The order of the Bench was delivered by
Ramit Kochar, Accountant Member-This appeal, filed by the Revenue, being ITA No. 1247/Mum/2014, is directed against the directions dated 23-12-2013 passed by Dispute Resolution Panel – II, Mumbai (hereinafter called “the DRP”) u/s 144C(5) of the Act for the assessment year 2009-10 against the draft assessment order dated 21.03.2013 passed by the AO u/s. 144C(1) r.w.s. 143(3) of the Act , and in pursuance of the directions of the DRP-II, Mumbai , the AO passed the assessment orders dated 10-01-2014 u/s 143(3) r.w.s. 144C(13) of the Act.
2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-
“(1) Whether, on the facts and circumstances of the case and in law the Hon'ble DRP is correct in holding that the assessee did not have PE in India in the A.Y's. 2004-05, 2005-06 and 2008-09 in term of Article 5(1), 5(2), 5(4) & 5(5) of the Indo-USA Treaty and the addition made by the AO being the profit margin of 5% of the sale made by the assessee is not sustainable.
(2) Whether on the facts and under the circumstances of the case, the Hon'ble DRP was correct in holding that interest u/s. 234B is not leviable in the case of non-resident despite a specific finding by the Hon'ble Delhi High Court in the case of DIT Vs. Alcatel Lucent USA Inc. dated 14/11/2013 in ITA Nos. 328 and 329/2012 wherein it has been specifically stated that a non-resident assessee which does not admit income chargeable to tax must be inferred to have induced the Indian payer not to deduct TDS, thus, rendering itself liable for advance tax interest.”
3. The brief facts of the case are that in the instant case draft assessment order dated 21.03.2013 was passed by the AO u/s 144C(1) r.w.s. 143(3) of the Act. The assessee filed objections against the draft assessment order with DRP-II,Mumbai. The DRP-II,Mumbai issued directions vide order dated 23rd December, 2013 u/s 144C(5) of the Act, and thereafter assessment order dated 10.01.2014 u/s 144C(13) read with Section 143(3) of the Act was passed by the AO in accordance with the directions given by the DRP- II,Mumbai.
4. The assessee company is engaged in manufacturing of high performance chemicals for use in transportation and industrial lubricants. The assessee company performs research and development, testing, production of intermediaries, blending of intermediaries into finished products for sale and distribution. The assessee is a resident of USA and accordingly DTAA between USA and India is applicable.
The assessee is having 50% shareholding and the balance 50% shares are held by Indian Oil Corporation in Lubrizol India Pvt. Ltd. (in short “LIL”). LIL is manufacturing various products in India under the License and Technology Transfer Agreement dated 1st April, 2007. The assessee is being paid a consideration for provision of technical services and for the rights in manufacturing technology, formulation technology and the patent rights. A total technical fee of Rs. 218,104,101/- has been paid during the year which has been offered for taxation as royalty by the assessee in the return of income filed with the Revenue.
Order u/s 92CA(3) of the Act was passed by the DCIT (TPO)-1(9),Mumbai on 31st December, 2012 , wherein the value of international transaction with Associated Enterprises (AE)with regard to Arm’s length Price (ALP) were not disturbed.
It was observed by the AO that the Indian subsidiary M/s LIL is not only engaged in manufacturing of products developed by M/s Lubrizol Corporation, USA but also in the marketing of products manufactured by the assessee. The details of sale made by the assessee in India are as under:-
| Sales to LIL USD |
10,837,412 |
Sales to others USD |
5,309,639 |
USD |
16,147,051 |
The assessee was asked to explain as to why the profits made by it on sale of products in India should not be taxed in India as assessee is having PE in the form of M/s LIL. In reply, the assessee submitted that it does not have any address in India and under Article 5(4) of the Indo-US treaty also , LIL cannot be treated as agency PE since LIL does not have authority to conclude contract on behalf of the assessee. It was also submitted that LIL does not secure orders on behalf of the assessee and in absence of any PE, no profits could be taxed in India under Article 7 of Indo-US treaty.
The assessee relied upon the decision of the Tribunal in assessee’s own case in ITA No. 7420/Mum/2010 for the assessment year 2006-07 dated 3rd June, 2011 , and orders of the Tribunal in ITA No. 6443, 6444 and 6445/Mum/2012 for the assessment years 2004-05, 2005-06 & 2008-09 wherein the Tribunal has held that the assessee does not have PE in India and is not taxable for sales which have been made from outside India. However, the Revenue filed appeal before the Hon’ble Bombay High Court against the afore-stated decisions of the Tribunal which was pending for adjudication by the Hon’ble Bombay High Court , and hence the submission of the assessee was not considered by the AO in its draft assessment order dated 21.03.2013 passed u/s 144C(1) r.w.s. 143(3) of the Act.
The A.O. observed that the assessee has entered into Exclusive Sales Representation Agreement dated 1st April, 2000 with LIL and as per the agreement, LIL is the Exclusive Marketing Co-ordinator for Lubrizol products in India and later on extended the territory to include Sri Lanka, Nepal and Bangladesh vide amendment dated 28th June, 2001. Under the agreement, LIL has accepted the assessee’s Exclusive Sales and Marketing Representation and LIL is appointed as sales and marketing representative to solicit orders for products for delivery in the territory. LIL is required to make efforts to promote the sale and distribution and to create demand for assessee’s products. The solicitation in marketing of products shall be at the will and complete discretion of the LIL, thus the assessee cannot sell any product in India without LIL being involved. The LIL will send quotations directly to the customers and will keep the assessee informed of such quotation. The assessee will send invoices directly to the customers and LIL shall be entitled to solicit orders for the products in accordance with the terms of the agreement. Thus, LIL is involved from the stage of solicitation of orders till the finalization of sale. It is also provided that LIL shall be indemnified regarding any claim or demand made by the customers, however, LIL will assist the assessee regarding the correct facts and position of the customers in the matter.
Another agreement was also entered into namely Sales and Marketing Agreement – Metal working Products which deals with marketing of metal working products dated 1st January, 2002. Another agreement has also been entered into between the assessee and LIL and the terms and conditions were same as for the earlier agreement except that for better services to the customers , LIL has been made responsible to purchase these products on its own account from the assessee and to resale such products to customers in India.
It was also observed by the A.O. that so far as marketing of product, LIL is virtual projection of the assessee in India and it has got full rights and responsibilities in respect of marketing and sales and merely because of making orders directly on the assessee in the agreement will not save the assessee from taxability in India.
It was also observed that LIL is manufacturing the products of the assessee in India and besides this LIL is also marketing the similar products of the assessee in various territories including India under exclusive sales representation agreement dated 01.04.2000. LIL is not only promoting the products of the assessee but also involved in procurement of orders and its responsibility and involvement continues up to the stage of sale as it is to be kept informed about all development related to the sale. LIL has also maintained stocks of various products made by the assessee and the A.O. held that LIL is PE of the assessee under the Article 5(1), 5(2) and 5(4) of Indo-US DTAA.
The assessee submitted in response to the observations of the AO that LIL has been remunerated by way of commission for the services provided by it and nothing more can be brought to tax in India. The A.O. rejected the contentions of the assessee holding that LIL has been remunerated by way of commission only for the functions performed but for determination of profits, three things namely functions performed, assets deployed and risk undertaken have to be seen. For the sales made in India, the assessee has assumed all the risks. While the production is taking place outside India, still the risk undertaken by the assessee in sales and marketing of the products in India exists, hence, assessee’s profits for the same is taxable in India. Further , as per Article 7(1) of Indo-US DTAA, profit arising on sales done in India even directly by the assessee of the same or similar products as done by the LIL will also be taxable in India due to operation of force of attraction rule. LIL is held to be PE of the assessee in India, is engaged in manufacture of same or similar products under the same brand name under the Technology Transfer Agreement . It was further held that LIL also promotes products of the assessee and solicits order on behalf of the assessee and is involved in marketing and sale from finding a customer up-to the finalization of sale. Thus, keeping in view of the profits earned and attributable to functions, assets and risk in India undertaken by the assessee through its PE will be taxable in India. The AO estimated assessee’s profit in India @ 5% for sales made in India and brought to tax income of Rs. 4,07,95,524/- vide draft assessment orders dated 21.03.2013 passed u/s 144C(1) r.w.s. 143(3) of the Act.
5. Aggrieved with the draft assessment order u/s 144C(1) r.w.s. 143(3) dated 21st March, 2013 passed by the AO, the assessee filed objections with the DRP and the DRP issued the directions u/s 144C(5) of the Act vide orders dated 23rd December, 2013 and allowed the objections of the assessee by deleting the addition of Rs. 40,795,524/- made by the AO by relying on the decision of the Tribunal for assessment year 2006-07 in assessee’s own case in ITA No. 7420/Mum/2010 vide orders dated 03-06-2011 wherein the Tribunal held as under:-
“22…… After considering the relevant material and 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 products manufactured by it in India. The total sales of LIPL are Rs. 408.84 crores and commission received from the assessee is 0.756 crores which constitutes only 0.18% of the sales. The assessee also sold products to Indian customers for which LIPL rendered 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 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 these facts of the case, we are of the view that the learned counsel has demonstrated by (sic) the assessee does not have a PE in India. For this conclusion, we derive support from the decision of ITAT, Mumbai in the case of DDIT v. 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."
This has been followed for AY 2004-05, 2005-06 & 2008-09. Respectfully following the same as facts are identical for the relevant AY it is held that assessee did not have PE in India in terms of Article 5(1) and 5(5) of India-US Tax Treaty and hence addition of Rs. 4,07,95,524 made by AO is deleted. This objection is allowed.”
6. Since , the DRP-II,Mumbai has directed to delete the addition of Rs. 4,07,95,524/- on account of profit earned by the assessee on sales made in India, the AO passed the assessment orders dated 10-01-2014 u/s 144C(13) r.w.s. 143(3) of the Act in accordance with the directions of DRP- II,Mumbai.
7. Aggrieved by the directions of the DRP-II,Mumbai issued u/s. 144C(5) of the Act which culminated into an assessment order dated 10-01-2014 passed by the AO u/s. 144C(13) read with Section 143(3) of the Act , the Revenue is in appeal before the Tribunal.
8. The learned CIT D.R. relied upon the draft assessment orders dated 21.02.2013 passed by the A.O. u/s. 144C(1) r.w.s. 143(3) of the Act, and submitted that the department has not accepted decision of the Tribunal in ITA No. 6443 to 6445/Mum/2012 vide orders dated 18th January, 2013 for assessment year 2004-05, 2005-06 and 2008-09 , and also decision of the Tribunal in ITA No. 7420/Mum/2010 vide orders dated 3rd June, 2011 for assessment year 2006-07 and filed appeal against afore-stated Tribunal’s orders with Hon’ble Bombay High Court which is pending for adjudication with the Hon’ble Bombay High Court. However, the learned CIT D.R. fairly conceded that the facts are identical in the instant assessment year vis-à-vis facts of the earlier year which were adjudicated by the Tribunal vide afore- stated orders by holding that the assessee did not have PE in India in terms of Article 5(1) and 5(5) of India-US Tax Treaty whereby additions made by the AO were deleted and the additions to the income made by the A.O. being a profit margin of 5% on the sales made by the assessee in India was held to be not sustainable in the absence of assessee’s PE in India and the Tribunal deleted the same, and the matter is squarely covered by the afore-stated Tribunal order’s in assessee’s own case in the instant assessment year under appeal .
9. The ld. Counsel for the assessee, at the outset, submitted that the matter is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case in ITA No. 6443 to 6445/Mum/2012 for assessment years 2004-05, 2005-06 & 2008-09 vide orders dated 18th January, 2013 and also in assessee’s owncase in ITA No. 7420/Mum/2010 for assessment year 2006-07 vide orders dated 3rd June, 2011 wherein it was held by the Tribunal that the assessee did not have PE in India in terms of Article 5(1), 5(2), 5(4) and 5(5) of the Indo-US Treaty and the additions to the income made by the A.O. being a profit margin of 5% on the sales made by the assessee in India was held to be not sustainable in the absence of assessee’s PE in India and the Tribunal deleted the same. The Tribunal order in ITA No. 7420/Mum/2000 for assessment year 2006-07 vide orders dated 03-06-2011 is reproduced below:-
“This appeal filed by the Assessee is directed against the order of (IT)-Range-4, Mumbai, passed on 01/10/2010 for the assessment year 2005-06 wherein the assessee has raised the following grounds of appeal:-
“On the facts and in the circumstances of the case and in law, the learned Additional Director of Income-Tax (International Taxation (ADIT) has erred in concluding that the appellant has a Permanent Establishment (PE) in India under Article 5 of the Double Taxation Avoidance Agreement between India and USA (Tax Treaty) and thereby has erred in charging to tax, the business profits of the appellant in India under Article 7 of the Tax treaty.
2. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in concluding that Lubrizol India Pvt. Ltd. (LIPL) is a virtual projection of the appellant in India.
3. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in concluding that the appellant has a fixed place PE under Article 5(1) and 5(2) of the Tax Treaty in Indian when the appellant does not have any place in India at its control or disposal from which business is carried on.
4. On the facts and in the circumstances of the case and in law, the learned ADIT has 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 when LIPL has no authority to conclude contracts on behalf of the appellant in India.
5. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in bringing to tax the profits of the appellant, despite the fact that
a) LIPL was remunerated on an arms length basis, which has been accepted in the transfer pricing assessment of both the appellant and LIPL, and
b) LIPL is liable to tax on the commission income derived from the appellant, which extinguishes the tax liability of the appellant principal.
6. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in taxing the profits of Rs. 1,79,64,063 on sales to LIPL by applying force of attraction rule under Article 7(1) of the Tax Treaty without appreciating the fact that such s sales have been concluded outside India, the title to the goods have passed outside India, profits from such sales have accrued/arisen outside India and therefore the profit from such sales are not taxable in India under section 5 of the income-tax Act, 1961.
7. On the facts facts and in the circumstances of the case and in law, the learned ADIT has erred in considering an adhoc 5% profit, amounting to Rs. 2,29,26,152 of the appellant's total sales to India, as its income taxable in India without considering the profit attribution principles under IT act and the Tax Treaty.
8. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in levying interest of Rs. 52,73,244 u/s 234B of the Act despite the fact that the appellant was not liable to discharge any advance tax, since it is a non-resident whose entire income is tax deductible at source.
9. On the facts and in the circumstances of the case and in law, the learned ADIT has erred in initiating penalty proceedings u/s 271 (l)(c) of the Act."
2. Briefly stated the facts of the case are that the assessee is a foreign company incorporated under thelaws of the United States of America (USA). It is engaged in the business of manufacture and sale of high performance chemicals which are used in transportation and industrial lubricants. The assessee is a tax resident of USA, which is not disputed by the AO and, therefore, it is entitled to the benefits under the India-USA Double Taxation Avoidance Agreement (India-US Treaty). During the year under consideration, the assessee filed its return of income on November 6, 2006 declaring total income of Rs. 14,48,32,150/-. The AO referred the matter to the Transfer Pricing Officer (TPO) u/s 92CA of the Act for computation of arms' length price of the international transactions entered into by the assessee with its Associated Enterprises (AE), namely, Lubrizol India Pvt. Ltd. (LIPL). The arms' length value of international transactions entered into by the assessee with its AE were accepted by the TPO vide order dated 27th October, 2009 passed u/s 92CA (3) of the Act and no adjustments were recommended by the TPO.
3. Subsequently, a draft assessment order was issued by the AO u/s 144C (1) of the Act, proposing to make an addition of Rs. 2,29,26,152/- as attribution-of profit on sales to customers in India on account of the marketing efforts undertaken by LIPL, by holding that LIPL was a permanent establishment of the assessee being a virtual projection of the assessee in India. The AO also concluded that LIPL is a PE of the assessee in India in terms of Article 5(1), 5(2), and 5(4) of the India-US Treaty. The AO was of the opinion that since the assessee had assumed all the risks in respect of the sales made to India, as such the profits arising from such sales had to be taxed in India.
4. The assessee filed its objections before the Dispute Resolution Panel-Il, Mumbai (DRP) against the above draft assessment order. The DRP vide its directions dated September 29,2010 upheld the draft assessment order of the AO in its entirety. Consequent to such directions, the AO passed its final assessment order on 1st October, 2010 determining the income of the assessee at Rs. 16,77,58,302/-. Aggrieved, the assessee has preferred this appeal before the ITAT contesting the addition made in the final assessment order.
5. Before us, the main argument of the learned counsel for the assessee is that the assessee is a tax resident of USA and is neither having any fixed place of business In India nor any business connection in India. The learned counsel for the assessee 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 India Oil Corporation and the assessee, both owning 50% and therefore, the assessee has no controlling ownership in LIPL. It is further submitted that during the year under consideration, the assesee 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 are 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 on such sales made by the assessee to LIPL and third parties, the AO has computed a profit margin of 5% and made an addition of Rs. 2,29,26,152/- to the income of the assessee.
6. It is submitted that as per Article 7 of the India-US Treaty, the assesee would be taxable in India only if the assessee has a PE in India and the taxability shall be limited to the extent of profits which are attributable to such PE in India. It is submitted that if the assessee has no PE in India, then the assessee would not be liable to tax in India in respect of the above mentioned business profits. It is pointed out that the force of attraction rule under Article 7 of the India- US Treaty would become applicable only and only if the assessee has a PE in India and not otherwise. The learned counsel for the assessee in relation to the issue that the assessee did not have a PE in India, took us through Article 5 of the treaty, which is reproduced below:-
"Article 5 - Permanent Establishment
1. For the purposes of this convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term 'permanent establishment' includes especially:
(a) a place of management
(b) a branch
(c) an office
(d) a factory
(e) a workshop
(f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources,
(g) a warehouse, in relation to a person providing storage facilities for others,
(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on.
(i) a store or premises used as a sales outlet
(j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period.
(k) a building site or construction, installation or assembly project or supervisory activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve months period,
(l) the furnishing of services, other than included services as defined in Article 12 (royalties and fees for included services) within a contracting state by an enterprise through employees or other personnel, but only if
(i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period or
(ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (associated enterprise)
3. Notwithstanding the preceding provisions of this Article, the term 'permanent establishment' shall be deemed not to include anyone or more of the following:
a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery;
c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.
d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise
4. Notwithstanding the provisions of paragraphs. 1 & 2, where a person - other than an agent of an independent status to whom paragraph 5 applies - is acting in a contracting state on behalf of an enterprise of the other contracting state, that enterprise shall be deemed to have a permanent establishment in the first mentioned state, if
a) he has an habitually exercises in the first-mentioned state an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;
b) he has no such authority but he has no such authority but habitually maintains in the first-mentioned state a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the state on behalf of the enterprise have contributed to the sale of the goods or merchandise, or
c) he habitually secures orders in the first-mentioned state, wholly or almost wholly for the enterprise
5. An enterprise of contracting state shall not be deemed to have a permanent establishment in the other contracting state merely because it carries on business in that other state through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, hence the activities of such an agent are devoted wholly or almost wholly on behalf of that, enterprises and the transactions between the agent and the enterprise are not made under arms' length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.
6. The fact that a company which is a resident of a contracting state controls or is controlled by a company which is a resident of the other contracting state, or which carries on business in that other state (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other".
7. The learned counsel for the assessee also drew our attention to the relevant clauses of the Exclusive Sales Representation Agreement entered into between the assessee and LIPL, which along with the amendment thereto is placed at page nos. 1 to 14 of the paper book. The relevant clauses relied upon by him are reproduced below:
"3. Services to be rendered by LIPL
With respect to all areas in the territory except in India, the service to be rendered by LIPL under this agreement shall include the following (collectively the 'services')
i) to keep informed of business opportunities, particularly of tenders and competitive bids from customers;
ii) such other services as are mutually agreed upon from time to time by the parties; .
iii) LIPL agrees to use its reasonable efforts to promote the sale and distribution of and to create a demand for products in the territory, except India.
iv) LIPL shall have no power, right or authority to bind or obligate Lubrizol, except as set forth in this agreement.
Rates and prices
The prices of the products .will be determined by Lubrizol. Prices and terms of sale are subject to change by Lubrizol at any time upon notice to LIPL. LIPL shall have no authority to change or fix the prices or rates in any manner other than as notified by Lubrizol in accordance with the terms of this agreement.
7. Procedure for placing orders
Customers will place orders for the purchase of the products directly with Lubrizol. It is anticipated customers will open confirmed irrevocable letters of credit directly with Lubrizol for the purchase of the products. The customer will be required to make its own arrangements to obtain necessary import license, permissions for outward remittances or such other permissions, consents or other sanctions as may be required to be obtained under the laws of the country of the customer or elsewhere, LIP will send quotations directly to the customers and will keep Lubrizol informed of such quotations. Lubrizol will send invoices directly to the customers and will keep LIPL informed of such invoices. LIPL shall be entitled to solicit orders for the products in accordance with the terms of this agreement. All orders received by LIPL shall be forward to Lubrizol for acceptance or rejection and LIPL shall have no authority to accept for or on behalf of, Lubrizol any order placed on Lubrizol, Lubrizol may reject or cancel any order for any reason whatsoever.
8. Consideration
8.1 During the continuance of this agreement, Lubrizol agrees to pay LIPL a commission on all shipments of products resulting from order s submitted by LIPL or its customers for delivery in the territory at the commission rate of three percent (3%) of the applicable effective ex-works ..... It is expressly understood and agreed by LIPL that no commission shall be paid by Lubrizol to LIPL for products submitted and purchased by LIPL for its own account.. ..
9. Undertaking by Lubrizol
9.1 Not to hold LIPL responsible for any defect, shortfall, variance in quality of the products and shall indemnify and keep indemnified LIPL from any claim or demand made upon LIPL by any customer or any other persons whatsoever on account of the above. LIPL shall assist Lubrizol in any such manner by obtaining any reporting factual matters and positions of customers.
9.2 To supply LIPL with information, particulars and data necessary to enable LIPL to satisfactory comply with its _. obligations under this agreement.
9.3 Not to hold LIPL responsible in any manner whatsoever for payment of any tax payable by Lubrizol by reason of the sale of products and to indemnify and keep indemnified LIPL from any demand that may 'be made upon LIPL for the income of Lubrizol.
12.A No liability of LIPL
12A-1 LIPL shall not warranty or guarantee or share any quality of any other specification of the products and shall not be responsible for the same
12-A-2 LIPL shall not be responsible for the creditworthiness of any of the customers and Lubrizol will not be entitled to hold LIPL responsible for the same ...
8. The learned counsel for the assessee has relied upon the following precedents in support of the case of the assessee:
1. Ericsson Radio Systems AB Vs. DCIT, 96 TTJ l(Del)(SB)
2. Western Union Financial Services Inc Vs. ADIT, 101 TTJ 56(Del).
3. Visakhapatnam Port Trust, 144 ITR 146 (A.P.)
9. By referring the above case laws, the learned counsel for the assessee has submitted that i) the assessee had no presence or fixed place whatsoever in India, ii) no portion of LIPL's premises was under the assessee's control, iii] the activities in India were carried out by LIPL's own employees, and such employees were under control/ supervision of LIPL. It is also submitted that though the AO has alleged the existence of PE under Article 5(1) of the treaty, he has not brought any material on record to establish that the assessee has PE in India. It is, therefore, submitted that since the assessee does not own or have access to any fixed place of business in India, it cannot be said to have a PE in India under Article 5(1) of the India-US treaty. It is submitted that an independent agent is said to be one who is both legally and economically independent of its principal, for which other aspects of independence include:-
i) extent of obligations which the agent' has vis -a-vis the principal;
ii) extent of detailed instructions and comprehensive control of principal;
iii) sharing of entrepreneurial risks;
iv) reliance on the special skill and knowledge of the agent by the principal; and
v) number of principals rerpresented by the agent.
10. The learned counsel of the assessee has submitted that the agency activity should be within the agent's ordinary business. The AAR in the case of AI Nisr Publishing, 239 ITR 879 examined the charter documents to determine whether the agency activities formed part of the agent's overall business activities. The activity should be similar or usual for the industry to which the agent belongs. It is submitted that the agents who have the authority to bind the principal vis-a-vis customers on the following conditions:-
i) It is sufficient if the agent has the authority to negotiate all parties of the contract in the manner that IS binding on the principal, even if someone else performs the formality of actual spinning abroad
ii) Contracts must relate to the enterprise's business proper
iii) There must be certain degree of frequency or regularity in conclusion of contracts by the agent on behalf of the principal.
11. In view of the above, the learned counsel for the assessee has submitted that LIPL cannot be considered as acting on behalf of the assessee in India as an, agent. The learned counsel has invited our attention to Article 5(5) of the India-US Treaty and submitted that where a non-resident enterprise carried on business in India through an independent agent acting in the ordinary course of its business, it shall not be deemed to have a PE in India. It is submitted that LIPL is engaged in manufacturing and sale of products on its own account. Such business represented substantial portion of the revenues of LIPL (own sales of Rs. 408 crores approx vis-a-vis commission income of Rs. 0.76 crores received from the assessee). The manufacturing business of LIPL was an independent activity and was carried on its own account Accordingly, in the instant case, not all the sales related activities of LIPL were done only for the assessee. It is engaged in the sales and marketing activities of products manufactured on its own account. It was reiterated that LIPL in its capacity as a customer support representative only forwarded the quotations received from the prospective customers to the assessee for acceptance or rejection and LIPL did not have the authority to accept for or on behalf of the assessee any order placed on the assessee. LIPL did not have any authority to represent, guarantee or commit on behalf of the assessee. The learned counsel for the assessee referred in this connection to Clause 13 of the Exclusive Sales Representation Agreement - Lubrizol and Clause 13 of the Sales and Marketing agreement - Metal working products. In view of the above facts, it is submitted that the conditions mentioned at point nos. 2,3, & 4 referred in the protocol for the purpose of determining 'securing orders' were not satisfied, hence, the LIPL did not 'secure orders' on behalf of the assessee and so did not satisfy the test for it to be regarded as a dependent agent PE under Article 5(4) of the India-US treaty, It is, therefore, submitted that there did no t exist a PE of the assessee under any of the clauses of Article 5 of the India-US treaty, hence, the conclusion of the AO is not justified and his order may be reversed.
12. The learned counsel for the assessee has submitted that the assessee carried out all its operations outside India and carried on only customer support operations in India, through LIPL. In terms of the agreements, the income attributable to these operations could only be such amount as an independent enterprise carrying on similar activity would have earned from the assessee on an arms' length basis. The learned counsel drew our attention to the transfer pricing order of LIPL dated October 27, 2009 and Form 3CB of LIPL for the subject assessment year to state that the commission income earned by LIL from the assessee has been held to be at arm's length price and hence, no further assessment of income should be made in the hands of the assessee.
13. Finally, the learned counsel for the assessee has relied upon the decision of the ITAT, Mumbai in thecase of DDIT Vs. Diamler Chrysler AG Germany, 39 SOT 418 and submitted that the case of the assessee is squarely covered by the said decision of the ITAT.
14. In the light of the above submissions and judicial precedents relied upon, the learned counsel for the assessee has submitted that on the facts of the case, the AO was not justified in alleging that there existed a PE of the assessee in India under any of the clauses of Article 5 of the India-US treaty and hence, the AO was not justified in attributing profit in respect of sales made by the assessee. It is, therefore, prayed that the assessment made by the AO is not justified on facts and hence, the income so assessed be ordered to be deleted.
15. The learned DR, on the other hand, has strongly relied upon the order of the AO and drew our attention to various clauses of the agreement between the assessee and LIPL placed at page nos. 1 to 27 of the paper book. He submitted that the AO has rightly concluded that there exists a PE of the assessee in India in terms of Article 5 of the India-US Treaty and hence, the profit attributed by the assessee is taxable in India. The learned D.R. has submitted that as per the agreement Clause 2 the Lubrizol India Pvt. Ltd. is an exclusive agent of the assessee and it has to do exclusive sales and marketing to solicit orders. The Lubrizol India Pvt. Ltd. is to keep assessee informed about the business opportunities particularly of tenders and competitive bids from customers. The Id. D.R. further submitted that as per the agreement Para 13 (13.2) the Lubrizol India' Pvt. Ltd. shall use all samples, technical, business, financial and other information furnished by the assessee to LIPL which is identified, stamped and marked as confidential matter solely and exclusively for the purpose of providing the services pursuant to the agreement. The LIPL shall not disclose such confidential matter to third parties without the prior written consent of assessee whether during or after the terms of this agreement. The Id. D.R submitted that the LIPL thus is a sole agent of the assessee and as per Article 5 (2) (1), it constitutes PE of the assessee in India. The D.R further submitted as per Indo-US treaty Article 5 (5) LIPL is a dependent agent and constitutes PE of the assessee in India from this angle also. The Id. D.R further submitted that as per Sec.9 (l)(i) of the Indian Income Tax Act 1961, the income of the assessee thus is taxable in India. The Id. D.R further submitted that the case of Dailmer Chrysler (supra) relied upon by the assessee has no application to the facts of the case in hand as in that case, it was held by the Ld. CIT (A) that assessee had no PE in India whereas in the present case, the AO has held that the assessee is having PE in India. In support of revenue's case, the 'learned DR has relied upon the following decisions:-
1. Rolls Royce Plc. Vs. DDIT, 113 TT J 446 (Del Trib)
2. Rolls Royce Singapore (P) Ltd. Vs. ADIT, 40 DTR 289 (Del Trib.)
16. In the case of Rolls Royce Plc. (supra) the cost of maintenance of premises of Indian agent is paid by the foreign company and the premises also available to all the employees of foreign company in respect of any business operation in India. The employees of the Indian company have an authority (RRIL) to sign documents and issue certificate on behalf of the assessee such documents are binding on the assessee. Hence there is a fixed PE under Article 5(1) of the Treaty. (20 & 21 Paras of the Tribunal order). In the present case, the premises used by the LIPL the assessee does not bear any cost of such premises and does not have any control over such premises. The LIPL employees have no power to conclude contract on behalf of the assessee. The facts of the case in hand is entirely different, therefore, the above relied by the learned D.R has no application to the facts of the case.
17. In the case of Rolls Royce Singapore, the Indian agent (ANR) is required to act exclusively for the assessee in relation to the promotion of its products and is restricted from assisting directly or indirectly to any other person, firm, company and competing with the assessee directly or indirectly, advising or representin g or associating itself with the business of any such entity in India (Para 92 of the Tribunal order). The Indian agent (ANR) has been rendering services to negotiate and secure orders in India (101,102 Paras of the Tribunal order). The payment received by the Indian agent (ANR) not yet arm's length (103,108 &111 of the Tribunal order). In the present case the total sales of LIPL 408.84 crores, commission received from the assessee was 0.76 crores only which constitute only 0.18% of the total sales. This shows that the LIPL has its own substantial business apart from revenue in the form of commission from the assessee. The LIPL does not have any authority to negotiate the contract. The transactions between LIPL and the assessee are in arm's length price. The facts of the present case are entirely different from the Rolls Royce Singapore (supra) has no application to the assessee's case.
18. In the rejoinder, the learned counsel for the assessee has submitted that the decisions relied upon by the learned DR are distinguishable on facts and the same, therefore, are not applicable to the facts of thecase of the assessee.
19. We have heard learned representatives of the parties, perused the relevant record and gone through the order of the AO as well as decisions cited. The issue to be adjudicated in this appeal is whether the AO is right in holding that the assessee has PE in India and thereby taxing the profits earned by the assessee in India. The assessee is a foreign company incorporated under the laws of United States of America and is engaged in the business of manufacture and sale of high performance chemicals, which are used in transportation and industrial lubricants. The assessee is a tax resident of the USA which is not disputed by the A.O. and hence it is entitled to the benefits under the India-USA Double Taxation Avoidance Agreement (India-US Treaty). The assessee filed its return of income declaring total income of Rs. 14,48,32,150/-, against which the AO made a reference to the TPO u/s 92CA of the Act for computation of arm’s length price of the international transactions entered into by the assessee with its Associated Enterprise (AE), namely, Lubrizol India Pvt. Ltd. (LIPL). The arm's length value of the international transactions entered into by the assessee with its AE were accepted by the TPO vide order dated 27, 2009 passed u/s 92CA(3) of the act and no adjustments were recommended by the TPO. Subsequently, a draft assessment order was issued by the AO u/s 144C(1) of the Act, proposing to make an addition of Rs. 2,29,26,152/- as attribution of profit on sales to customers in India on account of the marketing efforts undertaken by LIPL, by holding that LIPL was a permanent establishment of the assessee being a virtual projection of the assessee in India. The AO also concluded that LIPL is a PE of the assessee in India in terms of Article 5(1), 5(2), and 5(4) of the India-US Treaty. The AO was of the opinion that since the assessee had assumed all the risks in respect of the sales made to India, as such the profits arising from such sales had to be taxed in India. Against the said draft order of AO, the assessee filed its objections before the Dispute Resolution Panel-II(DRP) and the DRP upheld the draft assessment order of the AO in its entirety by observing as under:-
"1.14……….. it is clear that so far as marketing of products is concerned, LIPL is virtual projection of the assessee in India. It has got full rights and responsibilities in respect of marketing and sales. The provision of making orders directly on the assessee in the agreement will not save the assessee from taxability in India as while interpreting the agreement it has to be seen as a whole' and all responsibilities and duties of the agent appointed in India have to be seen. LIPL has been remunerated by way of commission only for the functions performed by it. For determination of profits, three things namely functions performed, assets deployed and risk undertaken have to be seen. For the sales made in India, asseessee has assumed all the risks. While the production is taking place outside India, still the risk undertaken by the assessee in sales and marketing of the products in India exists and assessee’s profits for the same is to be taxed in India.
1.15 As per the AO, profits arising on sales done in India, even directly by the assessee of the same or similar products as done by LIPL will also be taxable in India due to operation of force of attraction rule LIPL, which is held to be PE of the assessee in India, is engaged in manufacturing of same or similar products under the same brand name under the technology transfer agreement. Further, it is an undisputed fact that LIPL also promotes products of assessee and solicits order on behalf of assessee and is involved in marketing and sale from finding a customer up to finalization of sale. In view of these facts, profits earned and attributable to function, assets and risk in India undertaken by the assessee through its PE, is taxable in India.
1.16 Thus, after careful consideration of facts of case, we are of the view that no interference in the action of the AO is required and the AO is directed to proceed as proposed in draft assessment order.
2. The AO shall give effect to the above directions as per provisions of section 144C(3) of the Act. "
20. Consequent to the said directions of the DRP, the AO passed final assessment order determining the income of the assessee at Rs. 16,77,58,302/ - as against the income returned by the assessee of Rs. 14,48,32,150/-, resulting into addition of Rs. 2,29,26,152/- being profit margin of 5% on the sales made by the assessee to LIPL and third parties.
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 place 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 controlling ownership in LIPL. It is further submitted that during the year under consideration, the assesee did not carry out any business activities in India and it did not rrender 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 which 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 and 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 products manufactured by it in India. The total sales of LIPL are Rs. 408.84 crores and commission received from the assessee is 0.756 crores which constitutes only 0.18% of the sales. The assessee also sold products to Indian customers for which LIPL rendered 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 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 these 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 in the 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) & 5(5) of the Indo-US Treaty 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.”
The Tribunal has followed the afore-stated order of the Tribunal dated 03-06- 2011 in ITA no 7420/Mum/2010 while adjudicating the appeals on identical facts And circumstances for the assessment years 2004-05, 2005-06 & 2008- 09 in ITA No. 6443 to 6445/Mum/2012 vide orders dated 18th January, 2013 in assessee’s own case and held that the assessee did not have PE in India in the year’s under consideration in terms of Article 5(1),5(2),5(4) and 5(5) of the India-US treaty and the additions made by the AO to the income of the assessee being a profit margin of 5% on the sales made by the assessee were ordered to be deleted by the Tribunal. Respectfully following the afore-stated orders of co-ordinate benches of the Tribunal in the assessee’s own case , we hold that the assessee did not have not have PE in India in the year under consideration in terms of Article 5(1), 5(2), 5(4) & 5(5) of the Indo-US Treaty and the addition of Rs. 40,795,524/- made by the A.O. being a profit margin of 5% of the sale made by the assessee in India is not sustainable and we affirm the directions dated 23.12.2013 passed by the DRP-II,Mumbai u/s 144C(5) of the Act which culminated into an assessment order dated 10.01.2014 passed by the AO u/s 144C(13) read with Section 143(3) of the Act. We order accordingly.
10. The Revenue is also aggrieved by the decision of the DRP in holding that interest u/s 234B of the Act is not leviable in the case of non-resident despite a specific finding by the Hon’ble Delhi High Court in the case of DIT v. Alcatel Lucent USA Inc. dated 14th November, 2013 in ITA No. 328 & 329/2012 wherein it has been specifically stated that a non-resident assessee which does not admit income chargeable to tax must be inferred to have induced the Indian payer not to deduct TDS, thus making itself liable to advance tax interest. We have observed that this issue is also decided by the Tribunal in ITA No. 6443 to 6445/Mum/2012 for assessment years 2004-05, 2005-06 & 2008-09 vide orders dated 18th January, 2013 whereby it was held that interest is not leviable u/s 234B of the Act based on the facts and circumstances of the assessee’s case. The relevant findings of the Tribunal are as under:-
“15. Ground No. 7 is against the levy of interest u/s 234B of the Act.
16. At the time of hearing the ld. Counsel for the assessee submits that since the assessee is a foreign company not liable to tax in India, therefore, following the decision of the Hon’ble Bombay High Court in Director of Income-tax (International Taxation) v. NGC Network Asia LLC (2009) 313 ITR 187 (Bom) the interest charged by the A.O. u/s 234B is liable to be deleted.
17. On the other hand, the ld. D.R. supports the order of the A.O.
18. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Counsel for the assessee that the issue is covered in favour of the assessee by the decision of the Hon’ble jurisdictional High Court (supra) wherein it held that “when a duty was cast on the payer to deduct the tax at source, on failure of the payer to do so, no interest could be imposed on the assessee”. Respectfully following the same and keeping in view of our finding recorded in paras 12 to 14 of this order, we delete the interest charged by the A.O. u/s 234B of the Act and accordingly the ground taken by the assessee is allowed.”
Respectfully following the afore-stated order of the co-ordinate bench of this Tribunal in assessee’s own case in ITA No. 6443 to 6445/Mum/2012 for assessment years 2004-05, 2005-06 & 2008-09 vide orders dated 18th January, 2013, we order deletion of the interest levied by the A.O. u/s 234B of the Act. We order accordingly.
11. In the result, the appeal filed by the Revenue in ITA N0. 1247/Mum/2014 for the assessment year 2009-10 is dismissed.