD BE SAID TO BE ATTRIBUTABL E TO THE ASSESSEE IN INDIA ON ACCOUNT OF ITS AGENCY PE. IT IS SOUGHT TO BE CANVASSED THAT FOR THE VERY INSTANT ASSESSMENT YEAR, THE INDIAN AGEN T , I.E. HEMPEL INDIA HAD REPORTED EARNINGS OF COMMISSION FROM THE ASSESSEE AS AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC. 92B OF THE ACT, AND WHICH WAS SUBJECT TO A TRANSFER PRICING ASSESSMENT. THE LEARNED REPRESENTATIVE REFERRED TO PAGE 361 OF THE PAPER BOOK WHEREIN IS PLACED THE ORDER PASSED BY THE TRANSFER PRICING OFFICER UNDER SECTION 92CA(3) OF THE ACT DATED 27.10.2017 ACCEPTING THAT THE INTERNATIONAL TRANSACTION REPORTED BY HEMPEL INDIA AS AT AN ARMS LENGTH PRICE. OUR ATTENTION HAS ALSO BEEN DRAWN TO THE FINAL ASSESSMENT ORDER UNDER SECTION 143(3) OF THE ACT PASSED BY THE ASSESSING OFFICER IN THE CASE OF HEMPEL INDIA FOR ASSESSMENT YEAR 2014 - 15 DATED 22.12.2017, A COPY OF WHICH HAS ALSO BEEN PLACED IN THE PAPER BOOK AT PAGES 362 TO 363. REFERENCE WAS ALSO INVITED TO PAGES 116 TO 150 OF THE PAPER BOOK WHEREIN IS PLACED A COPY OF THE TRANSFER PRICING ANALYSIS AND REPORT OF HEMPEL INDIA CORRESPONDING TO THE PERIOD UNDER CONSIDERATION WHICH SHOWS THAT HEMPEL INDIA HAD CHARGED A MARK - UP OF 8.17% ON COST INCURRED BY IT FOR PROVIDING AGENCY SERVICES TO THE ASSESSEE BEFORE US. ON THE BASIS OF THE A FORESAID, IT IS CANVASSED THAT THE ACTION OF THE LOWER AUTHORITIES IN MAKING THE IMPUGNED ADDITION TO THE RETURNED INCOME IS UNTENABLE. 6. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE HAS REITERATED THE ADDITION MADE BY THE ASSESSING OFFICER, SO HOWEVER, THE FACTUAL MATRIX BROUGHT OUT BY THE LEARNED REPRESENTATIVE HA S NOT BEEN DISPUTED. 7 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 APPOI NTED 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 AB OUT THE EXISTENCE OF ASSESSEES 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. I N THE PRESENT CASE, THE POINT SOUGHT TO BE MADE BY THE ASSESSEE IS THAT THE CO MMISSION 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, ACCO RDING TO THE ASSESSEE, NO FURTHER INCOME COULD 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 ARMS LENGTH PRICE. UNDOUBTEDLY, THE PROPOSITION SOUGHT TO BE CANVASSED BY THE ASSESSEE H AS THE APPROVAL OF HON'BLE SUPREME COURT IN THE C ASE 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 ARMS 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, 8 THE COMMISSION HAS BEEN FOUND TO BE AT ARMS 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 PART ING, 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 H AS BEEN RELIED UPON BY THE ASSESSEE BEFORE US. IN THE SAID CASE ALSO, THE AFORESAID PROP OSITION 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 RECIPIE NT. THE HON'BLE HIGH COURT SPECIFICALLY REPUDIATED THE AFORESAID PLEA AND HELD THAT ONCE IT WAS TREATED AS ARMS 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 COMMIS SION 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 PRICIN G 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 ADDITIO N OF ` 5,15,05,000/ - TO THE RETURNED INCOME IS CLEARLY UNTENABLE IN THE FACTS OF THE INSTANT CASE . WE HOLD SO. 9. SINCE WE HAVE DELETED THE ADDITION ON THE AFORESAID SHORT POINT, WHICH IS COVERED BY GROUND OF APPEAL NO. 1 READ WITH GROUND OF APPEAL NO. 9 4, THE OTHER GROUNDS RAISED ARE RENDERED ACADEMIC AND THERE IS NO NECESSITY TO ADJUDICATE THE SAME. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 8 T H FEBRUARY, 2019. SD/ - SD/ - ( RAVISH SOOD ) JUDICIAL MEMBER ( G.S. PANNU ) VICE PRESIDENT MUMBAI, DATE : 8 T H FEBRUARY , 201 9 *SSL* C OPY TO : 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT(A) CONCERNED 4) THE CIT CONCERNED 5) THE D.R, I BENCH, MUMBAI 6) GUARD FILE BY ORDER DY./ASSTT. REGISTRAR I.T.A.T, MUMBAI