Income Tax Appellate Tribunal - Mumbai
Dcit (It) 3(1)(2), Mumbai vs Lubrizol Corporation Usa, Mumbai on 25 May, 2018
P a g e |1
ITA No. 860/Mum/2016 A.Y 2011-12
Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA
IN THE INCOME TAX APPELLATE TRIBUNAL "L" BENCH, MUMBAI
BEFORE SHRI SHAMIM YAHYA, AM AND SHRI RAVISH SOOD, JM
ITA No.860/Mum/2016
(निर्धारण वषा / Assessment Years:2011 -12)
Deputy Commissioner of Income M/s Lubrizol Corporation USA
Tax (IT)-3(1)(2), C/o Ford, Rhodes, Parks & Co.
Room No. 113,1st Floor, बिधम/ Sai Commercial Building,
Scindia House, Ballard Estate, Vs. 312/313, 3 rd Floor,
Mumbai-400038 BKS Devshi Marg, Govandi (E)
Mumbai-400 088
स्थामी रेखा सं ./ जीआइआय सं ./ PAN No. AAACT2758F
(अऩीराथी /Revenue) : (प्रत्मथी / Assessee)
अऩीराथी की ओय से / Revenue by : Shri Samuel Darse, D.R
प्रत्मथी की ओय से/Assessee by : Shri Aliasgar Rampurawala, A.R
सुनवाई की तायीख / : 21.05.2018
Date of Hearing
घोषणा की तायीख / : 25.05.2018
Date of Pronouncement
आदे श / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present appeal filed by the revenue is directed against the order passed by the A.O under Sec. 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 (for short 'Act'), dated 21.01.2016. The revenue assailing the order passed by the A.O had raised before us the following grounds of appeal:-
P a g e |2 ITA No. 860/Mum/2016 A.Y 2011-12 Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA "1. Whether on the facts and in the circumstances of the cases and in law the Ld. DRP-1 was correct in holding that the Respondent Company did not have a PE in India in terms of Article -5(1), 5(2), 5(4) and 5(5) of the India-US treaty.
2. The appellant prays that the order of the Ld.DRP on the above ground(s) be set aside and that of the Assessing Officer be restored.
3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."
2. Briefly stated, the facts of the case are that the assessee which is a foreign company incorporated under the laws of the United States of America (for short 'USA') and resident of USA, engaged in the business of manufacturing of high performance chemicals for use in transportation and industrial lubricants had e-filed its return of income for A.Y 2011-12 on 29.11.2011, declaring total income at Rs.27,21,59,236/-. The case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
3. The associate enterprise (for short 'AE') of the assessee company, viz. Lubrizol India Pvt. Ltd. (for short 'LIPL') was a 50:50 joint venture (JV) between the assessee company and Indian Oil Corporation Ltd., a public sector undertaking. LIPL also provided marketing support services for various products manufactured by the assessee. The assessee had entered into following agreements with LIPL:-
(i) Exclusive sales representation agreement dated 1st April 2000, including first amendment to this agreement dated 28.06.2001; and
(ii) Sales and marketing agreement-Metalworking products dated 1st January.
4. During the year under consideration, the total sales made by the assessee company to Indian entities was as under:-
Particulars Amount (in INR)
Sales made to LIPL 91,90,80,599
Sales made to other Indian customers (Note) 28,94,25,595
Total 1,20,85,06,194
The assessee company had entered into a Technology Transfer Agreement, dated 01.04.2007 with LIPL. Under this agreement the assessee company P a g e |3 ITA No. 860/Mum/2016 A.Y 2011-12 Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA had earned a royalty/technical fee income from LIPL amounting to Rs.27,21,59,236/-for the year under consideration, which was offered for tax on gross basis in its return of income for the year under consideration, viz. A.Y 2011-12, under Sec. 115A of the Act.
5. During the course of the assessment proceedings, the A.O holding a conviction that the assessee company had a permanent establishment (for short 'PE') in the form of LIPL in India, therefore, called upon the assessee to explain as to why the profits made by it on sale of products in India should not be brought to tax in India. The submissions of the assessee that its associate enterprise, viz. LIPL could not held as an agency PE of the assessee, did not find favour with the A.O. The A.O observing that the assessee had carried out only sales and marketing activities through its PE in India, viz. LIPL, therefore, on an estimate basis attributed the profits of the assessee in India @ 5% of its total sales of Rs.1,208,506,194/- and made an addition of amount of Rs.60,425,310/- to its returned income. The A.O on the basis of his aforesaid deliberations proposed to assess the total income of the assessee vide his draft assessment order, dated 16.03.2015 at Rs.332,584,546/-.
6. The assessee objected to the variations proposed by the A.O in the draft assessment order before the Dispute Resolution Panel-2, Mumbai (for short 'DRP'). The DRP taking cognizance of the fact that in the assessee's own case for the earlier years, viz. A.Y 2004-05, 2005-06 and 2008-09, on the basis of the same facts as were involved in the year under consideration, it was observed by the DRP that the assessee did not have a PE in India in terms of Article 5(1) and 5(5) of India-USA Tax Treaty. Keeping in view the judicial precedence and finding no reason to deviate from its earlier decisions for the aforementioned preceding years, the DRP adopted a consistent view and concluded that during the year under consideration also the assessee did not have a PE in India. On the basis of its aforesaid deliberations, the addition of Rs.6,04,25,310/- made by the A.O was held by the DRP as not sustainable and was directed to be deleted.
P a g e |4 ITA No. 860/Mum/2016 A.Y 2011-12 Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA
7. The A.O giving effect to the directions of the DRP, vide his assessment order passed under Sec.144C(1) r.w.s.143(3) of the Act, dated 21.01.2016 dispensed with the proposed addition of Rs.6,04,25,310/- and accepted the returned income of Rs.27,21,59,236/- filed by the assessee.
8. The revenue being aggrieved with the order passed by the A.O under Sec. 144C(1) r.w.s. 143(3) had carried the matter in appeal before us. At the very outset of the hearing of the appeal, it was submitted by the ld. Authorized Representative (for short 'A.R') for the assessee that the issue that the assessee did not have a PE in India, had been deliberated at length and decided in favour of the assessee by the coordinate benches of the Tribunal in the assessee's own case for A.Y. 2006-07 (ITA No. 7420/Mum/2010, dated 03.06.2011); A.Ys 2004-05, 2005-06 and 2008-09 (ITA Nos. 6443 to 6445/Mum/2012, dated 18.01.2013); A.Y 2009-10, (ITA No. 1247/Mum/2014, dated 13.07.2016); A.Y 2010-11 and 2012-13 (ITA Nos. 508-509/Mum/2017, dated 06.03.2017); and A.Y 2013-14 (ITA No. 4726/Mum/2017, dated 08.11.2017). It was submitted by the ld. A.R that in all the aforementioned appeals the Tribunal has held that the assessee company did not have a PE in India. Per contra, the ld. Departmental Representative (for short 'D.R') did not controvert the aforesaid factual position.
9. We have deliberated on the facts of the case, and after perusing the respective orders of the coordinate benches of the Tribunal are persuaded to be in agreement with the claim of the ld. A.R that the issue that the assessee does not have a PE in India, is covered by the aforesaid orders of the Tribunal. We may herein observe that the Tribunal in the case of the assessee i.e. Lubrizol Corporation USA Vs. Addl. Director of Income Tax (ITA No. 7420/Mum/2010; dated 03.06.2011) for AY. 2006-07, while concluding that the assessee did not have a PE in India, had observed as under:-
" 1 9 . W e h a v e h e a r d l e a r n e d r e p r e s e n t a t i v e s o f th e p a r t i e s , p e r u s e d the relevant record and gone through the order of the AO as well as decis io ns cite d. The issue to be adjud icated in th is appeal is whe the r th e A O is r ig h t in h o l d in g th a t th e a s s e s s e e h a s P E in India and thereby tax ing the prof its earned by the assessee P a g e |5 ITA No. 860/Mum/2016 A.Y 2011-12 Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA i n I n d i a . T h e assessee is a f oreign company incorporated under the laws of United States of America and is engaged in the business of manuf acture 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 AO and hence it is entitled to the b e n e f i t s u n d e r t h e I n d i a - U S A D o u b l e T a x a t i o n A v o i d a n c e A g r e e m e n t ( „ In d ia - U S T re a ty ‟ ) . T h e as s es s ee f ile d i ts r e tu r n of in c o me d e c lar in g to tal income of Rs.
14,48,32,150/-, against which the AO made a ref erence to the TPO U/s 92CA of the Act f or compu tation of a r m ' s le n g th p r ic e of th e in te r n a t io n a l tr an s a c t io n s e n te r e d in to b y th e as s e s s e e wi th its A s s o c ia te d E n te r p r is e ( AE ), n a me ly , L u b r iz o l In d ia P v t . L t d . ( L I P L ) . T h e a r m ' s l e n g t h v a l u e o f t h e i n t e r n a t i o n a l tr an s ac tio n s en te red in to b y th e assessee with its A E we re acc e p te d by the TPO vide order dated 27, 2009 passed u/s 92CA(3) of the act and no adjustments were recommended by the 'FPO. Subsequently, a draf t 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 p r of it o n s ale s to c u sto me r s in In d ia o n ac c o u n t of th e mar k e tin g ef f orts under taken by U IP L, by ho ld ing th at L IP L was a per manen t e s t a b l i s h m e n t o f t h e a s s e s s e e b e i n g a v i r t u a l p r o j e c t i o n o f t h e ass essee in In d ia. T he AO als o co nc lude d th a t LT PL is a PE of the assessee in India in terms of Article 5(1), 5(2), and 5( 4) of the India- U S T re aty . T he A O was of the o p in io n th a t s in c e th e assessee h ad assumed all the risks in respect of the sales made to India, as such the prof its aris ing f rom such sales had to be taxed in India. Against the said draf t order of AO, the assessee f iled its objections before the D is pu te Resolu tio n Panel - II(DRP) and the DRP upheld the d r a f t assessment order of the AO in its entirety by observing as under:-
"1.14 ...................... it is clear that so f ar as marketing of products is concerned, LJPL is virtual projection of the assessee in India. It h as go t f ul l r i g h ts an d r espo n si bil i tie s i n r e spec t of m arke ti n g a n d sales. The provision, of making orders directly on the assessee in. the agree me nt will no t s ave the assessee f rom tax abil ity in Indi a as whil e interpreting th e agreement it h as to b e s e e n a s a wh o l e a n d a l l r e s p o n s i b i l i t i e s a n d d u t i e s o f t h e agent appo inted in India have to be seen. LIPL has been remunerated by way of commission only f or the f unctions perf ormed by it. For determination of profits, three things namely f unc ti o ns pe rf ormed , ass e ts depl o ye d an d r isk u nd er t ak e n h av e to be seen. F or the s al es m ade in In di a, a ss essee h as assume d all the risks. While the production, is taking place outside India, S t i l l th e r i s k u n d e r t a k e n b y t h e as s e s s e e i n s al e s a n d m a r k e t i n g of t h e p r o d u c t s i n I n d i a e x i s t s a n d a s s e s s e e ' s p r o f i t s f o r t h e same is to be taxed in India.
1. 1 5 As pe r th e A O, p rof its ar is i n g o n s al es d on e i n In d i a, eve n 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 In di a, is eng ag ed in m an uf acturi ng of same or sim il ar pro duc ts u n d e r t h e s a m e brand name under the technology transf er agreement. F ur th e r, i t is an u nd is pu te d f ac t th a t L IPL al so promotes p r o d u c t s of a s s e s s e e a n d s o l i c i t s o r d e r o n b e h a l f of as s e s s e e P a g e |6 ITA No. 860/Mum/2016 A.Y 2011-12 Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA a n d i s i n v o l v e d i n m a r k e t i n g a n d s a l e f ro m f i n d i n g a customer up to f inalization of sale. In vie w of these facts, prof its e a r n e d a n d a t t r i b u t a b l e t o f u n c t i o n , a s s e t s a n d r i s k i n I n d i a undertaken by the assessee through its PE, is taxable in India. 1.16 Thus, af ter caref ul consideration of f acts of case, we are of the vie w that no interf erence in the action of the AO is required a n d the AO is directed to proceed as proposed in draf t assessment order.
2. The AO shall giv e eff ect to the above directions as per provisions of section 144C(3) of the Act."
2 0 . C o n s e q u e n t t o t h e s a id d i r e c t i o n s of th e D R P , t h e A O p a s s e d 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 in to addition of Rs. 2,29, 26,152/ - be ing prof it marg in of 5% on the sales made by the assessee to LIPL arid third parties.
21. T he main argu men t of the learned counsel f or the a s s e s s e e bef ore us is that the assessee is a tax residen t of USA it is ne ithe r h a v i n g a n y f i x e d p l a c e o f b u s i n e s s i n I n d i a n o r a n y b u s i n e s s c o n n e c t i o n i n I n d i a . H e wa s c o n t e n d e d th a t t h e A O h a s wr o n g l y in te r pre te d Ar tic le 5 (1), 5(2) and 5 (4) of the In d ia - U S T re aty . It is submitted that L IPL is a joint venture of Indian Oil Corporation and t h e a s s e s s e e , b o t h o wn i n g 5 0 % , t h e r e f o r e , t h e a s s e s s e e h a d n o c ontrolling ownership in LIPL. It is further submitted that during the Year under consideration, the assessee 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, th e r is k an d t i t l e in s u c h g o o d s als o p as s e d to th e c u s to me r s o u ts id e In d ia, an d so th e r e ar o s e no in c o me ta x ab le in In d i a. It is also submitted that the AO has alleged that the sales made by th e ass essee to L IP L an d also th o s e mad e to th ir d p ar tie s h ave g iven 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 :hat the on the sales made by the assessee to LIPL and third parties, the A.O 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 Treaty, which are mentioned above in the arguments of learned AR e s t a b l i s h t h a t t h e a s s e s s e e d o e s n o t h a v e P E i n I n d i a . A f te r c o n sidering the relevant material and the relevant aspects, it is noted that the LIPL has carried out an independent business of manufacture of vario us products under technolog y transf er ag re e me nt with the assessee in India. It is having its own marketing network f or sale of various products manufactured by it in India. The total sales of LIPL are Rs. 408.84 crores and commission received f rom the assessee is 0.756 crores which constitutes only 0.18% of the sales. The assessee also s o l d p r o d u c ts t o In d i a n c u s to m e r s f o r wh ic h L I P L r e n d e r e d certain services. The assessee sold the products direc tly to the Indian customers. Contract of sale is concluded once the purchase order is accepted by the assessee in USA. On conf irmation of the order and receipt of direct payment f rom Indian customer, the assessee sends P a g e |7 ITA No. 860/Mum/2016 A.Y 2011-12 Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA the products in the name of Indian customer with the invoices raised b y the assessee dire ctly on Indian customers. The L I PL assists the a s s e s s e e in th e d ir e c t s a l e of p r o d u c ts to In d i a n c u s to me r s a n d 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 f inal decision regarding price, terms and conditions is taken by assessee. The assessee has no operation in respect o f m a n u f acture o r sale of product c ar r ied ou t in Ind ia. Sales are made by the assessee to LIPL on principal to principal basis. The assessee als o does no t have a rig ht to use LIPL premises. H aving reg ard to all the s e f acts of the case, we are of the view that the learned counsel has demonstrated by t h e a s s e s s e e d o e s n o t h a v e a P E i n I n d i a . F o r t h i s 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 wh i c h p r o f i t s c a n b e a t t r i b u t e d a n d me r e l y a c t i n g f o r a n o n - resident principal would not by itself render an agent to be considered as PE f or the purpose of allocating prof its taxable in the hands of th e principal, it is further held that merely calling a person as agent acting on behalf of f oreign non -resident would not by itself render him to be considered as an agency PE and pro tanto part of the prof its of the non-resident is liable to be taxed in India.
23. In v ie w of the above discussion and f ollowing the ratio laid down b y th e IT A T , M u mb a i in th e c as e of D a iml e r C h r y s le r ( s u p r a) , we h e ld th a t th e assess ee d id no t h ave PE in In d ia in th e ye ar unde r 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 p r o f i t m a r g i n o f 5 % o n t h e s a l e s m a d e b y t h e a s s e s s e e , i s n o t sustainable. The said is therefore deleted and Ground Nos. 1 to 7 are allowed."
We find that the aforesaid order of the Tribunal had thereafter been followed by the Tribunal in the case of the assessee for AY's 2004-05, 2005-06, 2008- 09, 2009-10, 2010-11, 2012-13 and 2013-14, as observed by us hereinabove. We are of the considered view that as the facts involved in the case before us remains the same, as were there before the Tribunal in the aforementioned cases, therefore, finding no reason to take a different view, respectfully follow the same. We thus, are of the considered view that as the facts of the case for the year under consideration remain the same, therefore, it can safely be concluded that the assessee does not have a PE in India during the year under consideration. We thus, in terms of our aforesaid observations uphold the order passed by the A.O under Sec.
P a g e |8 ITA No. 860/Mum/2016 A.Y 2011-12 Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA 144C(1) r.w.s. 143(3) of the Act, and in terms of our aforesaid observations confirm the deletion of an addition of Rs.60,425,310/- by him.
10. The appeal filed by the revenue is dismissed.
Order pronounced in the open court on 25.05.2018
Sd/- Sd/-
(Shamim Yahya) (Ravish Sood)
ACCOUNTANT MEMBER JUDICIAL MEMBER
भुंफई Mumbai; ददनांक 25.05.2018
Ps. Rohit
आदे श की प्रनिलऱपि अग्रेपषि/Copy of the Order forwarded to :
1. अऩीराथी / The Appellant
2. प्रत्मथी / The Respondent.
3. आमकय आमुक्त(अऩीर) / The CIT(A)-
4. आमकय आमक् ु त / CIT
5. ववबागीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai
6. गार्ड पाईर / Guard file.
सत्मावऩत प्रतत //True Copy// आदे शधिुसधर/ BY ORDER, उि/सहधयक िंजीकधर (Dy./Asstt. Registrar) आयकर अिीऱीय अधर्करण, भुंफई / ITAT, Mumbai P a g e |9 ITA No. 860/Mum/2016 A.Y 2011-12 Deputy Commissioner of Income Tax (IT) Vs. M/s Lubrizol Corporation USA