M/s. Hyundai Rotem Company, New Delhi v. ADIT, New Delhi

ITA 3300/DEL/2009 | 2002-2003
Pronouncement Date: 27-07-2012 | Result: Allowed

Appeal Details

RSA Number 330020114 RSA 2009
Assessee PAN AABCK6367L
Bench Delhi
Appeal Number ITA 3300/DEL/2009
Duration Of Justice 3 year(s) 5 day(s)
Appellant M/s. Hyundai Rotem Company, New Delhi
Respondent ADIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 27-07-2012
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted C
Tribunal Order Date 27-07-2012
Date Of Final Hearing 19-04-2012
Next Hearing Date 19-04-2012
Assessment Year 2002-2003
Appeal Filed On 22-07-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C NEW DELHI) BEFORE SHRI RAJPAL YADAV AND SHRI K.D. RANJAN ITA NOS. 3300 TO 3302/DEL/2009 ASSESSMENT YEARS: 2002-03 & 2004-05 M/S. HYUNDAI ROTEM COMPANY VS. ASSISTANT DIT MEZZANINE FLOOR PLOT NO.10-11 INTERNATIONAL TAXA TION BHANDARI HOUSE COMMERCIAL COMPLEX CIRCLE 2(1) MUKHERJEE NAGAR NEW DELHI. NEW DELHI. (PAN: AABCK6367L) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI GC SRIVA STAVA ADV. RESPONDENT BY: SHRI DR GUPTA C IT (DR) ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE PRESENT THREE APPEALS ARE DIRECTED AT THE INSTA NCE OF ASSESSEE AGAINST THE COMMON ORDER OF LEARNED CIT(APPEALS) DA TED 08.04.2009 PASSED FOR ASSESSMENT YEARS 2002-03 TO 2004-05. THE GROUNDS OF APPEALS TAKEN BY THE ASSESSEE IN ALL THE ASSESSMENT YEARS A RE ALMOST VERBATIM EXCEPT GROUND NO. 5 IN ASSESSMENT YEAR 2004-05. IN OTHER Y EARS THIS GROUND IS NOT THERE. GROUND NO.6 IN ASSESSMENT YEAR 2004-05 IS TH E GROUND NO. 5 IN OTHER YEARS THEREFORE WE TAKE NOTE OF THE GROUNDS OF AP PEAL FOR ASSESSMENT YEAR 2004-05 WHICH READ AS UNDER: THE FOLLOWING GROUNDS OF APPEAL ARE MUTUALLY EXCLU SIVE OF AND WITHOUT PREJUDICE TO EACH ANOTHER. 2 1. THAT THE LEARNED CIT(APPEALS) HAS GROSSLY ERRED BOT H ON FACTS AND IN LAW IN UPHOLDING THE ORDER OF THE LEARNED CI T(APPEALS) ASSESSING OFFICER (LD.A.O) IN NOT ACCEPTING THE CO ST PLUS METHODOLOGY ADOPTED BY THE APPELLANT FOR DETERMININ G PROFITS ATTRIBUTABLE TO ITS PROJECT OFFICE (P.O) IN INDIA . 2. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AN D IN LAW IN HOLDING THAT SEVERAL IMPORTANT ACTIVITIES IN RELATI ON TO THE CONTRACT FOR SUPPLY OF ROLLING STOCK FROM OUTSIDE I NDIA COULD NOT HAVE BEEN COMPLETED OUTSIDE INDIA. 3. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AN D IN LAW IN NOT APPRECIATING THAT THE INCOME ATTRIBUTABLE TO TH E ACTIVITIES CARRIED OUT IN INDIA HAD ALREADY BEEN OFFERED FOR T AX AS PER THE ORIGINAL RETURN OF INCOME. 4. IN ANY CASE AND WITHOUT PREJUDICE TO GROUND 1 2 AND 3 ABOVE THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING AT TRIBUTION OF 50% OF THE INCOME FROM OFFSHORE TO TAX IN INDIA WH EREAS NO PART OF THE ACTIVITY RELATING TO OFFSHORE SUPPLY IS CARRIED OUT BY APPELLANTS PROJECT OFFICE IN INDIA. 5. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AN D IN LAW IN DIRECTING THAT THE METHODOLOGY FOR DETERMINATION OF PROFITS FROM CONTRACT ADOPTED BY THE LEARNED ASSESSING OFFICER IN A.Y. 2003-04 SHOULD BE FOLLOWED IN A.Y. 2004-05 ALSO IR RESPECTIVE OF WHETHER THE METHOD ADOPTED BY THE LEARNED A.O. IS CORRECT OR NOT. 6. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AN D IN LAW IN CONFIRMING A.OS METHODOLOGY OF DETERMINING THE I NCOME AS A WHOLE AND NOT THE INCOME ATTRIBUTABLE TO THE PROJ ECT OFFICE 3 WHICH CONSTITUTES THE PERMANENT ESTABLISHMENT (P.E ) OF THE APPELLANT IN INDIA ON ACCOUNT OF THE FOLLOWING REAS ONS: A. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AN D IN LAW IN UPHOLDING THE METHODOLOGY ADOPTED BY LEARNED A.O. BY RESORTING TO RULE 10 OF THE INCOME-TAX RULE S 1962 (THE RULES) FOR DETERMINING THE INCOME OF TH E APPELLANT EVEN THOUGH THE INCOME ATTRIBUTABLE TO TH E PROJECT OFFICE HAD BEEN OFFERED FOR TAX BASED ON A TRANSFER PRICING (TP) STUDY. B. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AN D IN LAW IN UPHOLDING A.OS CONTENTION IN CONCLUDING THA T THE DESIGNING HAS NOT BEEN DONE ON AN ISOLATED BASIS AB ROAD. C. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AN D IN LAW UPHOLDING THAT THE PROJECT OFFICE OF THE APPELL ANT HAS A SUBSTANTIAL ROLE TO PLAY IN THE DESIGNING AND MANUFACTURING OF THE ROLLING STOCK. D. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AN D IN LAW TO COME TO A CONCLUSION THAT THE TRANSFER PRICI NG DOCUMENTATION PREPARED BY THE APPELLANT DOES NOT CA PTURE THE FUNCTIONS AND RISKS OF PE APPROPRIATELY OR THE HEAD OFFICE AS THE CASE MAY BE AS THERE IS NO MENTION OF THESE ITEMS IN THE TP STUDY E.G. THE RISKS UNDERTAKEN B Y THE HEAD OFFICE WITH RESPECT TO SUPPLY. 7. THAT WITHOUT PREJUDICE ON FACTS AND IN LAW THE CIT(A) ERRED IN NOT PASSING A SPEAKING ORDER WITH RESPECT TO SUBMIS SIONS MADE BY THE APPELLANT AND IN NOT ADJUDICATING ON THE FOL LOWING ISSUES: 4 A. THAT THE LEARNED A.O. ERRED ON FACTS AND IN LAW IN IGNORING THE TP STUDY SUBMITTED BY THE APPELLANT IN SUPPORT OF THE INCOME ATTRIBUTED TO THE PROJECT OFF ICE IN INDIA (GROUND NO. 6.1 OF THE GROUNDS OF APPEAL ATTA CHED WITH FORM 35). B. THAT THE LEARNED A.O. ON FACTS AND IN LAW IN CONCL UDING THAT THE MEMORANDUM OF UNDERSTANDING (MOU') BETWEEN THE HEAD OFFICE AND THE PROJECT OFFICE OF T HE APPELLANT IS AN AFTERTHOUGHT AND DONE FOR THE PURP OSE OF MISLEADING (GROUND NO. 6.2 OF THE GROUNDS OF APPEA L ATTACHED WITH FORM 35). 8. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AND IN LAW IN DIRECTING THE LEARNED A.O. TO BRING THE PAYMENTS R ELATABLE TO COST CENTRE B-4 AND B-5 TO TAX UNDER ARTICLE 7 READ WITH ARTICLE 13(5) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BE TWEEN INDIA AND KOREA (THE TREATY) AS BUSINESS INCOME WHEN ACCORDING TO THE DECISION OF THE AUTHORITY FOR ADVA NCE RULING (AAR) THERE COSTS FORMED PART OF COST OF ASSETS SUPPLIED FROM OVERSEAS. 9. THAT THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AND IN LAW IN UPHOLDING THE ORDER OF THE LEARNED A.O. IN RELATION TO LEVY OF INTEREST UNDER SEC. 234B OF THE ACT. 5 THE APPELLANT CRAVES LEAVE TO SUBMIT SUCH FURTHER G ROUNDS AT OR BEFORE THE HEARING OF THE APPEAL SO AS TO ENABLE Y OUR HONOUR TO DECIDE THE APPEAL ACCORDING TO LAW. 2. THE FACTS ARE COMMON IN ALL THE YEARS THEREFORE FOR THE FACILITY OF REFERENCE WE ARE TAKING UP THE FACTS MAINLY FROM A SSESSMENT YEAR 2002-03. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HAS FILED ITS RETURN OF INCOME WHICH WAS REVISED ON 10.3.2003 CLAIMING CARRY FORWA RD OF LOSSES OF RS.258 47 650. THE ASSESSEE FURTHER REVISED ITS RET URN OF INCOME ON 31.3.2004 DECLARING INCOME AT RS.6 52 900. THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AND A NOTICE UNDER SEC. 143(2) OF THE ACT WAS ISSUED AND SERVED UPON THE ASSESSEE. 3. IN ASSESSMENT YEAR 2003-04 THE RETURN WAS FILED ON 2 ND DECEMBER 2003 DECLARING AN INCOME OF RS.5 31 558. THE ASSESS EE REVISED THE RETURN ON 08.04.2004 DECLARING THE SAME INCOME AS SHOWN IN TH E ORIGINAL RETURN. NOTICE UNDER SEC. 143(2) OF THE ACT WAS ISSUED ON 1 2.10.2004 WHICH WAS DULY SERVED UPON THE ASSESSEE AND ASSESSMENT ORDER HAS BEEN FRAMED ON 24.3.2006 UNDER SECTION 143(3) OF THE ACT. IN ASSES SMENT YEAR 2004-05 THE RETURN WAS FILED ON 31.10.2004 DECLARING AN INCOME OF RS.158 48 100. THE 6 CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AND NOTIC E UNDER SEC. 143(2) WAS ISSUED ON 16.2.2005. IN THIS ASSESSMENT YEAR LEARN ED ASSESSING OFFICER HAS MADE A REFERENCE TO THE LEARNED TPO FOR DETERMINAT ION OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE HAS ALSO APPROACHED LEARNED AUTHORITY FOR ADVANCE RULINGS ON TWO ISSUES I.E. W HETHER FEES RECEIVED DURING TRAINING AND SUPERVISION AND MAINTENANCE WAS REQUIRED TO BE ASSESSED AS FEE FOR TECHNICAL SERVICES OR NOT? LEARNED AUTH ORITY HAS HELD THAT THE RECEIPTS ARE TAXABLE AS FEE FOR TECHNICAL SERVICES ON GROSS BASIS. ASSESSING OFFICER HAS PASSED THE ASSESSMENT ORDER ON 27.12.20 06 UNDER SECTION 143(3) OF THE ACT. THE FOLLOWING DETAILS WOULD DEPICT THE INCOME RETURNED BY THE ASSESSEE ADDITION MADE BY THE ASSESSING OFFICER AN D THE ULTIMATE ASSESSED INCOME: ASSESSMENT YEAR (A.Y) RETURNED INCOME (RS.) ADDITION TO RETURNED INCOME (RS.) ASSESSED INCOME (RS.) 2002-03 652 900 108 083 945 108 736 845 2003-04 53 15 581 248 122 069 253 437 65 0 2004-05 15 848 696 55 509 839 71 358 5 35 4. THE ASSESSEE IS A PROJECT OFFICE OF HYUNDAI ROTE M COMPANY A COMPANY INCORPORATED UNDER THE LAW OF SOUTH KOREA A ND MAINLY ENGAGED IN MANUFACTURING OF ROLLING STOCKS DEFENCE PROJECT AN D PLANT EQUIPMENT. THE 7 ASSESSEE FORMED A CONSORTIUM WITH MITSUBISHI CORPOR ATION (M.C.) JAPAN AND MITSUBISHI ELECTRIC CORPORATION JAPAN TO BID F OR THE CONTRACT RS-I I.E. MASS RAPID TRANSPORT SYSTEM CONTRACT FROM DELHI MET RO RAIL CORPORATION FOR A DESIGN MANUFACTURE AND SUPPLY TEST COMMISS IONING TRAINING AND TRANSFER OF TECHNOLOGY OF PASSENGER ROLLING STOCK. THIS CONTRACT WAS AWARDED TO THE CONSORTIUM VIDE AGREEMENT DATED 22.5.2001 ( THE CONTRACT HEREINAFTER REFERRED AS RS-I CONTRACT). THE CONSIDERATION FOR T HE ENTIRE WORK TO BE CARRIED OUT BY THE CONSORTIUM WAS A FIXED LUMP SUM PRICE OF RS.3 110 439 836. IT WAS APPORTIONED AMONGST VARIOU S COST CENTRES (A TO Z) WHICH IS ALSO CONSIDERED AS A MILESTONE. THESE COST S CENTRES ARE REPRODUCED AS UNDER: COST CENTRE TOTAL APPORTIONED AMOUNTS OF COST CENTRE ITEMS US DOLLARS RUPEES AMOUNT A. PRELIMINARIES AND GENERAL REQUIREMENTS FOR ROLLING STOCK FOR RAIL AND METRO CORRIDORS. 52 847 413 34 088 557 B. DESIGN OF ROLLING STOCK FOR RAIL AND METRO CORRIDORS 8 707 930 8 114 758 C. OFFSHORE MANUFACTURE 8 FACTORY TESTING INSPECTION MARINE INSURANCE AND SHIPPING TO PORT IN INDIA AND TRANSIT INSURANCE FROM PORT IN INDIA TO DEPOT SITE OF 14 NO. 25 KV ASSESSEE COMPANY TRAINS FOR RAIL CORRIDOR AND ONE 1500 VDC TRAINS FOR METRO CORRIDOR. 46 437 149 151 458 704 D. INDIGENOUS MANUFACTURE FACTORY TESTING INSPECTION AND DESPATCH TRANSIT INSURANCE FROM FACTORY TO DEPOT OF 29 NO. 25 KV ARE ASSESSEE COMPANY TRAINS FOR RAIL CORRIDOR AND 16 NO. 1500 VDC TRAINS FOR METRO CORRIDOR. 105 546 593 2 795 448 312 E. INLAND TRANSPORTATION OF TRAINS WITHIN INDIA INCLUDING HANDLING CHARGES AT PORT IN INDIA DEPOT OR AT ANY OTHER PLACE AND ALL OTHER INCIDENTAL COSTS RECEIPT OF CARS IN 12 121 020 71 017860 9 DEPOT FORMATION OF TRAINS SATISFACTORY COMPLETION OF TESTS AND RUNNING OF TRAIN IN THE DEPOT. F. INTEGRATED TESTING AND COMMISSIONING OF TRAINS ON THE SELECTION AND SERVICE TRIALS. 19 054 140 - G. TRAINING 1 558 410 1 420 358 H. OPERATION AND MAINTENANCE MANUALS. 1 731 563 - I. UNIT EXCHANGE SPARES CONSUMABLE SPARES FOR A PERIOD OF THREE YEARS SPECIAL TOOLS TESTING AND DIAGNOSTIC EQUIPMENT. 10 538 115 34 569 358 J. SUPERVISION AND MAINTENANCE 2 454 936 14 321 929 TENDER TOTAL 260 997 269 3 110 439 836 5. IN THE PRESENT THREE YEARS ASSESSEE HAD FILED I TS RETURN OF INCOME BY SHOWING THE INCOME OF THE PROJECT OFFICE AT COST + 9% BASIS. ACCORDING TO THE ASSESSEE IT HAS CARRIED OUT TRANSFER PRICING A NALYSIS AND ITS INCOME WAS DETERMINED AT ARMS LENGTH PRICE. IN SUPPORT OF ITS RETURN IT HAS SUBMITTED THE 10 TRANSFER PRICING STUDY UNDERTAKEN BY IT. AS FAR AS TRAINING AND SUPERVISION FEE MENTIONED AT COST CENTRES G & J OF THE ABOVE CHART ARE CONCERNED THEY WERE OFFERED FOR TAXATION ON GROSS BASIS BECAUSE THE AS SESSEE WENT TO THE AUTHORITY FOR ADVANCE RULINGS WHO HAS HELD THAT TH ESE ARE FEES FOR TECHNICAL SERVICES. ACCORDINGLY THE INCOME WAS OFFE RED @ 15% ON GROSS BASIS IN THE RESPECTIVE YEARS. AS FAR AS THIS ASPEC T IS CONCERNED IT IS NOT IN DISPUTE BEFORE US. IN ASSESSMENT YEAR 2002-03 THE TRANSACTIONAL VALUE OF INTERNATIONAL TRANSACTION WITH HEAD OFFICE WAS LESS THAN THRESHOLD LIMIT PROVIDED IN SECTION 92C OF THE ACT FOR MAKING A REF ERENCE TO THE TPO FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATI ONAL TRANSACTION. THEREFORE THE TRANSACTIONS WERE NOT REFERRED TO TH E LEARNED TPO FOR DETERMINATION OF ARMS LENGTH PRICE. THOUGH IN ASSE SSMENT YEAR 2003-04 THE TRANSACTIONAL VALUE WAS MORE THAN THE LIMIT BUT STI LL NO REFERENCE WAS MADE TO THE LEARNED TPO FOR DETERMINATION OF ARMS LENG TH PRICE OF THE TRANSACTION. IN ASSESSMENT YEAR 2004-05 IT WAS REF ERRED TO THE TPO FOR TRANSFER PRICING ANALYSIS. LEARNED TPO HAS ACCEPTE D THE TRANSFER PRICING STUDY CARRIED OUT BY THE ASSESSEE AND FOUND THAT TH E ASSESSEE HAS SHOWN VALUE OF ITS INTERNATIONAL TRANSACTION AT ARMS LEN GTH PRICE. 11 6. LEARNED ASSESSING OFFICER HAS DETERMINED THE IN COME OF THE ASSESSEE IN ASSESSMENT YEARS 2002-03 AND 2003-04 BY APPLYING RULE 10 OF THE INCOME-TAX RULES 1962. HE ADOPTED A GLOBAL FORMULA RY APPORTIONMENT APPROACH IN ORDER TO DETERMINE THE INCOME ATTRIBUTA BLE TO THE PROJECT OFFICE. ACCORDING TO THE ASSESSING OFFICER GROSS PROFIT AS PER THE GLOBAL ACCOUNT OF THE ASSESSEE ON THE CONTRACT RECEIPTS ARE 12.66% FO R ASSESSMENT YEAR 2002-03 AND 18.78% FOR ASSESSMENT YEAR 2003-04. HE ALLOWED THE DEDUCTION FOR THE EXPENSES INCURRED FOR THE PROJECT OFFICE IN INDIA A ND FURTHER DEDUCTION AS PER SECTION 44C OF THE ACT. ASSESSING OFFICER THEREAFTE R TOOK 50% OF THE RESULTANTS AS THE PROFITS ATTRIBUTABLE TO THE OPERA TIONS IN INDIA AND COMPUTED THE INCOME ON THE BASIS OF PROFIT RATE DECLARED GLO BALLY. 7. AS FAR AS ASSESSMENT YEAR 2004-05 IS CONCERNED THE ISSUES ARE NOT MUCH IN DISPUTE AT THE LEVEL OF ASSESSING OFFICER BECAUSE LEARNED TPO HAS ACCEPTED THE TRANSFER PRICING STUDY UNDERTAKEN BY T HE ASSESSEE. ASSESSING OFFICER HAS TREATED THE RECEIPTS RELATABLE TO COST CENTRES B-4 AND B-5 PERTAINING TO DESIGNING ACTIVITIES AS ROYALTY AND T AXED THE SAME ON GROSS BASIS IN THE LIGHT OF ARTICLE 13 OF INDIA KOREA TAX TREATY. 12 8. ON APPEAL BEFORE THE LEARNED CIT(APPEALS) THE A SSESSEE HAS RAISED NUMBER OF GROUNDS IN EACH YEAR AND LEARNED FIRST AP PELLATE AUTHORITY MADE LUCID ANALYSIS ON ALL THESE ISSUES. LEARNED FIRST A PPELLATE AUTHORITY HAS PARTLY ALLOWED THE APPEALS OF THE ASSESSEE. 9. BEFORE US LEARNED COUNSEL FOR THE ASSESSEE WHIL E TAKING US THROUGH THE GROUNDS OF APPEAL SUBMITTED THAT AS FAR AS EXISTENC E OF PE IS CONCERNED THERE IS NO DISPUTE. THE DISPUTE RELATES TO THE INC OME ATTRIBUTABLE TO SUCH PE IN INDIA. WHETHER THAT INCOME HAS TO BE DETERMINED ON THE BASIS OF RULE 10 IGNORING THE MECHANISM PROVIDED IN SECTIONS 92 TO 9 2F OF THE INCOME-TAX ACT 1961 READ WITH RULES 10A TO 10E WHEREIN A MEC HANISM FOR DETERMINATION OF ARM'S LENGTH PRICE HAS BEEN INTROD UCED W.E.F. 25.8.2011. IF THIS ISSUE IS ADJUDICATED THEN ALL OTHER ISSUES WO ULD BE ACADEMIC IN NATURE. LEARNED REPRESENTATIVES HAVE ADDRESSED THEIR ARGUM ENTS ON THIS ISSUE. THEY HAVE PLACED ON RECORD WRITTEN NOTE ON THIS ASPECT. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT AS PER ARTICLE 7(2) O F INDIA KOREA TAX TREATY THE INCOME OF A PE HAS TO BE DETERMINED AS IF IT WA S A DISTINCT AND SEPARATE ENTERPRISES ENGAGED IN THE SAME OR SIMILAR ACTIVITY UNDER THE SAME OR SIMILAR CONDITION AS IF THAT ENTERPRISES WAS CARRYING OUT. IN OTHER WORDS THE PE HAS TO BE IDENTIFIED AS DISTINCT ENTITY TO THE GENERAL ENTERPRISES. IN ORDER TO 13 DETERMINE THE INCOME OF THE PE ACCRUED OR ARISING I N THE STATE WHERE IT IS EXISTING ONE HAS TO EVALUATE THE TRANSACTION WITH THE ENTERPRISES UNDER THE ARM'S LENGTH PRICE. THE MECHANISM TO DETERMINE ARM' S LENGTH PRICE OF THE TRANSACTION HAS BEEN INCORPORATED IN THE FORMATION OF TRANSFER PRICING CODE. THIS MECHANISM WAS AVAILABLE IN A LIMITED FORMULA I N SECTION 92 AND OLD RULES 11. THEY READ AS UNDER: INCOME FROM TRANSACTIONS WITH NON-RESIDENTS HOW C OMPUTED IN CERTAIN CASES 92. WHERE A BUSINESS IS CARRIED ON BETWEEN A RESID ENT AND A NON- RESIDENT AND IT APPEARS TO THE ASSESSING OFFICER TH AT OWING TO THE CLOSE CONNECTION BETWEEN THEM THE COURSE OF BUSINE SS IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE RESIDENT EITHER NO PROFITS OR LESS THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN THAT BUSINESS THE ASSESSING O FFICER SHALL DETERMINE THE AMOUNT OF PROFITS WHICH MAY REASONABL Y BE DEEMED TO HAVE BEEN DERIVED THAN FROM AND INCLUDE SUCH AMOUNT IN THE TOTAL INCOME OF THE RESIDENT. X X X X X X X X X X DETERMINATION OF INCOME FROM THE TRANSACTIONS WIT H NON-RESIDENT 11. THE PROFITS AND GAINS DERIVED FROM ANY BUS INESS CARRIED ON IN THE MANNER REFERRED TO IN SECTION 92 MAY BE DETERMI NED FOR THE PURPOSE OF ASSESSMENT TO INCOME TAX ACCORDING TO RU LE 10. 14 10. WITH EFFECT FROM 21.08.2001 A DETAILED MECHANI SM FOR DETERMINING THE ARM'S LENGTH PRICE HAS BEEN INCORPORATED IN CHA PTER X UNDER SECTIONS 92 TO 92F READ WITH RULE 10A TO RULE 10E VIDE FINANCE ACT 2001. SIMILARLY RULE 11 SUPRA WAS OMITTED W.E.F. 21.8.2001 AND SI MULTANEOUSLY RULES 10A TO 10E DEALING WITH THE MECHANISM FOR DETERMINATION OF ARM'S LENGTH PRICE INTRODUCED W.E.F. 21.8.2001. ACCORDING TO THE LEARN ED COUNSEL FOR THE ASSESSEE WITH THE SUBSTITUTION OF SECTION 92 AND O MISSION OF RULE 11 THE APPLICABILITY OF RULE 10 STANDS LIMITED TO THE CASE S COVERED BY BUSINESS CONNECTION BEING IN INDIA AS STIPULATED UNDER SEC. 9 BECAUSE IN ALL DTA SEPARATE ENTITY AND ARM'S LENGTH PRICE APPROACH HAS BEEN INCORPORATED. HE ALSO SUBMITTED THAT EVEN IF IN THE CASES WHERE BUSI NESS CONNECTION IS THERE AND THERE IS NO APPLICATION OF ANY TAX TREATY THOS E CASES ALSO HAVE TO UNDERGO THE TP REGULATION IF THERE IS SOME INTERNATIONAL T RANSACTION WITH THE ASSOCIATE ENTERPRISE. THE EMPHASIS OF THE LEARNED C OUNSEL FOR THE ASSESSEE IS THAT THE OMISSION OF RULE 11 AND INTRODUCTION OF R ULE 10A TO 10E THE RULE 10 HAS LOST ITS APPLICATION IN CASES WHERE THE TREA TY PROVIDES A SEPARATE ENTITY AND ARMS LENGTH APPROACH FOR THE DETERMINATION OF P ES INCOME. HE SUBMITTED THAT LEARNED CIT(APPEALS) IN PARAGRAPH NO . 10 ON PAGE 31 HAS OBSERVED THAT BY COMPUTING THE INCOME OF THE ASSESS EE APPLYING RULE 10 NO 15 PREJUDICE HAS BEEN CAUSED AND DETERMINATION OF INCO ME ON THE BASIS OF THE ARM'S LENGTH PRICE BECOME ACADEMIC. HE POINTED OUT THAT ASSESSEE IS AGGRIEVED WITH THIS MECHANISM AND PREJUDICE HAS BEE N CAUSED TO IT. THESE ARE THE ONLY TWO ASSESSMENT YEARS WHERE ASSESSING O FFICER HAS ADOPTED THIS METHOD. OTHERWISE ON ALL OTHER SUBSEQUENT ASSESSME NT YEARS THE INCOME DETERMINED BY THE ASSESSEE AT COST.+9% HAS BEEN ACC EPTED BY THE DEPARTMENT. THIS MECHANISM IS TOTALLY UNSCIENTIFIC AND CONTRARY TO THE PROCEDURE PROVIDED IN SECTION 92 TO 92F READ WITH R ULES 10A TO 10E. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER MADE REFER ENCE TO THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF HYUNDAI HEAVY INDUSTRIES CORPORATION LTD. REPORTED IN 291 ITR 482 ON THE STRENGTH OF THI S DECISION HE APPRAISED US AS TO HOW INCOME OF A PE HAS TO BE DETERMINED. SIMI LARLY HE MADE REFERENCE TO THE DECISION OF HON'BLE SUPREME COURT IN THE CAS E OF DIT INTERNATIONAL TAXATION VS. MORGAN STANLEY REPORTED IN 292 ITR 416 . 11. ON THE OTHER HAND LEARNED DR HAS SUBMITTED THA T FOR DETERMINING THE INCOME ATTRIBUTABLE TO PE A DISCRETION LIES WITH TH E ASSESSING OFFICER EITHER TO RESORT TO RULE 10 READ WITH SECTION 9 OR TO RULE 10B READ WITH SECTION 92C OF THE ACT.HE PLACED ON RECORD A NOTE IN ORDER TO B UTTRESS HIS CONTENTIONS AND 16 ASSIGNING FOLLOWING REASONS AS TO WHY THE ACTION OF THE ASSESSING OFFICER RESORTING RULE 10 FOR DETERMINING THE INCOME OF THE PE DESERVES TO BE UPHELD. A) BOTH RULE 10 AND 10B(1) PROVIDE A METHODOLOGY T O DETERMINE THE INCOME OF A NON-RESIDENT. THIS IS ALS O CLEAR FROM THE HEADING OF RULE 10 WHICH STATES DETERMINATION OF INCOME IN THE CASE OF NON-RESIDENT AND THE HEADING OF RUL E 10B WHICH STATES DETERMINATION OF ARM'S LENGTH PRICE UNDER S ECTION 92C. THE PURPOSE OF BOTH THE RULES IS TO DETERMINE THE I NCOME WHICH IS ATTRIBUTABLE TO A NON-RESIDENT FOR THE ACTIVITIE S DONE IN INDIA. THE RULES ARE THUS NOT MUTUALLY EXCLUSIVE AND ARE N OT IN CONFLICT WITH EACH OTHER. RATHER THEY PROVIDE PARALLEL MECHA NISM. B) ARTICLE 7(2) OF THE INDO-KOREAN TREATY WHICH CAM E INTO FORCE BASIS OF SEPARATE ENTITY SPEAKS OF ATTRIBUTION OF P ROFIT TO THE PE ON THE BASIS OF SEPARATE ENTITY APPROACH. IT DOES N OT SPEAK OF APPLICATION OF TRANSFER PRICING PROVISIONS. IN FACT BETWEEN 1986 TO 2002 THERE WERE NO SPECIFIC TRANSFER PRICING PRO VISIONS IN THE INDIAN INCOME-TAX ACT NOR RULE 10B WAS THERE MEANIN G THEREBY ARTICLE 7(2) OF THE TREATY WAS APPLIED BY RESORTING TO RULE 10. SINCE RULE 10 IS STILL THERE EVEN AFTER INSERTION OF SECTION 92C/RULE 10B THE A.O. IN CAN RESORT TO THIS RULE F OR THE ATTRIBUTION OF PROFIT TO THE PE. C) THE HON'BLE SUPREME COURT IN THE CASE OF MORGAN STANLEY & CO. (292 ITR 416) ON PAGE 442 HAS APPROVED IN PRIN CIPLE THE 17 DECISION OF THE AAR WHEREBY IT EQUATED THE ARMS LE NGTH ANALYSIS WITH ATTRIBUTION OF PROFITS. THIS MEANS TH AT FOR DETERMINING THE INCOME OF A NON-RESIDENT RESORT CAN BE HAD EITHER TO THE ARM'S LENGTH ANALYSIS (SECTION 92C R. W. RULE 10B) OR TO ATTRIBUTION OF PROFIT (SECTION 9 R.W. RULE 10). D) THE HON'BLE SUPREME COURT IN THE ABOVE DECISION ALSO REFERRED TO ARTICLE 7 OF THE UN MODEL CONVENTION. W HILE ARTICLE 7(2) OF THE CONVENTION STIPULATES ATTRIBUTION OF PR OFITS TO THE PE ON THE PRINCIPLES OF SEPARATE ENTITY APPROACH ARTI CLE 7(4) ALLOWS ATTRIBUTION OF PROFITS TO THE PE ON THE BASIS OF AP PORTIONMENT OF THE TOTAL PROFITS OF THE ENTERPRISE WITH THE REQUIR EMENT THAT THE METHOD OF APPORTIONMENT SHOULD BE IN ACCORDANCE WIT H THE PRINCIPLES CONTAINED IN ARTICLE 7. THE CONVENTION T HUS RECOGNIZES THAT PROFIT ATTRIBUTION CAN BE DONE EITH ER UNDER ARMS LENGTH ANALYSIS (RULE 10B) OR ON THE BASIS OF APPOR TIONMENT OF THE TOTAL PROFITS (RULE 10). E) THE REVISED ARTICLE 7 OF THE OECD MODEL CONVENTI ON WHICH SPEAKS OF TWO STEP ANALYSIS HAS NOT BEEN ACCEPTED N OT ONLY BY INDIA BUT EVEN BY SOME OF THE OECD MEMBER COUNTRIES AND HAVE EXPRESSED RESERVATION ON THIS. FURTHER TWO ST EP APPROACH IS PRESCRIBED MUCH LATER ON AND NOT APPLICABLE FOR RELEVANT YEARS. IN ANY CASE INDIA FOLLOWS UN MODEL CONVENTI ON AND AS MENTIONED ABOVE UN MODEL ALLOWS APPORTIONMENT OF T OTAL PROFITS. 18 IN VIEW OF THE ABOVE POSITION OF LAW IT IS HUMBLY SUBMITTED THAT AFTER REJECTING THE TP STUDY THE A.O. RIGHTLY RESORTED TO RULE 10 FOR ATTRIBUTING PROFITS TO THE PE. HE ALSO RIGHTLY HELD THAT SINCE INCOME OF THE FOREIGN COMPANY AS A WHOLE WAS BEING DETERMINED AND COMPOSITE ACTIVITIES (INCLUDING OFF SHORE SUPPLY) WERE PERFOR MED ITS INCOME FOR THE INDIAN OPERATIONS COULD NOT BE DEFINITELY ASCER TAINED AND HENCE RULE 10 WAS TO BE INVOLVED. WITHOUT PREJUDICE TO THE ABOVE IF THE HONBLE BENC H IS OF THE VIERW THAT THE PROFIT ATTRIBUTION SHOULD HAVE BEEN DONE U /S. 92 THEN THE MATTER MAY KINDLY BE REMANDED BACK TO THE A.O/TPO F OR DETERMINING THE ARM'S LENGTH PRICE UNDER THE PROVISIONS CONTAIN ED IN CHAPTER X OF THE ACT. 12. THE LEARNED COUNSEL FOR THE ASSESSEE IN REBUTTA L POINTED OUT THAT THERE IS NO PARALLEL REGIME OF RULE 10 AND SECTION 92. IT IS NOT THE CASE THAT THE ASSESSING OFFICER HAS THE DISCRETION TO APPLY EITHE R OF THE TWO. IF THIS PROPOSITION OF THE LEARNED DR IS TO BE ACCEPTED THE N IT WOULD NEGATE THE MANDATORY NATURE OF APPLICATION OF TP PROVISIONS WH ICH CLEARLY STIPULATE IN SECTION 92 THAT THE INCOME ARISING FROM INTERNATION AL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. A CCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE THERE IS NOTHING IN THE S TATUTE TO SUGGESTS THAT THE ASSESSING OFFICER HAS ANY DISCRETION IN THE MATTER. THE LANGUAGE OF RULE 10 ITSELF SUGGESTS THAT IT IS A RULE OF LAST RESORT AN D IS NOT AVAILABLE TO THE 19 ASSESSING OFFICER AS FIRST OR THE ALTERNATE OPTION PARTICULARLY WHEN THE MATTERS ARE TO BE GOVERNED BY ARTICLE 7(2) OF THE D TA READ WITH SEC. 92 OF THE INCOME-TAX ACT 1961. HE EMPHASIZED THAT THE AS SESSING OFFICER OUGHT TO HAVE DETERMINED ARM'S LENGTH PRICE BY ADOPTING T HE TRANSFER PRICING METHODOLOGY PRESCRIBED UNDER THE ACT AND USING ONE OF THE PRESCRIBED TRANSFER PRICING METHODS WHICH HAS BEEN ADOPTED BY THE ASSESSING OFFICER IN ALL SUBSEQUENT YEARS. THE CIRCULAR ISSUED BY THE CB DT BEARING NO.14 DATED 12.12.2001 IS ALSO CONTEMPLATES THAT TRANSACTIONS B ETWEEN FOREIGN ENTERPRISES AND ITS PE ARE SUBJECT TO TRANSFER PRIC ING. HE PRAYED THAT THE INCOME SHOWN BY THE ASSESSEE ON THE BASIS OF COST + 9% SHOULD BE ACCEPTED. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. THERE ARE CERTAIN ASPECTS ON WHICH THERE IS NO DISPUTE BETWEEN THE PARTIES. THE ASSESSEE HAS A PE WITHIN INDIA. THE I NCOME ATTRIBUTABLE TO THE PE AND ACCRUING FROM INDIA IS TAXABLE SUCH INCOME HAS TO BE DETERMINED ON THE BASIS OF ACTIVITIES CARRIED ON BY SUCH PE IN IN DIA. ACCORDING TO THE ASSESSEE ITS PROJECT OFFICE PROVIDES LIAISONING CO-ORDINATION ADMINISTRATIVE SUPPORT SERVICES TO ITS HEAD OFFICE IN CONNECTION WITH THE CONTRACT BEING EXECUTED IN INDIA. IT HAS UNDERTAKEN DETAILED TRANSFER PRICING STUDY WHICH CONTAINS FUNCTIONS PERFORMED ASSETS EM PLOYED AND RISK 20 ASSUMED ANALYSIS. ON THE BASIS OF THIS ANALYSIS TH E ASSESSEE HAS DETERMINED THE ARM'S LENGTH PRICE FOR THE ACTIVITIES CARRIED O N BY THE PROJECT OFFICE. THE INCOME OF THE ASSESSEE HAS TO BE DETERMINED EITHER ON THE BASIS OF DTAA BETWEEN INDIA AND KOREA OR ON THE BASIS OF THE INDI AN INCOME-TAX ACT 1961 WHICHEVER IS MORE FAVOURABLE TO THE ASSESSEE. BEFOR E ADVERTING TO THE FACTS WE WOULD LIKE TO TAKE NOTE OF ARTICLE 7 OF THE INDO KOREA TREATY WHICH READS AS UNDER: 'ARTICLE 7 - BUSINESS PROFITS - 1. THE PROFITS OF AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT STA TE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE C ARRIES ON BUSINESS AS AFORESAID THE PROFITS OF THE ENTERPRISE MAY BE TAXE D IN THE OTHER STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE TO THAT PER MANENT ESTABLISHMENT. 2. SUBJECT TO THE PROVISIONS OF PARAGRAPH (3) WHER E AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN THERE SHALL IN EACH CONTRACTING STATE BE ATTRIBUTED TO THAT PERMANENT E STABLISHMENT THE PROFITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DIS TINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIE S UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT. 3. IN THE DETERMINATION OF THE PROFITS OF A PERMANE NT ESTABLISHMENT THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE I NCURRED FOR THE PURPOSES OF THE PERMANENT ESTABLISHMENT INCLUDING E XECUTIVE AND GEN- ERAL ADMINISTRATIVE EXPENSES SO INCURRED WHETHER IN THE STATE IN WHICH THE 21 PERMANENT ESTABLISHMENT IS SITUATED OR ELSEWHERE W HICH ARE ALLOWED UNDER THE PROVISIONS OF THE DOMESTIC LAW OF THE CON TRACTING STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED. 4. NO PROFITS SHALL BE ATTRIBUTED TO A PERMANENT ES TABLISHMENT BY REASON OF THE MERE PURCHASE BY THAT PERMANENT ESTABLISHMENT O F GOODS OR MERCHANDISE FOR THE ENTERPRISE. 5. FOR THE PURPOSE OF THE PRECEDING PARAGRAPHS THE PROFITS TO BE ATTRIBUTED TO THE PERMANENT ESTABLISHMENT SHALL BE DETERMINED BY THE SAME METHOD YEAR BY YEAR UNLESS THERE IS GOOD AND SUFFICIENT RE ASON TO THE CONTRARY. 6. WHERE INCOME OR PROFITS INCLUDE ITEMS OF INCOME WHICH ARE DEALT WITH SEPARATELY IN OTHER ARTICLES OF THIS CONVENTION TH EN THE PROVISIONS OF THOSE ARTICLES SHALL NOT BE AFFECTED BY THE PROVISI ONS OF THIS ARTICLE.' 14. HON'BLE SUPREME COURT IN THE CASE OF HYUNDAI HE AVY INDUSTRIES HAS CONSIDERED THESE PROVISIONS. IN THIS CASE HON'BLE SUPREME COURT HAS FORMULATED THE QUESTION REQUIRED TO BE ANSWERED AND OBSERVED THAT ONE HAS TO DETERMINE WHAT ARE THE PROFITS REASONABLY ATTRIB UTED TO ASSESSEES PE IN INDIA. ACCORDING TO THE HON'BLE SUPREME COURT FOR ANSWERING THIS QUESTION THE SCHEME OF THE ACT IS REQUIRED TO BE ANALYSISED. THE HONBLE COURT HAS OBSERVED THAT UNDER SECTION 4 OF THE ACT IT IS TOT AL INCOME OF EVERY PERSON WHICH IS TAXABLE. A FOREIGN COMPANY WHICH IS NOT WH OLLY CONTROLLED OR MANAGED IN INDIA IS A NON-RESIDENT SO FAR AS ITS RE SIDENTIAL STATUS IS CONCERNED. SECTION 5(2) OF THE INCOME-TAX ACT 1961 LAYS DOWN THAT AS FAR AS 22 A NON-RESIDENT ASSESSEE IS CONCERNED THE SCOPE OF TOTAL INCOME OF SUCH AN ASSESSEE IS CONFINED TO THE INCOME WHICH ACCRUES OR ARISE IN INDIA OR IS DEEMED TO ACCRUE OR ARISE IN INDIA AND WHICH INCOME IS RECEIVED OR DEEMED TO BE RECEIVED BY SUCH FOREIGN COMPANY. THE CONJOIN T READING OF SECTIONS 4 AND 5 ACCORDING TO THE HON'BLE SUPREME COURT IS TH AT UNDER THE ACT THE TAXABLE UNIT IS A FOREIGN COMPANY AND NOT ITS BRANC H OR PE IN INDIA. A NON- RESIDENT ASSESSEE MAY HAVE SEVERAL INCOME ACCRUING OR ARISING TO IT IN INDIA OR OUTSIDE INDIA BUT SO FAR AS TAXABILITY UNDER SEC . 5(2) OF THE ACT IS CONCERNED IT IS RESTRICTED TO INCOMES WHICH ACCRUE OR ARISE OR WHICH DEEMED TO ACCRUE OR ARISE IN INDIA. THE SCOPE OF THIS DEEM ING FICTION IS PROVIDED IN SECTION 9 OF THE ACT THEREFORE AS FAR AS THE INCO ME ACCRUING OR ARISING IN INDIA INCOME WHICH ACCRUES OR ARISE TO A FOREIGN E NTERPRISES IN INDIA AND ONLY SUCH PORTION OF INCOME ACCRUING OR ARISING TO SUCH FOREIGN ENTERPRISES AS IS ATTRIBUTABLE TO ITS BUSINESS CARRIED OUT IN I NDIA. HONBLE COURT HAS FURTHER OBSERVED THAT THIS BUSINESS COULD BE CARRIE D OUT THROUGH ITS BRANCHES OR THROUGH SOME OTHER FORMATION OF ITS PRESENCE IN INDIA SUCH AS OFFICE PROJECT SITE FACTORY AS SALE AS OUTLET ETC. IT IS THEREFORE IMPORTANT TO NOTE THAT UNDER THE ACT WHILE THE TAXABLE SUBJECT IS FO REIGN GENERAL ENTERPRISES IT IS TAXABLE ONLY IN RESPECT OF THE INCOME INCLUDING BUSINESS PROFIT WHICH ACCRUES OR ARISE TO THAT FOREIGN GENERAL ENTERPRISE S IN INDIA. ACCORDING TO THE 23 HON'BLE SUPREME COURT THE ACT DOES NOT PROVIDE FOR TAXATION OF THE PE OF A FOREIGN ENTERPRISES EXCEPT TAXATION ON PRESUMPTIVE BASIS FOR CERTAIN TYPES OF INCOME SUCH AS THOSE MENTIONED UNDER SEC. 44BB 44B BA AND 44BBB. THUS THE INDIAN INCOME-TAX ACT 1961 IS CONCERNED ONLY WITH THE PROFITS EARNED IN INDIA AND THEREFORE A METHOD IS TO BE F OUND OUT TO ASCERTAIN THE PROFITS ARISING IN INDIA AND THE ONLY WAY TO DO SO IS BY TREATING THE INDIAN PE AS A SEPARATE PROFITS CENTRE VIS--VIS THE FOREIGN ENTERPRISES. BY ADOPTING THIS COURSE THE TAX AUTHORITIES CAN DETERMINE THE PROFI TS OF PE IN INDIA WHICH WOULD INDICATE THE INCOME ACCRUED OR ARISEN FROM TH E INDIAN OPERATIONS. THE COMPUTATION OF PROFITS IN EACH PE WOULD DECIDE THE QUANTUM OF INCOME ON WHICH THE SOURCE COUNTRY CAN LEVY TAX. HONBLE COUR T FURTHER OBSERVED THAT WHERE THERE IS A TAX TREATY BETWEEN BOTH THE STATES THEN TREATY WOULD APPLY IF IT IS MORE BENEFICIAL TO THE FOREIGN ENTERPRISES. 15. IN ORDER TO DETERMINE THE INCOME OF THE PE IN I NDIA IT IS WORTH TO MAKE REFERENCE TO THE STATUS OF SUCH INCOME ARISING FROM THIS CONTRACT TAXED IN DIFFERENT ASSESSMENT YEARS AS FOLLOWS: S.NO. ASST. YRS. TPO A.O. CIT(A) 1. 2002-03 TRANSACTION VALUE WAS LESS THAN THRESHOLD A.O. REJECTED THE METHOD OF INCOME ADOPTED BY UPHELD THE WORKING OF A.O. 24 LIMIT SO NO REFERENCE TO TPO. THE ASSESSEE AT COST+9% APPORTIONED THE INCOME UNDER RULE 10 OF THE GLOBAL PROFIT. 2. 2003-04 TRANSACTION VALUE WAS MORE BUT NO REFERENCE. -DO- -DO- 3. 2004-05 COST REFERENCE TO TPO TP ANALYSIS OF THE ASSESSEE ACCEPTED. A.O. MADE ADDITION BY TREATING INCOME OF COST CENTRE B- 4 B-5 AS ROYALTY AND CERTAIN OTHER ISSUES RELATED TO DOUBLE TAXATION. THOUGH REVERSED A.O.S ORDER AND DIRECTED THE A.O. TO FOLLOW METHODOLOGY ASSESSMENT YEARS 2002- 03 AND 2003- 04 4. 2005-06 -DO- WRITTEN INCOME COST PLUS METHODOLOGY ACCEPTED. -DO- 5. 2006-07 NO REFERENCE NO SCRUTINY ASSESSMENT NO REFERENCE NO SCRUTINY ASSESSMENT -DO- 6. 2007-08 REFERENCE TO TPO TP ANALYSIS OF ASSESSEE ACCEPTED. RETURNED INCOME AT COST+ METHODOLOGY ACCEPTED. -DO- 25 16. NOW THE QUESTION BEFORE US IS WHAT IS THE EVID ENCE POSSESSED BY THE ASSESSING OFFICER TO SAY THAT THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE IS NOT PROPER AND ITS TRANSACTIONS WITH TH E HO ARE NOT AT ARMS LENGTH. ASSESSING OFFICER HAS NOT ASSIGNED ANY REAS ON FOR THIS PURPOSE. IT IS TRUE THAT IF A REFERENCE TO THE TPO WAS NOT MADE FO R MAKING A TRANSFER PRICING ANALYSIS THEN ASSESSING OFFICER CAN MAKE IN DEPENDENTLY SUCH ANALYSIS BUT WITHOUT REJECTING THE TRANSFER PRICING STUDY CARRIED OUT BY THE ASSESSEE WITHOUT POINTING OUT ANY ERROR IN SUCH STU DY LEARNED ASSESSING OFFICER HAS JUMPED TO APPLY RULE 10. THIS RULE READ S AS UNDER: IN ANY CASE IN WHICH THE ASSESSING OFFICER IS OF O PINION THAT THE ACTUAL AMOUNT OF THE INCOME ACCRUING OR ARISING TO ANY NON-RESIDENT PERSON WHETHER DIRECTLY OR INDIRECTLY THROUGH OR F ROM ANY BUSINESS CONNECTION IN INDIA OR THROUGH OR FROM ANY PROPERTY IN INDIA OR THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN IN DIA IN CASH OR IN KIND CANNOT BE DEFINITELY ASCERTAINED THE AMOUNT OF SUCH INCOME FOR THE PURPOSES OF ASSESSMENT TO INCOME-TAX MAY BE CALCULATED:- (I) AT SUCH PERCENTAGE OF THE TURNOVER SO ACCRUING OR ARISING AS THE ASSESSING OFFICER MAY CONSIDER TO BE REASONABLE; (II) ON ANY AMOUNT WHICH BEARS THE SAME PROPORTION TO THE TOTAL PROFITS AND GAINS OF THE BUSINESS OF SUCH PERSON (SUCH PROFITS AND GAINS BEING COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF 26 THE ACT) AS THE RECEIPTS SO ACCRUING OR ARISING BEAR TO THE TOTAL RECEIPTS OF THE BUSINESS. (III) IN SUCH OTHER MANNER AS THE ASSESSING OFFICER MAY DEEM SUITABLE. 16. ON A PLAIN READING OF THIS RULE SUGGESTS THAT I T CAN BE APPLIED IN THE CASES WHERE INCOME ACCRUING OR ARISING TO ANY NON-R ESIDENT FROM ANY BUSINESS CONNECTION IS SUCH WHICH CANNOT BE DEFINIT ELY ASCERTAINED. IN THE PRESENT CASE ASSESSEE HAS SUBMITTED THE TRANSFER P RICING REPORT AND BUTTRESSED ITS CONTENTION WITH THE MATERIAL THAT IN COME SHOWN AT COST+9% IS AT ARMS LENGTH. LEARNED ASSESSING OFFICER NOWHERE POINTED OUT THAT INCOME CANNOT BE DEFINITELY ASCERTAINED ON THE BASIS OF TH E MATERIAL PLACED ON RECORD BY THE ASSESSEE AND THEREFORE HE IS COMPUTING THE INCOME UNDER RULE 10. SIMILARLY LEARNED CIT(APPEALS) HAS NOT ADJUDICATED THIS ISSUE RATHER SIMPLY OBSERVED ON PAGE 31 THAT NO PREJUDICE IS CAUSED TO THE ASSESSEE BY DETERMINING ITS INCOME UNDER RULE 10. TO SOME EXTEN T WE AGREE TO THE CONTENTIONS OF THE LEARNED DR THAT RULE 10 PROVIDES A MECHANISM FOR TAXING THE INCOME OF A PE UNDER RULE 10 ALSO BECAUSE ONCE A RULE IS IN EXISTENCE IN A STATUTE BOOK ITS EXISTENCE CANNOT BE DENIED. ONE HAS TO DETERMINE WHETHER THE CONDITIONS ENUMERATED IN THE RULES ARE AVAILABL E FOR ITS APPLICATION OR NOT. IN THE PRESENT CASE IF WE WEIGH THE PROCEDURE PROV IDED UNDER RULE 10 READ 27 WITH SECTION 9 VIS--VIS UNDER SEC. 92 TO 92F READ WITH RULES 10A TO 10E IN THE LIGHT OF TRANSFER PRICING STUDY CARRIED OUT BY THE ASSESSEE VIS--VIS ITS CONSISTENT STAND OF SHOWING INCOME FROM THIS ONE PR OJECT SPREAD OVER IN A NUMBER OF ASSESSMENT YEARS UNDER A PARTICULAR METHO D THEN THE SCALE WOULD TILT TOWARDS THE DETAILED METHOD PROVIDED UNDER SEC . 92 TO 92E READ WITH RULES 10A TO 10E FOR COMPUTING THE INCOME OF PE L IKE THE ASSESSEE. WE DO NOT HAVE ANY DISPUTE ABOUT THE PREPOSITION THAT IT IS THE ASSESSING OFFICER WHO HAS TO DETERMINE THE ULTIMATE INCOME OF THE ASS ESSEE AND RECOMMENDATIONS OF THE TPO ARE NOT BINDING UPON HIM . SIMILARLY IN A GIVEN CASE RULE 10 CAN BE APPLIED. BUT BEFORE THAT ASSES SING OFFICER HAS TO DEMONSTRATE THAT INCOME OF NON-RESIDENT ACCRUING OR ARISING FROM ANY BUSINESS CONNECTION IN INDIAN CANNOT BE DEFINITELY ASCERTAINED FROM THE ACCOUNTS OR FROM THE MATERIAL AVAILABLE ON THE RECO RD. FOR THE PRESENT ASSESSEE THE DEPARTMENT ITSELF HAS ACCEPTED THE ME THOD OF ASSESSEE IN A NUMBER OF YEARS. THE ASSESSING OFFICER HAS NOT POIN TED OUT AS TO HOW INCOME OF THE ASSESSEE CANNOT BE ASCERTAINED IN ASS ESSMENT YEAR 2002-03 AND 2003-04. SUB ARTICLE 5 OF ARTICLE 7 OF THE DTAA BETWEEN INDIA AND SOUTH KOREA PROVIDES THAT PROFITS ATTRIBUTABLE TO P E SHALL BE DETERMINED BY THE SAME METHOD YEAR BY YEAR UNLESS THERE IS GOOD A ND SUFFICIENT REASON TO THE CONTRARY. NO REASONS ARE ASSIGNED BY THE ASSESS ING OFFICER FOR ADOPTING 28 DIFFERENT METHOD FROM SAME SOURCE OF INCOME IN DIF FERENT YEARS. HE SIMPLY JUMPED TO APPLY RULE 10 WHICH IS NOT A RIGHT COURSE IN THIS CASE. IN VIEW OF THE ABOVE DISCUSSION WE HOLD THAT INCOME OF THE AS SESSEE BE COMPUTED AT COST+9% AS DECLARED BY IT AND ACCEPTED IN SUBSEQUE NT YEAR FROM THE SAME CONTRACT. 17. THE ABOVE DISCUSSION WILL TAKE CARE GROUNDS OF APPEALS FROM 1 TO 8. IN GROUND NO.9 THE ASSESSEE HAS CHALLENGED LEVY OF IN TEREST UNDER SEC. 234B OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE CONTE NDED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F HON'BLE UTTRANCHAL HIGH COURT RENDERED IN THE CASE OF CIT VS. SEDCO FOREX I NTERNATIONAL DRILLING REPORTED IN 264 ITR 320. HE FURTHER RELIED UPON THE DECISION OF THE ITAT RENDERED IN THE CASE OF SEDCO FOREX INTERNATIONAL D RILLING VS. DCIT REPORTED IN 72 ITD 415 AND UPON THE ORDER OF THE ITAT IN THE CASE OF ADIT VS. WESTERN GECO INTERNATIONAL LTD. REPORTED IN 21 SOT 549. LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE LEARNED CIT (APPEALS). WE FIND THAT THIS ISSUE HAS ALSO BEEN CONSIDERED BY THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MOTOROLA INC. REPORTED IN 95 ITD 269. IN AL L THESE DECISIONS REFERRED BY THE ASSESSEE IT HAS BEEN HELD THAT IN CASE OF A NON-RESIDENT WHERE ENTIRE INCOME IS SUBJECT TO WITHHOLDING TAX UNDER THE PROV ISIONS OF SEC. 195 OF THE ACT THEN ASSESSEE COULD NOT BE HELD TO HAVE COMMIT TED DEFAULT IN PAYMENT 29 OF ADVANCE-TAX AND CONSEQUENTLY IT WAS NOT LIABLE T O PAY INTEREST UNDER SEC. 234B OF THE ACT. LEARNED CIT(APPEALS) HAS TRIED TO DISTINGUISH THESE DECISIONS AND GAVE A DIFFERENT INTERPRETATIONS TO S ECTIONS 208 AND 209 OF THE ACT. HOWEVER CONSIDERING THESE JUDGMENTS OF THE HO N'BLE UTTRANCHAL HIGH COURT AND THE ORDER OF THE CO-ORDINATE BENCH WE AR E OF THE VIEW THAT LEARNED CIT(APPEALS) HAS NOT APPRECIATED THE PRINCI PLES LAID DOWN IN THESE DECISIONS IN RIGHT PERSPECTIVE. THE ASSESSEE IS NOT LIABLE TO PAY INTEREST UNDER SECTION 234B OF THE ACT. THIS GROUND OF APPEAL IS A LLOWED. 18. IN THE RESULT ALL THE APPEALS OF THE ASSESSEE ARE ALLOWED. DECISION PRONOUNCED IN THE OPEN COURT ON 27.07.201 2 SD/- SD/- ( K.D. RANJAN ) ( RAJPAL YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 27/07/2012 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR