Income Tax Appellate Tribunal - Mumbai
Varian India P. Ltd, Mumbai vs Assessee
आयकर अपील य अ धकरण,
धकरण, मंुबई यायपीठ 'एल
एल'
एल मंुबई
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" BENCH, MUMBAI
ी पी.
पी.एम.
एम. जगताप,
जगताप, लेखा सद य,
य एवं ी अ मत शु ला, या यक सद य के सम
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
आयकर अपील सं. / ITA no. 4672/Mum./2011
( नधारण वष / Assessment Year : 2002-03)
आयकर अपील सं. / ITA no. 4673/Mum./2011
( नधारण वष / Assessment Year : 2003-04)
आयकर अपील सं. / ITA no. 4674/Mum./2011
( नधारण वष / Assessment Year : 2004-05)
आयकर अपील सं. / ITA no. 4675/Mum./2011
( नधारण वष / Assessment Year : 2005-06)
आयकर अपील सं. / ITA no. 4676/Mum./2011
( नधारण वष / Assessment Year : 2006-07)
Varian India Pvt. Ltd. .................... अपीलाथ /
India Branch
Appellant
G-01, Prime Corporate Park
203-231, Opp. Blue Dart Centre
Sahar Road, Andheri (E)
Mumbai 400 099
बनाम v/s
Asstt. Director of Income Tax ................... यथ /
(International Taxation)
Respondent
Range-2(1), Mumbai
थायी लेखा सं./ Permanent Account Number - AAACV3294Q
राज व क ओर से / Revenue by : Ms. Neeraj Pradhan
नधा रती क ओर से / Assessee by : Mr. Kanchan Kaushal a/w
Mr. Dhanesh Bafna
Varian India Pvt. Ltd.
2
सनवाई
ु क तार ख / आदे श घोषणा क तार ख /
Date of Hearing - 29.11.2012 Date of Order -
आदे श / ORDER
अ मत शु ला, या यक सद य के ारा /
PER AMIT SHUKLA, J.M.
The aforesaid appeals preferred by the Assessee, are against the separate impugned orders of even date 21st March 2011, passed by the learned Commissioner (Appeals)-XI, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act"), for the assessment years 2002-03 to 2006-07 respectively. Since the grounds raised by the assessee in all the appeals are common, therefore, as a matter of convenience, these are being disposed off by way of this consolidated order. The Assessee has mainly challenged two types of additions which are as under:-
Particulars A.Y. A.Y. A.Y. A.Y. A.Y.
2002-03 2003-04 2004-05 2005-06 2006-07
Disallowance on
account of
9,81,966 -- -- -- --
dealer's
commission
Addition on
account of
attribution of
profits to 63,25,580 36,23,371 40,09,360 8,76,559 36,06,267
Permanent
Establishment
(PE)
2. Brief facts of the case are that the assessee is an Indian Branch of Varian India Pvt. Ltd. (for short "VIPL"), which is incorporated in U.S.A. VIPL in turn is held by Varian Inc., U.S.A. and is thus 100% subsidiary of Varian India Pvt. Ltd.
3Varian U.S.A. VIPL has only an Indian Branch which is primarily engaged in the distribution of Varian products manufactured by Varian Group of companies (for short "VGCs") all over the world. These products mainly relate to analytical instruments, laboratory equipments and other scientific instruments and electronic items. In the assessment year 2002-03, the assessee had shown sales of ` 52,05,468, in the relevant previous year and has shown other income of ` 6,10,74,335, which mainly includes commission income received from various Varian Group of Companies.
3. The Assessing Officer, during the course of the assessment proceedings for the assessment year 2002-03 on a perusal of Profit & Loss Account, noted that the assessee has claimed expenses on account of dealer's commission of ` 23,11,639, and was accordingly required to furnish the details of such commission. From the details furnished, it was further noted by him that the order of execution of sale fell in the financial years ending 31st March 2001 and 31st March 2002, i.e., financial years 2000-01 and 2001-02, and in some of the cases, it pertained to much earlier year, whereas, the date of debiting the payment of commission in the books of account was in the financial year 2002-03. Thus, he concluded that the commission payment to the extent of ` 9,81,966, as per the details given at Para-3.4 do not pertain to the present assessment year and, therefore, the same cannot be allowed in this year. In response to the show cause notice, it was explained by the assessee that the dealers' commission is payable to the dealers not only for the services rendered in respect of the purchase or but also for installation of the product sold in certain cases and follow up for final payment including release of bank guarantee. The commission to the dealers become due only on the satisfactory installation of the equipment and other formalities. The dealers also raised their invoices on completion of all these activates. Thus, the liability for payment of commission to the dealers crystallized Varian India Pvt. Ltd.
4only on completion of all the activities for which the dealer is responsible. Further, this method of accounting for booking the expenses on actual completion of activities by the dealers, has regularly been followed by the assessee from last several years.
4. The Assessing Officer rejected the assessee's explanation on the ground that as per the details furnished by the assessee, the assessee has been claiming expenditure on the basis of cash system whereas the assessee is following mercantile system of accounting. There cannot be a separate system for booking the sale in one year and claiming the expenditure in other year. Accordingly, he disallowed the sum of ` 9,81,000, claimed by the assessee under the head Dealers Commission"
since it does not pertain to the year in question.
5. Before the Commissioner (Appeals), same submissions were reiterated by the assessee that the assessee has claimed its expenditure only when the liability has been crystallized. In support of its system of accounting, it relied upon various case laws, which has been reproduced at Page-5 of the appellate order. The Commissioner (Appeals) upheld the action of the Assessing Officer and rejected the assessee's contentions on the ground that the expenditure pertaining to the earlier years cannot be deducted in the relevant financial year and accrual of dealers' commission is dependent on the execution of sales and the assessee cannot withhold the commission without any mutually agreed terms between the dealer and the assessee company. Accrual of dealers' commission is different from the modalities of the payments and it accrues immediately on the completion of the sale. Further, if the assessee's plea is accepted for allowing the expenditure in this year, it would result in cash system of accounting with no certainty regarding the amount of commission payable in a particular year.
Varian India Pvt. Ltd.
56. Before us, the learned Counsel submitted that the assessee has been following the system of debiting the dealers commission based on dealers invoices which is raised after various formalities have been completed like installation, follow-up for final payment, release of bank guarantee, etc. This system of accounting has been accepted in the earlier years. Therefore, the same cannot be adversely viewed or held against. In support of this contention, reliance was placed on the following decisions:-
1. CIT v/s Shrimati Singari Bai, [1945] 13 ITR 224 (All.);
2. CIT v/s A. Krishnaswami Mudlaiar, [1964] 53 ITR 122 (SC);
3. CIT v/s Mc Milan & Co., [1958] 33 ITR 182 (SC) and
4. Balapur Vibhag Jungle Kamdar Mandali v/s CIT, [1982] 135 ITR 91 (Guj.)
7. Per contra, the learned Departmental Representative submitted that the assessee has debited the sales in the earlier years and the commission payable on such sales has been booked in this year which is clearly in violation of mercantile system of accounting. Once the sale has been booked, the commission payable can only be claimed in that year only. Even if the assessee has been following the system of booking of expenditure after fulfilling of various formalities, then also, the same cannot be allowed as this system of accounting itself is faulty. She strongly relied upon the findings and the conclusions drawn by the Commissioner (Appeals) as well as by the Assessing Officer.
8. We have carefully considered the rival contentions, perused the orders of the authorities below and the material on record. On perusal of the details, as incorporated in the assessment order, it is seen that the assessee has executed the sale in the earlier years on which the amount of commission payable to the dealers are also mentioned which is at the time of booking of sale orders. The commission has been paid by the assessee in this year on the ground that the same becomes payable only on Varian India Pvt. Ltd.
6satisfactory installation of equipments at customers place and after fulfillment of various formalities like follow up for final payments, release of bank guarantee, etc., and also after the invoice have been raised by the dealers. However, before us, no agreement with the dealers can be produced that the commission is payable only on execution of various modalities and formalities as stated by the assessee. Once the assessee had shown sales in the earlier years, the expenditure relating to payment of commission pertaining to such sales, has to be accounted in the same year unless there is a specific agreement with the dealers to this effect. In the absence of any agreement, it would be difficult to conclude that the liability for payment of commission has crystallized in this year. The sales and expenditure associated with it has to be matched and shown in the same year. The assessee cannot be allowed to follow mixed system of account i.e., accrual of sales in one year i.e., at the time of raising the sale bills and expenses to be allowed in different year when various other formalities relating to the sales have been fulfilled. Thus, the findings of the Commissioner (Appeals), as given in Para-3.3, which for better appreciation of facts, are reproduced below:-
3.3 I have carefully gone through the order of the Assessing Officer and also the submissions as made by the Authorized Representative of the appellant company. I am inclined to agree with the views of the Assessing Officer that expenses pertaining to earlier years are not deductible in the Financial Year relevant to the Assessment Year 2002-03, The accrual of the dealers commission is dependent on the execution of the sales order by the dealer. The appellant company can withhold the dealer commission in case mutually agreed terms between the dealer and the appellant company are not complied with by the dealer. Accrual of dealer commission is different from the modalities of its payments. The dealers commission accrues on the completion of sale. The sales and the expenses associated with it are to be matched and shown in the same year. In case, plea of the appellant company is accepted that the commission actually paid by the appellant company during the year, should be allowed as a expenditure, it would result in cash system of accounting with no certainty regarding the amount of commission payable in a particular year Varian India Pvt. Ltd.7
depending upon what terms were made by the dealer or otherwise. For example, the sale was completed by a dealer in the name of Shri N.S. Anilkumar on 23-04-1999 and commission of Rs. 16,916/- is being claimed in the Assessment Year 2002-03. The argument of the Authorized Representative that such dealer commission was allowed in the past, therefore, for the sake of continuity it may be allowed during the current year, is devoid of any logic. Assessment proceedings for each Assessment Year are different and independent, it does not mean that if by mistake a wrong claim allowed by the Assessing Officer in the earlier year, the same mistake will be repeated year after year. I find no infirmity in the order of the Assessing Officer wherein he has disallowed a sum of Rs. 9,81,966/- out of the dealer commission which actually pertained to earlier years but was claimed as expenditure by the appellant company during the year. However, the prior period expenses cannot be allowed in the Assessment Year 2002-03. Accordingly, this ground of appeal is dismissed."
We thus affirm the aforesaid findings of the Commissioner (Appeals) and we do not find any factual or legal reason to deviate from such findings. Accordingly, ground no.1, raised by the assessee stands dismissed.
9. Ground no.2, relates to addition on account of attribution of profits to P.E., which is common in all the appeals before us.
10. As stated earlier, the assessee is a branch of VIPL which in turn is a 100% subsidiary of Varian Inc. U.S.A. The Varian Group of Companies has various overseas entities like - (i) Varian Inc. U.S.A., (ii) Varian Australia Pty. Ltd., (iii) Varian SpA, Italy, (iv) Varian International A.G., Switzerland; and (v) Varian B.V., Netherlands. Varian Inc. U.S.A., is mainly engaged in designing, manufacturing and marketing of its technological products such as scientific instruments, vacuum technologies, contract electronics manufacturing and analytical lab instruments. The VIPL has entered into distribution and representation agreement (for short "D.R. Agreements") with all the five companies of Varian Group for supply and sale of analytical lab instruments to the Varian India Pvt. Ltd.
8Indian customers directly. The assessee carries out two types of sale of Varian products in India - one is direct sale and other is indent sale. Insofar as direct sale is concerned, the assessee directly imports spare parts from Varian Group of Companies (for short "VGCs") and sell them to Indian customers directly on its own account on principal-to-principal basis. These spare parts are made available on discounted price by the various Associates Enterprises (for short "A.Es") i.e., Varian Group of Companies which is sold by the assessee on its own account. In the activities relating to indent sale, the Varian group of companies sell analytical lab instruments to the Indian customers directly and the assessee carries out pre-sale activities like liaisoning and other incidental post-sale support activities for which it is entitled for commission. In the D.R. Agreement entered with the five companies wherein the Assessee has been referred to as independent contractor, is collecting the orders from the Indian customers on behalf of these five VGCs and pass on these purchase orders to them. The main feature of D.R. Agreements with all the five A.Es have been incorporated in the assessment order from Pages-5 to
8. The nature of relationship, scope of agreement, obligations and the process of sale and payment, etc., under the said agreement which are relevant for better appreciation of the issue involved, are as under:-
2. Nature of Relationship The relationship established by this Agreement between Supplier and Contractor is that of supplier and independent contractor and is not one of partnership, joint venture, employer-employee, dependent agent or anything other than supplier and independent contractor. Contractor is an independent contractor under this Agreement and shat not have the right to assume or create any obligation of any kind, either express or implied, on behalf of Supplier or any of Varian, except as expressly provides for in this Agreement. Contractor shall not purport to be an agent of Supplier Contractor shall act solely as an independent contractor with no power or authority to act for, bind or commit Supplier or any of Varian As regards commission agent activities, orders received by Contractor will not be binding until accepted in writing by Supplier.
Varian India Pvt. Ltd.
9This Agreement a binding only between the undersigned Contractor and Supplier, and no unrelated third party rights are created by this Agreement.
3. Scope of Agreement A. Definitions -- For purposes of this Agreement "Verisry" means Supplier and / or any subsidiary and / or affiliated company of Supplier (other than Contractor "Products" mean the items and components thereof, stated on Schedule A, that are manufactured by Varian: "Business Unit" means the business unit(s) 01 Varian that is responsible for making the listed Product; "Territory' means the geographic region(s) as stated on Schedule A. B. The following enclosure(s) are made a part of this Agreement:
Schedule A -- Territory (Territory) products ("Products"), discount or commission allowed Contractor.
Schedule B -- Varian's standard terms and conditions of sale and Varian's standard warranty terms.
C. Notwithstanding the above Varian shall have the right to quote directly and sell to any customer directly within the Territory and / or Contractor may sell on the basis of commission rate specified in Schedule A, however, Contractor's service obligations under Section 4 will remain the same and not be otherwise affected Where Contractor obtains only sales orders and does not purchase Products. Contractor's entire consideration in those transactions will be a commission as set forth in Schedule A. If sales of Products are made by through or with the assistance of persons other than Contractor to customers within territory, at Supplier's sole discretion, commission may be allocated by Supplier on a fair and reasonable basis.
4. Obligations The provisions of this section below shall apply only to the extent permitted at any particular time by the laws and regulations r effect in the country in which this Agreement is made or to be performed. If any such restriction or obligation is or becomes prohibited under such laws or regulations, it shall be automatically void and separated from the remainder of this Agreement, or Varian at its option may terminate this Agreement immediately, in whole or in part, by written notice.
A. Contractor shall: actively and diligently promote the sale of the Products in the Territory and co-operate with Varian in any promotional effort, deal fairly and openly with customers for Varian India Pvt. Ltd.
10Products: maintain a sales and service organization trained to provide technical and sales assistance to customers: comply with performance standards and quotas established by Varian. Contractor has been retained not on a specific Product or product line basis but on an aggregate of products basis.
B. Contractor shall generally assume the normal business risks regarding holding of inventory: however, see Sections 6 and 7 below for special circumstances.
C Contractor shall provide customer support including facilitating communications by and between Varian and customers or prospective customers regarding Product inquiries, orders, delivery schedules, quality, service, administrative or other matters. Contractor shall maintain records and summary reports regarding such communications with customers and prospective customers and shall provide such items to Varian upon request of Varian.
D Contractor shall furnish to Varian such reports and information relating to the purpose of this Agreement which includes, but is not limited to, customer sales activities, market prices, products and strategies of competitors, possible new products, future customer needs, market trends and related matters, that may reasonably be requested from time to time by Varian.
E. Contractor is responsible to and shall perform administrative support functions such as order processing, customer credit review, invoicing, accounts receivable processing and collections for all of its Contractor sales to customers in the Territory.
F. Contractor shall supervise customs clearance arid freight forwarding for all Products sold into the Territory and be responsible for import brokerage, payment of customs duties, reforwarding, and administrative support of import operations, other than those sales for which a customer or a third party agrees to take such responsibility.
G. Contractor shall immediately notify Varian in writing of any claim that a Product or trademark infringes any trademark, copyright, trade secret, or similar law in order to allow Varian to defend such claims.
H. Contractor shall be responsible for technical support including Product installation, training, maintenance, and warranty obligations to customer.
I. Contractor may employ third parties, whether related or not, in the execution of its responsibilities Contractor may participate with other Varian Contractors, where appropriate, in the joint sharing of Varian India Pvt. Ltd.
11costs where such costs provide a proportionate benefit to Contractor.
5. Sale and Payment A. Sale of Products from Supplier to Contractor shall be at prices established by Supplier from time to time in price lists or quotations, less the applicable discount(s) set forth in Schedule A. Supplier shall have the right to change the schedule of discounts (or rate of commission in Schedule A) with 15 days notice to Contractor. Discounts and or commissions for products not manufactured by Varian shall be separately agreed to on a case by case basis. Prices are net to Supplier, Contractor may he charged extra for all export packing, handling, insurance, transportation, taxes, fees, duties and any other items not specifically included in Supplier's price lists and/or quotations, unless otherwise agreed to in writing on a case by case basis. Sales shall be made only pursuant to Contractor's written purchase orders. No order shall be final arid binding until accepted in writing by Supplier.
B. Unless otherwise agreed in writing as to specific purchases, payment by Contractor is due the earlier of (1) 30 days after payment is due from customers, or (2) 60 days after Supplier invoices Contractor for Product purchases by Contractor for Contractors inventory. If payment by Contractor is late, Contractor may be charged an arms length late payment charge and/or interest.
C The terms and conditions as reflected in invoice or other shipping documents shall be controlling upon the parties, unless such terms and conditions conflict without any provision within this master Distribution Agreement. Notwithstanding the above and any invoice, shipment, or sales terms, titles and risk of loss shall transfer to Contractor, when the Product arrives at the country of destination.
6. Transfer Price Adjustment The intercompany transfer pricing shall be cased on arm's length criteria. In the event of unforeseen market place occurrences which have a significant adverse financial effect upon Contractor, the parties agree to negotiate in good faith such Product price reductions or direct expense reimbursements from Supplier as are arm's length. Contractor shall be entitled to return discontinued or obsolete inventory Products at its original cost (this does not apply to mere excess inventory).
7. Warranties and Representations Varian India Pvt. Ltd.
12A. Contractor shall extend to customers all standard Varian warranties (and such other terms as agreed to between Contractor and Varian on a case by case basis), that apply to specific Products sold to such customers with respect to which Contractor is compensated for under he discounts or commissions allowed under Section 3A. A current copy of Varian's standard warranties are attached hereto as Schedule B, Contractor shall take responsibility for all customer warranty claims under the terms of Varian's standard warranties.
B. Varian owns the exclusive right, title and interest in each Trademark, Tradename, Servicemark and similar items including related patents, copyrights if any and similar intangibles (collectively referred to as Intangibles).
C. Contractor warrants that It will not make any representations, warranty or guaranty in connection with Product other than as authorised by Varian. Contractor shall advise Varian of any claim for damages or breach of warranty in respect to the Product asserted by a customer and shall cooperate with Varian in the defense or handling of such claim.
D. Contractor further warrants that it will not at any time do or cause to be done, by any act or omission, directly or indirectly, that would in any way impair Varian's right title or interest in intangibles."
11. In pursuance of the D.R. Agreement with these five A.Es (i.e., VGCs) in relation to the indent sale, the assessee has earned following commission:-
i) Varian Australia ` 47,16,563
ii) Varian USA ` 34,12,975
iii) Varian Italy ` 58,07,471
iv) Varian Chrompak
` 3,49,91,934
International Netherlands
v) Varian AG - Switzerland ` 53,70,674
` 5,42,99,617
Varian India Pvt. Ltd.
13
12. The Assessing Officer required the assessee to furnish the working of the profit attributable to the P.E. which he meant the Assessee in respect of sales made in the territory of Indian on behalf of the VGCs in view of Article-7 of DTAA between India and U.S.A. and similar agreements with other countries. In response, the assessee submitted that with regard to the indent sale, the assessee is entitled to receive commission in respect of orders booked, where it is required to do marketing and liaisoning activities. With regard to the direct resale, the assessee submitted that it import goods on its own account and sell the same directly. In the indent sale, the assessee's involvement is restricted to liaisoning and business development only and all the other activities relating to the sale are executed by the customers themselves. In other words, the execution of sale is being done directly by the VCGs and the customers. All the market risk and credit risk arising from such sales to the customers in India are that of the VGCs and not of the assessee. The commission income as well as the income from direct sales has been fully offered for taxation in India.
13. The Assessing Officer, after analysing the various provisions of D.R. Agreements and Article 5 r/w Article 7 of the DTAA, held that the assessee is dependent agent of three companies viz., Varian Inc. U.S.A., Varian Australia and Varian Italy, because "Force of Attraction Rule" are applicable by virtue of Article 7(i) of their respective DTAA. Therefore, the profits of these companies which are attributable to business in India is also taxable in the hands of the assessee being P.E. of these three VGCs. Before the Assessing Officer, the assessee made an elaborate submission with regard to the non-applicability of "Force of Attraction Rule" as per Article 7(i) of Indo-US DTAA and similar provisions of Indo-Australia and Indo-Italy DTAA, as the assessee is not a dependent agent and, hence, is not a P.E. of any of the Varian companies in view of Article 5. Further, the Transfer Pricing Officer to whom the matter was referred to by the Varian India Pvt. Ltd.
14Assessing Officer with regard to the commission income, import of spare parts, earned by the assessee from various A.Es, it has been found that the assessee has been compensated at arm's length for its activities and functions performed in India. In addition to that, it was also submitted that under the domestic laws under section 9(1)(i) r/w Explanation thereto, in case of a business of which all operations are not carried out in India, the income of such business is deemed under this clause to accrue or arise in India shall be only such part of income as is reasonably attributable to the operations carried out in India. Thus, in view of the provisions of section 9(1)(i) also, the assessee had shown the income which has been reasonably attributed to the operations carried out in India. Reliance was also placed on CBDT Circular no.23 of 1969.
14. The Assessing Officer analysed the assessee's contentions which has been referred to in Pages-9 to 21 of the assessment order. Finally, the assessee's explanation was rejected by the Assessing Officer mainly on the following reasons:-
"9.20 The claim of the assessee that if payment to the agent is made at arm's length, then the non resident is not liable to tax (hypothesis) is not acceptable for the following reasons :-
a) The payment to the agent and profit of the assessee from business operations in India are two separate things which cannot be compared.
b) The hypothesis is applicable only in the case of independent agents where no assets I capital of NR are used in India, no risk is assumed by the NR in India and no other activity is carried out by the NR in India.
c) The draft discussion paper of OECD also suggest apportionment basis for determination of profits attributable to PE which is similar to the provisions in Rule 10 of the IT Rules.
d) No such categorical statement/hypothesis has been suggested by the OECD or any other commentary.
Varian India Pvt. Ltd.
15e) It would also not be in accordance with the statutory provisions like sec 44B of the act which is a self contained code.
f) The circular no. 01 of 2004 also provides that when core activities of the business of the assessee is outsourced, then there would be substantial profit of the principal would be the income of the non-resident taxable in India.
g) There has been undue reliance on one line of the circular no 23 of 1969 without looking into the entire context.
h) It would make principles of force of attraction inapplicable in India."
15. Thereafter, he also analyzed the various functions carried out by the Indian Branch i.e., the assessee to come to the conclusion that the assessee branch is the P.E. in respect of the business done out of supplies made by VGCs, U.S.A., Australia, Italy in India. The relevant conclusion of the Assessing Officer for the sake of ready reference is reproduced herein below:-
"10.3 Varian India shall extent to the customers in India for all standard varian warranties that apply to specific products sold. VIB shall take responsibility for all customer warranty claims under the terms of Varian's Standard Warranties. Varian owns the exclusive right, title and interest in each trademake, tradename, servicemark and similar items, including related, on which warranties are extended to the customers and VIB represents and protects the right and interest on the rights, title, interest, trademark, etc. 10.4 From the above, it is seen that the nature of business of the assessee is something more than that of a "commission agent". As the "Indian branch" performs "Sales representation services" for Varian product to the customers in India, it has to render "after sales and maintenance services" under the warranty period of the customers in India. Obviously, for such services, the "assessee" is not getting any thing from the customers. For any substandard product supplied by the Varian group the Indian branch has to incur the additional cost required in the "after Sales and maintenance services" of such products. To that extent, the Indian branch is bearing the risk on behalf of foreign supplier. Hence the profits arising on account of such risks taken by the Indian branch, is the income of the branch and not of the agent. In view of the above discussion, it is held that the assessee branch is the PE in respect Varian India Pvt. Ltd.16
of the business done out of the supplies made by Varian Group of USA, Australia and Italy."
16. Further, in the absence of actual profit attributable to the P.E., vis-à- vis three VCGs, he applied the provisions of Rule-10 of the Income Tax Rules, 1962, to estimate the profit attributable to the P.E. in view of "Force of Attraction Rule" applicable under the DTAA of U.S.A, Australia and Italy and estimated 10% of the operating profit from the business done in respect of these three companies. Accordingly, the addition of ` 63,25,580 was made.
17. Before the Commissioner (Appeals), apart from reiterating the contentions raised before the Assessing Officer, the assessee spelt out the activities and functions which were carried out by the assessee in the case of indent sale, on which commission was earned from various VGCs which were, inter-alia, spelt out as under:-
a) The appellant company is not a party to any legal contract with the customer;
b) The appellant company does not take title or own or have risk of loss as to the product, at any point of time;
c) The appellant company does not invoice the customer;
d) The appellant company does not receive funds from customers (the payments are being made by the Indian customers directly to Varian Group of Companies;
e) The appellant company does not remit funds to the Varian Group of Companies on behalf of the customers;
Varian India Pvt. Ltd.
17f) The title of goods passes directly from the Varian Group of Companies to the customer;
g) All other functions like unloading of shipment, warehousing, opening a Letter of Credit (LC), bank guarantee, etc. are executed directly by the importer / customer;
h) The supplying Varian entity dispatches goods directly to the customer who takes the delivery thereof;
i) The pricing of the instruments is at the sole discretion
of Varian Group of Companies; and
j) The appellant is not burdened with inventory
accounting.
18. It was further contended that the assessee, through its four offices in Mumbai, Delhi, Kolkata and Chennai, carries out only liaisoning activities which include providing of market information to VGCs and ready made quotations from VGCs to prospective buyers in India. On the basis of acceptances of quotations by the customers, all the customers place orders directly to the VGCs and such orders are not binding on the VGCs. These Varian companies may accept or reject the orders completely at their own discretion. The assessee only is entitled for certain percentage as commission on the order booked and does not, in any manner, carry any obligation vis-à-vis sales made by the VGCs to the Indian customers. Reliance was also placed on the judgment of Hon'ble Supreme Court in DIT (International Taxation) v/s Morgan Stanley and Co. Inc., [2007] 292 ITR 416 (SC), wherein it was held that there cannot be agency P.E. in India if the said P.E. has no authority to enter into or conclude contracts on behalf Varian India Pvt. Ltd.
18of the foreign enterprise. It was clarified that the assessee is strictly carrying out its activities as per the D.R. Agreements, wherein the assessee is only engaged or involved with incidental activities relating to pre-sale liaisoning and post-sale customer support. It provides market information and customers to the VGCs and, therefore, technical support including product installation, maintenance, warranty obligations, etc., to the Indian customers. For carrying out these activities, the assessee is compensated quite well in the form of commission income, which have been held to be as arm's length by the TPO. Regarding applicability of 10% of the operating profit on estimate basis of the profits of three VGCs, attributable to India, it was submitted that the Assessing Officer has made an assumption of that the Varian global accounts are comparable to the operating profit account of a distributor company which is wholly erroneous because the profits of VGC also include research and development operations and various other factors. Without prejudice, on the basis of comparative analysis of the comparable companies engaged in distribution activities of the products similar to the assessee, it was submitted that the profitable percentage is only 1.99% which should be taken into consideration for estimating the profit.
19. The Commissioner (Appeals) rejecting the entire contentions of the assessee held that first of all, "Force of Attraction Rule" does apply in assessee's case and all the essential conditions given in Article-7(1) are applicable i.e., the assessee is a dependent agent and P.E. of Varian Inc. U.S.A., Varian Australia and Varian Italy in India and secondly, the business activities carried out by these VGCs directly in India is same or similar kind as those which are sold / carried out by these enterprises through P.E. in India. He also analysed Article 5(4) and Article 5(5) of Indo U.S. DTAA and held that the Assessee through its branch is dependent agent of the three VGCs and all the conditions given in these articles stand Varian India Pvt. Ltd.
19fulfilled in assessee's case. For coming to this conclusion, he observed as under:-
i) VGCs are exercising comprehensive control over the branches of Varian India;
ii) Orders sent by the branches of Varian India are accepted or rejected by VGCs at their own discretions;
iii) Detailed instructions for installation, maintenance and after sales service are issued by VGCs to the technical staff employed by Varian India;
iv) Branches of Varian India bear an enterpreneurial risk in terms of collections of debtors, bad debts and sales returns, etc;
v) The appellant habitually secures order wholly or almost wholly for Varian Inc. USA, Varian Australia and Varian Italy;
vi) The appellant does not secure orders for any other manufacturer of analytical instruments and works exclusively for securing orders for goods manufactured and sold under the brand name "Varian"; and
vii) He further observed that goods sold by VGCs to Indian Customers are analytical instruments, which are more or less similar in nature and these technical products have been manufactured based on research and development efforts undertaken by the parent company i.e., Varian U.S. Varian India Pvt. Ltd.20
20. On application of Rule-10, he concluded that the rate of 10% applied by the Assessing Officer is neither excessive nor unreasonable. Regarding additional evidence relating to comparative analysis, he rejected the assessee's claim after giving detail reasons. Thus, the entire conclusion drawn by the Assessing Officer and the addition made was confirmed.
21. Learned Counsel, Mr. Kanchan Kaushal, representing the assessee, summarizing the facts of the issue involved, submitted that the assessee which is an Indian Branch of VIPL is incorporated in U.S.A. and does not have any other business operations except for the Indian Branch. The assessee is engaged in two types of sales, one indent sale and the other is direct sale. Under the indent sale, the assessee is only entitled for commission as per the D.R. Agreement, wherein it carries out pre-sale activities like liaisoning, marketing and promotion of products sold by VGCs and other incidental and ancillary post-sales support service services. Under these activities, the assessee is not responsible for maintaining books of account either for booking of sales or for the corresponding purchase as it is not a part of any legal contract with the customers. The assessee neither takes any title or own any risk of loss of the products. It neither raises invoice to the customers nor received any funds as the dealing as per the agreement is only between the VGCs and the customer. Insofar as the activity relating to the direct sales are concerned, the assessee directly imports spare parts from VGCs and sell them to Indian customers directly on its own account. These spare parts are brought on discounted price from VGCs sold them to Indian customers on principal-to-principal basis and not as an agent of any of the VGCs. For the purpose of its operation of indent sales, the assessee has four offices located in Delhi, Mumbai, Kolkata and Chennai which are mainly involved in liaisoning activity, providing marketing information to VGCs and Varian India Pvt. Ltd.
21submissions of ready made quotation received from VGC for various Varian products to the prospective buyers. The customers in turn places the order on VGCs and the orders received through the assessee are not binding on the VGCs which may accept or reject the orders completely at their own discretion. The assessee's activities are strictly circumscribed under the terms of obligation mentioned in the D.R. Agreements. He drew our attention to relevant clause as are given in the D.R. Agreements which have been placed in paper book at Pages-119 to 126. He further reiterated that during the course of assessment proceedings, the matter was referred to the TPO for determining the ALP of the international transactions entered into by the assessee and various A.Es. In pursuance thereof, the TPO, after examining the transfer pricing documentation, FAR analysis, has come to the conclusion that no adjustment is required to be made to the value of international transactions as the same has been found to be at arm's length price. He further elaborated the functions performed by the assessee vis-à-vis indent sales, asset employed by the assessee and the risk assumed and pointed out that the assessee is only doing marketing, advertising, customer support service and warranty only and the inventory management are only with regard to spare parts which the assessee deals on principal-to-principal basis. The assessee does not have any intangible assets as it does not undertake any research and development work on its account and the tangible assets are some office equipments. The risk with regard to the indent sales viz. market risk, product liability risk, research and development risk, credit risk, inventory risk, foreign currency risk, etc., solely lies with VCGs only and the assessee does not share any part of such risks. Thus, the assessee, in any manner, cannot be said to be a dependent agent within the meaning of Article-5(4) of Indo-U.S. DTAA or Indo-Australia or Indo-Italian DTAA. For constituting a dependent agency within the meaning of Article 5(4), he submitted that it is very vital that the agent can habitually conclude the contract and similar other conditions Varian India Pvt. Ltd.
22enumerated in Para-4 of Article-5, which, in the present case, is completely lacking.
22. The learned Counsel further analysed the remarks and the observations given by the Assessing Officer as well as the Commissioner (Appeals), specifically with regard to their conclusion on dependent agency P.E., as given in Article-5(4) vis-à-vis assessee's facts. He furnished a statement showing the rate of commission received from various VGCs in support of the contentions that none of the clauses or conditions mentioned in Article 5(5) stand fulfill in assessee's case and, therefore, the assessee cannot be said to be P.E. of various VGCs in India. He also referred to the judgment of the Hon'ble Supreme Court in Morgan Stanley and Co. Inc. (supra), in support of the contention that there cannot be an agency P.E. in India if the P.E. has no authority to enter into or conclude contracts on behalf of foreign enterprise. Regarding application of "Force of Attraction Rule", as given in Article-7(1) of Indo-U.S. DTAA and similar provisions in Australia and Italy DTAA, he submitted that none of the pre- requisite conditions spelt out in Article-7(1) stand fulfilled as the assessee does not constitute P.E. in India of the VGCs and secondly, the product sold by the assessee and the VGCs are different. Further, he submitted that assessee's case is also supported by the provisions of section 9(1)(i) r/w Explanation i.e., the non-residence in India, which in the present case are VGCs, in case of business of which all the operations are not carried out in India are taxable in India, only on such part of income as is reasonably attributable to the operations carried out in India. In the present case, the assessee has duly offered its income in view of the provisions of section 9(1)(i). In support of this contention, reliance was placed on the judgment of Hon'ble Supreme Court in CIT v/s Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC). Lastly, he submitted that the estimation of profit @ 10% of the operating profit of VGCs in India Varian India Pvt. Ltd.
23cannot be attributed to the Assessee as the global account of the VGCs cannot be comparable to the operating profits of the distributor company as in the case of VGCs there are also the profit of research and development operations and other factors whereas in India the activities are only sale of some of the products. Reliance was placed on several decisions on this score which are enumerated in the written synopsis filed before us.
23. The learned Departmental Representative, per contra, submitted that the assessee is a branch of VIPL, US.A., which is a 100% subsidiary of Varian Inc., U.S.A., which is acting as a dependent agent for various VGCs. The entire activities carried on by the assessee and the obligations carried out by it clearly show that it is a dependent agent of various VGCs for the sale of their products. The assessee not only helps the VGCs in selling their products but also carries out various obligations of pre and post sale activities. The entire D.R. Agreement if it is to be understood in right perspective, then the assessee is not mainly a commission agent but a dependent agent who is carrying out all the activities on behalf of the parent companies. She further referred to various observations and the findings of the Assessing Officer as well as the Commissioner (Appeals) in support of her contentions that the VGCs are having exercising comprehensive control over the branches of Varian India and the assessee is a dependent agent within the meaning of Article 5. She submitted an analysis of various terms and conditions given in Article 5(4) and 5(5), vis-a-vis the activities carried on by the assessee in India to support her contentions that the findings given by the Assessing Officer and the Commissioner (Appeals) are in accordance with the DTAA. Once the assessee is a dependent P.E., the "Force of Attraction Rule" as given in Article 7(1) gets clearly applicable and the global profits of the three VGCs Varian India Pvt. Ltd.
24insofar as their operations in India are concerned, becomes taxable in India in the hands of the assessee.
24. Regarding TPO's order to whom reference was made for determining the ALP for international transactions, she submitted that prior to 1st June 2007, the Assessing Officer was not bound by the TPO's order and, therefore, any finding by the TPO regarding the adjustment of the price or profit, does not bind the Assessing Officer. On the issue of "Force of Attraction Rule", she relied heavily on a co-ordinate bench decision of the Tribunal in Linklaters LLP, [2010] 40 SOT 51 (Mum.) Further, she submitted that even if the assessee is to be treated as agent acting independently in the ordinary course of business and if its entire activities are devoted wholly or mostly on behalf of the foreign enterprise, then they should be considered as dependent agent and would constitute P.E. of the foreign enterprise, irrespective of whether the agent has the authority to conclude the contracts or not. In support of these contentions, she has placed reliance on a co-ordinate bench decision of the Tribunal in Reuters Ltd., ITA no.1325/Mum./2001, on the issue of constituting the P.E. in relation to the activities carried on behalf of the VGCs. She placed heavy reliance on the judgment of Delhi High Court in Rolls Royce PLC v/s DIT, [2011] 13 Taxman.com 233 (Del.) and AAR ruling in Aramex International Logistics Pvt. Ltd., In re (AAR) [2012] 348 ITR 159 (Del.). Lastly, she concluded by strongly relying upon the findings of the Commissioner (Appeals) as well as the Assessing Officer.
25. We have given our anxious consideration to the rival contentions, perused the orders of the learned Commissioner (Appeals) as well as of the Assessing Officer and the material referred to before us. In the present case, the assessee, VIPL is a U.S.A. based company, which in turn, is a 100% subsidiary of Varian Ind. U.S.A. VIPL carries out its business through its branch in India. There are other Varian Group companies like Varian India Pvt. Ltd.
25Varian Australia, Varian Italy, Varian Switzerland, Varian Netherlands. Varian Inc. U.S.A. is engaged in designing, manufacturing and marketing of technological products such as scientific instruments and analytical lab instruments and other contract electronic manufacturing. All the VGCs sell these products in India. The VIPL through its Indian branch (for short "VIB"), has entered into separate D.R. Agreement for carrying out various pre-sale activities and incidental and ancillary post-sale support activities. The VIB in India carries out two types of sale viz. (i) indent sale from where it earns the commission from various VGCs and the same is offered to tax in India and (ii) direct sales of spare parts which are imported from VGCs at discounted price and is sold in India on principal-to-principal basis. The profits from such activities are also offered for tax in India. The Assessing Officer as well as the Commissioner (Appeals) have held that VIB is acting as dependent agent for various VGCs and, therefore, it constitute a P.E. in India for various VGCs. Since VIB constitutes a P.E., therefore, by virtue of "Force of Attraction Rule" as envisaged in Article 7(1) of Indo-U.S. DTAA and similar provisions given in Article 7(1) of Indo- Australia and Indo-Italy DTAA, their profits attributable to India is to be taxed in the hands of the Assessee. Now, the main issues before us are that, firstly, whether the assessee company i.e., VIPL through its Indian branch (VIB) constitute a P.E. for Varian Inc., U.S.A., Varian Australia and Varian Italy. The second issue is, whether "Force of Attraction Rule" would be applicable in case the assessee is held to be the P.E. and; lastly, whether the rate of 10% of the profitability as applied by the Assessing Officer under Rule-10 can be said to be reasonable attribution of the profit.
26. On the first issue, the Commissioner (Appeals) has confirmed the action of the Assessing Officer after holding that the assessee is dependent agent of three VGCs in view of the activities and functions performed by the assessee for them in India. He has further held that the assessee is Varian India Pvt. Ltd.
26not only a P.E. under Article 5(4), but also under Article 5(5) of Indo-U.S. DTAA and similar articles contained in Indo-Australia and Indo-Italy DTAA.
27. To decide this issue as to whether the activities of the assessee falls within the parameters and definition given in Articles 5(4) and 5(5) of Indo U.S. DTAA and other DTAAs, it is necessary to understand the main functions and activities carried out by the Assessee in India for these three VGCs. As stated earlier at several places, as per the D.R. Agreements entered with various VGCs, the assessee is carrying out marketing, advertising of VGCs products through its four offices located in Delhi, Mumbai, Kolkata and Chennai, wherein, mostly, the products are advertised and information are placed with universities and laboratories. The assessee also provides customer support service and warranty of the products sold by the VGCs, which include technical support staff for solving the problem relating to the products offered, lectures and training course, technical and sales assistance to customers, information to the customers, etc. All these obligations have been spelt out in the D.R. Agreements. The products which are mainly analytical instruments sold by VGCs directly to the Indian customers are based on the information and order received through the assessee. The assessee does not book the indent sale and corresponding purchase in its books of account for the reason that it is not a part to any legal contract with the customers. It does not take any title or owns any risk of loss of the products and does not raise any invoice from the customers. It also does not receive any funds from the customers and the payment which are made by the customers by the VGCs. A title of the product passes directly from the VGCs to the customers. The orders which are placed through the assessee are not binding on the VGCs as they may accept or reject the order completely at their own discretion. The assessee has no authority to negotiate or conclude sale contracts on behalf of the VGCs. Coming to the nature of relationship, as illustrated in D.R. Varian India Pvt. Ltd.
27Agreements, VGCs have been termed as suppliers and the assessee as an independent contractor who does not have any right to assume or create any obligation of any kind, either expressed or implied on behalf of the supplier. The contractor will not act as an agent and will have no power or authority to act for or bind or commit supplier for any of the activities carried out in India. The orders received through contractor will not be binding unless accepted in writing by the supplier. From the Various other obligations which are enumerated in Para-4 of the D.R. Agreement, it is seen that they are mostly in the nature of promotion of the products, maintaining sales and service organization, providing customer support, product inquiries assist in delivery, schedules, administrative support, functions such as order processing, customer credit review and host of other services. Besides this, the assessee is also engaged in direct sales wherein it directly imports spare parts from VGCs and sells them to Indian customers directly on its own account. The VGCs do not sell spare parts to the Indian customers at all except to the assessee. The assessee buys the spare parts at a discounted price and in turn it sold to the customers independently. The dealing of spare parts between the assessee and VGCs are on principal-to-principal basis. It is for these activities, the assessee has to maintain its own inventories and stock of goods and is solely responsible for sale and purchase. For carrying out indent sale activities, the assessee receives commission income at the rate specified in the respective D.R. Agreements and with regard to the direct sale, the assessee only receives the spare parts on discounted price which is sold in India at the profit which is shown in its hands. The commission income as well as profit from the direct sale of spare parts has regularly been offered to tax in India.
28. Whether all these activities carried out by the assessee can be said to constitute dependent agent P.E. within the meaning of Article 5(4) of Varian India Pvt. Ltd.
28Indo-U.S. DTAA or within Article 5(5). Article 5(4) lays down the following conditions for constituting the P.E. "4. Nowithstanding the provisions of paragraphs 1 and 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 and habitually exercises in the first-mentioned State an authority to conclude contracts 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 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 that 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."
29. From the above, it can be seen that an agent is deemed to be P.E. if he is not independent and habitually exercise an authority to conclude contracts on behalf of the enterprise or if he has no such authority, but habitually maintains stock of goods or merchandise from which he regularly deliver goods or merchandise on behalf of the enterprise or he habitually secure orders solely or almost wholly for the enterprise. If any of these conditions mentioned in Para-4 above, are not fulfilled, the agent cannot constitute a P.E. for the foreign enterprise. We shall examine now whether any of these conditions stands satisfied or not.
(i) Regarding the first condition as to whether the assessee is a habitually exercising the authority to conclude contracts Varian India Pvt. Ltd.
29on behalf of the VGCs, it can be gathered from the facts discussed above that indent sale orders booked through the assessee are not binding on the VGCs as they may accept or reject the orders completely at their own discretion. From the D.R. agreement, it is seen that the assessee has no authority and also cannot negotiate or conclude contracts on behalf of the VGCs. It only provides marketing support liaisoning activity for pre-sale and incidental and ancillary post-sale activities;
(ii) The second condition that the agent has no such authorities but habitually maintains stock of goods and merchandise from which he regularly deliver goods on behalf of foreign enterprises and some activities conducted on their behalf which contributes to the sale of the goods and merchandise also does not fulfill, as the assessee has no authority on behalf of the VGCs and does not maintain any cost of analytical instruments supplied by the VGCs to the customer in India. The title of the goods supplied by the VGCs is directly passed on to the customers and the assessee neither undertakes any risk or title of the product at any point of time. The assessee mainly facilitates the process of sale. The assessee keeps stock of spare parts which it sells in India on its own account and this transaction is on principal-to- principal basis and no inventory of cost are maintained for indent sales; and
(iii) The third condition whether the person habitually secures orders wholly or almost wholly for the enterprise. In assessee's case, the order relating to indent sale are only introduced and liaised by the assessee and not secure by it.
Varian India Pvt. Ltd.
30The sale orders are not binding on the VGCs until accepted by them. The assessee has no authority to accept orders on behalf of any of the VGCs. In case of the assessee, the assessee deals not only with one Varian Inc., but also for other Varian Group of companies.
Thus, none of the three conditions as enumerated in Article 5(4) stand fulfilled so as to hold that the assessee is a dependent agent of various VGCs in India. In other words, the test of dependent agent P.E. fails in this case.
30. The test of dependent agent has been provided in Para-38 of the OECD Commentary in the following manner:-
"Whether a person is independent of the enterprise depends on the extent of the obligations which this person has vis-a-vis the enterprise. Where the person's commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such person cannot be regarded as independent of the enterprise. Another important criterion will be whether the enterpreneurial risk has to be borne by the person or by the enterprise the person represents."
Thus, the character of an agent who can be said to be dependent, if
- (i) his commercial activities for the enterprise are subject to instructions or comprehensive control; and (ii) he does not bear the entrepreneur risk. Under OECD Modal Treaty, the main thrust of an agent being a P.E. is that "he has an authority to conclude contracts in the name of enterprise". In other words, the agent has sufficient authority to bind enterprise's participation in the business activities and the agent's activity involved the enterprise to a particular extent in the business activities. Thus, the qualified character of the agency is the authorization to act on behalf of somebody else so much as to conclude the contracts. In the present case, Varian India Pvt. Ltd.
31as stated several time in this order that the assessee does not have authority to conclude contracts as none of the orders booked through the assessee is binding on the foreign enterprise i.e., VGCs.
31. The other important factor which needs to be seen is that whether the assessee assumes any kind of risk on behalf of the VGCs. From plain reading of D.R. Agreements and the material placed on record, it is seen that none of the risks like market risk, product liability risk, R&D risk, credit risk, price risk, inventory risk or foreign currency risk is undertaken by the assessee. All these risk factors are borne by VGCs. Thus, from the above, we find that the assessee is not a dependent agent in terms of the conditions laid down in Article 5(4).
32. Now, whether the assessee can be said to be a P.E. within the parameter of Article 5(5), which reads as under:-
"5. An enterprise of a 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, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's-length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph."
33. From the above, it is clearly borne out that an agent is a P.E. when the following twin conditions are satisfied simultaneously.
Firstly, when the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise; and Secondly, the transactions between the agent and enterprise are not made under the arm's length conditions.
Varian India Pvt. Ltd.
32As stated in several places in this order that the assessee is providing services to various VGCs namely Varian Inc. U.S.A., Varian Australia, Varian Italy, Varian Switzerland and Varian Netherlands. It has not devoted only for one foreign enterprise. The learned Counsel had submitted a statement representing the approximate value of sales made by these foreign enterprise in the calendar years 2001 & 2002, which for the sake of ready reference is reproduced below:-
Supplying Entity Rate of Total Amount of Total Amount of Sales (VGCs) Commission Commission for 2001 & (Approx.) for 2001 & 2002 2002 Calendar Year (Rupees) (%) (Rupees) (%) 2001 2002 Varian Australia 33% 45% 47,16,563 8.69% 1,41,91,798 7.70% Varian Inc., U.S.A 35% 29% 34,12,975 6.29% 1,03,47,529 5.61% (average rates) Varian SPA, Italy 15% 15% 58,07,471 10.70% 3,87,16,473 21.00% Varian Chrompak 41% 41% 3,49,91,933 64.44% 8,53,46,178 46.28% International Netherlands Varian AG, 15% 15% 53,70,674 9.89% 3,58,04,493 19.42% Switzerland Total 5,42,99,616 100% 18,44,06,472 100% From the above, it is evident that the percentage of commission income and sales from the three VGCs are quite normal and with regard to Varian Inc. U.S.A., the activities of the assessee are between 5 to 7%.
Hence, it cannot be said that the assessee is devoted wholly or almost wholly on behalf of any one VGC. The second condition as to whether the transactions between the assessee and VGC have been made under arm's length conditions. In the case of the assessee, the Assessing Officer has referred the matter to the TPO to determine the arm's length Varian India Pvt. Ltd.
33compensation with regard to international transactions. The TPO found that the assessee's transactions have been at arm's length price which acknowledges the fact that the assessee has been compensated by the VGCs at ALP. Even the Assessing Officer has also not adversely held that compensation in the form of commission is not at arm's length. The second condition also does not fulfill. Thus, under Article 5(5) also, the assessee cannot be held to be agent for constituting a P.E. in India for the various VGCs.
34. The Commissioner (Appeals) and the Assessing Officer have observed that the assessee which is a branch of VIPL, and which in turn is a 100% subsidiary of Varian Inc. U.S.A., therefore, the assessee constitute P.E. in India through its subsidiary. Merely because the assessee is a subsidiary of Varian Inc. U.S.A., VIPL or its branch i.e., VIB, would not constitute P.E. of Varian Inc. U.S.A. This is clear from Para-6 of Article-5, which is reproduced below:-
"6. The fact that a company which is a resident of a Contracting State controls or is controlled by 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."
From the above, it is clear that mere existence of a subsidiary does not by itself constitute the subsidiary company of P.E. of the parent company. Thus, within Para-6 of Article-5 also, the assessee cannot be held to constitute a P.E. for Varian Inc. U.S.A., or any other VGCs.
35. Even under the India Australia and India Italy DTAA, similar provisions are there in Article-5(4) with regard to the dependent agents which for the sake of ready reference are reproduced below:-
Varian India Pvt. Ltd.34
"Article 5(4) of India-- Australia, Double Taxation Avoidance Agreement
5. A person acting in one of the Contracting States on behalf of an enterprise of the other Contracting State - other than an agent of an independent status to whom paragraph (6) applies - shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if:
(a) the person has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise, unless the person's activities are limited to the purchase of goods or merchandise for the enterprise;
(b) the person has no such authority, but habitually maintains in that State a stock of goods or merchandise from which the person regularly delivers goods or merchandise on behalf of the enterprise;
(c) the person habitually secures orders in that State, wholly or principally for the enterprise itself or for the enterprise and other enterprises controlling, or controlled by or subject to the same common control as, that enterprise; or
(d) in so acting, the person manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise."
Article 5(4) of lndia--Italy, Double Taxation Avoidance Agreement "4. Notwithstanding the provisions of paragraphs 1 and 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,
(a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise;
(b) 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;
Varian India Pvt. Ltd.
35(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprise controlling, controlled by, or subject to the same common control, as that enterprise; or
(d) in so acting, he manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise."
Under these agreements (DTAA) also except for clause (d) all other clauses are by and large similar to Article 5(4) of Indo U.S. DTAA. The additional Clause (d) provides that if a dependent agent manufactures or process enterprise's goods or merchandise belonging to enterprise in that states, then such an agent is deemed as P.E. In the present case, admittedly, the Assessee does not manufacture or process any other products developed or manufactured by VGCs. Thus, this clause of Article 5(4) in the above DTAAs is also not applicable.
36. It would be relevant to deal with certain observations made by the Commissioner (Appeals) and the Assessing Officer wherein they have held that the assessee is an agency P.E. of the VGCs. The Commissioner (Appeals) has observed that VGCs are exercising comprehensive control over the branch of Varian India and that also bears entrepreneur risk in terms of collection of debtors and bad debt and sales return, etc. As already discussed in the forgoing paragraphs that in the case of indent sales, the sales made to the Indian customers are in pursuance of orders introduced and liaised by the assessee for which the assessee receives commission income from the VGCs. These indent sale orders produced by the assessee are not binding on the VGCs. They may accept or reject the orders completely at their own discretion and the assessee has no authority to negotiate or conclude contract on behalf of the VGCs. Further, the goods are delivered by the VGCs directly to the customers and all the risk associated with the sale of products lies with the VGCs and not with the assessee. Thus, the entrepreneur risk is not undertaken by the Varian India Pvt. Ltd.
36assessee. This also, inter-alia, means that the VGCs does not have any comprehensive control over the assessee. A lot of emphasis has been given by the Commissioner (Appeals) and the Assessing Officer on certain terms of obligation as per the D.R. Agreement. All those obligations which are undertaken by the assessee are only pre-sale and post-sale facilities provided to the customers by the assessee for which it is amply remunerated in the form of commission. There is nothing such obligation which binds the VGCs. In any case, these are mere administrative support functions and not the functions as are envisaged under Article 5(4).
37. Even at the cost of repetition, we hold that in order to treat any agent as P.E. within the meaning of Para-4 and 5 of Article-5, it is very vital that such agent should fit into the description of "Dependent Agent"
and has to perform either of the activities as mentioned in Articles-5(4) and 5(5), otherwise, it cannot be held that agent constitutes a P.E. of the foreign enterprise.
38. The next issue is whether the "Force of Attraction Rule" as given in Article 7(1)(b) and (c) of Indo U.S. DTAA, Article 7(1)(b), Indo Australia, DTAA, Article 7(1)(b) and (c) of India Italy DTAA will apply in case of assessee so as to tax the profits of foreign enterprise i.e., VGCs in the hands of the assessee in India. The basic condition for application of "Force of Attraction Rule" is that, it has to be established that the foreign enterprise has a P.E. in India and then only it can be said to be brought within the fiscal jurisdiction of another country to such a degree that such another country can tax the profits which the enterprise derived from that country. To fall within the realm of "Force of Attraction Rule" two basic requirements which would satisfy is that (i) the foreign enterprise has a P.E. in the other State for the purpose of selling goods and merchandise and (ii) the direct sale by the foreign enterprise is the same or similar kind of goods or merchandise as sold by the P.E. in India. In this case, we have Varian India Pvt. Ltd.
37already held that the assessee do not constitute a P.E. of various VGCs, therefore, "Force of Attraction Rule", will not be applicable in this case. Thus, this issue becomes purely academic in this case.
39. In assessee's case, there is another important fact that the assessee is showing the entire income as is reasonably attributable to the operations carried out in India. Section 9(1)(i) r/w Explanation thereto provides that non-resident in India in the case of business of which all the operations are not carried out in India are taxable in India only on such part of the income as is reasonable attributable to the operations carried out in India. It is not disputed in this case that the Assessee is showing its income which is attributable to its operation in India and is subject to tax on such income. This proposition forms support from the judgment of Hon'ble Supreme Court in Hyundai Heavy Industries Co. Ltd. (supra), wherein the Hon'ble Supreme Court observed and held as under:-
"A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under Section 5(2) is concerned, it is restricted to incomes which accrue or arise or is deemed to accrue or arise in India. The scope of this deeming fiction is mentioned in Section 9 of the Act. Therefore, as far as the income accruing or arising in India, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet, etc. (hereinafter called 'us "PE of foreign enterprise"), it is, therefore, important to note that under the Act, while the taxable subject is the foreign general enterprise (for short, "GE9, it is taxable only in respect of the income including business profits, which accrues or arises to that foreign GE in India. The Income-tax Act does not provide for taxation of FE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under Section 44BB, 44BBA, 44BBB etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian FE of foreign enterprise are required to be computed under normal accounting Varian India Pvt. Ltd.38
principles and in terms of the general provisions of the Income-tax Act. Therefore, ascertainment of a foreign enterprises taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India."
40. In view of the aforesaid findings, we hold that -
Firstly, the assessee i.e., Vairan Indian Branch of VIPL is not a dependent agent of VGCs and, therefore, it does not constitute a P.E. for various VGCs in India; and Secondly, once the assessee is not a P.E. of VGCs, then "Force of Attraction Rule" will not apply in terms of Article 7(1) of various DTAA.
Accordingly, the attribution of 10% profit margin on the basis of global accounts of VGCs, as applied by the Assessing Officer, also has no legs to stand in view of the above conclusion and, therefore, the addition made by the Assessing Officer on this score and as confirmed by the Commissioner (Appeals), thus, stands deleted.
41. Before parting with this order, we would like to discuss the judgment of Delhi High Court in Rolls Royce PLC (supra), as heavily relied upon by the learned Departmental Representative, wherein, in this case, the British Company supplied certain parts and equipment to Indian customers and RRIL was assessee's 100% subsidiary set-up in India through which it carried out marketing and selling of goods to Indian customers. The Assessing Officer held that RRIL was a P.E. of the assessee and attributed 100% of the profit earned from sale of goods of Indian customers to the activities carried on in India. The Tribunal restricted such attribution to 35%. The issue with which the High Court was dealing with as to whether such an attribution of profit after taking into consideration certain Varian India Pvt. Ltd.
39expenditures were reasonable or not. The assessee had contended that its objections with regard to the various expenses have not been taken into consideration. It was on this background the High Court has held that the decision given by the Tribunal on the facts of the case was correct. By the substantial questions of law no.2 and 4, the issue of P.E. under Article-5 of Indo U.K. DTAA was raised on which the High Court has held that such a question was not seriously contested. Moreover, in this case, the RRIL was 100% subsidiary of Rolls Royce which was held to be P.E. looking to the functions performed, whereas, in the present case, the issue is not whether the VIB i.e., the Indian Branch of VIPL is a P.E. of VIPL or not but whether the VIPL through VIB is a P.E. of other VGCs. Thus, in our considered opinion, the said judgment is not applicable on the facts of the present case.
42. The other judgments which are relied upon by the learned Departmental Representative are not commented upon as we feel that the same are not relevant.
43. प रणामतः नधा रती क अपील आं शक वीकत ृ क जाती है ।
43. In the result, assessee's appeal is partly allowed.
44. We not proceed to dispose off Assessee's other appeals i.e., in ITA no.4673/Mum./2001 for A.Y. 2003-04, ITA no.4674/Mum./2011 for A.Y. 2004-05, ITA no.4675/Mum./2011, for A.Y. 2005-06 and ITA no.4676/ Mum./2011 for A.Y. 2006-07.
45. In all these appeals, the only issue involved is whether the VIPL India Branch is a P.E. of various VGCs and accordingly, additions have been made on account of attribution of profits of the VGCs to the P.E. Since the issue involved is exactly similar to the issue decided in the above appeal in ITA no.4672/Mum./2011, for assessment year 2002-03, Varian India Pvt. Ltd.
40therefore, the findings given therein will apply mutatis mutandis in these appeals also. Consequently, all the appeals filed by the assessee are treated as allowed.
46. प रणामतः नधा रती क अपील वीकत ृ क जाती है ।
68. In the result, Assessee's all the appeals are allowed.
69. नणय के सारांश व प, नधा रती क नधारण वष 2002-03 क अपील आं शक वीकत ृ क जाती है एवं नधा रती क नधारण वष 2003-04, 2004-05, 2005-06 एवं 2006- 07 क अपील वीकत ृ क जाती है
68. To sum up, Assessee's appeal for A.Y. 2002-03 is partly allowed and Assessee's appeals for A.Ys 2003-04, 2004-05, 2005-06 and 2006-07 are allowed.
आदे श क धोषणा खले
ु यायालय म दनांकः को क गई।
Order pronounced in the open Court on 27th February, 2013.
Sd/- Sd/-
पी.
पी.एम.
एम. जगताप अ मत शु ला
लेखा सद य या यक सद य
P.M. JAGTAP AMIT SHUKLA
ACCOUNTANT MEMBER JUDICIAL MEMBER
मंुबई MUMBAI, दनांक DATED: 27-02-2013
FIT FOR PUBLICATION
JM AM
Varian India Pvt. Ltd.
41
आदे श क त ल प अ े षत / Copy of the order forwarded to:
(1) नधा रती / The Assessee;
(2) राज व / The Revenue;
(3) आयकर आयु (अपील) / The CIT(A);
(4) आयकर आयु / The CIT, Mumbai City concerned;
(5) वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / The DR, ITAT, Mumbai;
(6) गाड फाईल / Guard file.
स या पत त / True Copy
आदे शानसार
ु / By Order
द प जे. चौधर / Pradeep J. Chowdhury
वर नजी स चव / Sr. Private Secretary
उप / सहायक पंजीकार / (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मंुबई / ITAT, Mumbai