Mumbai ITAT Reiterates: No Further Profit Attribution to Foreign Enterprise Once Indian AE Is Remunerated at Arm’s Length

UPS Asia Group Pte. Ltd. Vs ACIT (ITAT Mumbai)

Mumbai ITAT Reiterates: No Further Profit Attribution to Foreign Enterprise Once Indian AE Is Remunerated at Arm’s Length

The Mumbai ITAT held that no further profits can be attributed to a foreign enterprise’s alleged Permanent Establishment (PE) or business connection in India where its Indian Associated Enterprise (AE)/Dependent Agent PE has already been remunerated at an arm’s length price. Following its own decisions in the assessee’s earlier years, the Tribunal observed that once the Indian AE has been compensated on an arm’s length basis and no transfer pricing adjustment has been made, no additional income can be attributed to the foreign enterprise under section 9(1)(i) or the India–Singapore DTAA. Consequently, the questions regarding the existence of a business connection or Permanent Establishment were rendered merely academic, and the additions of ₹4.13 crore towards attributed profits were deleted.

The Tribunal also held that interest on income-tax refund received by the Singapore company was not effectively connected with the alleged PE in India and, therefore, was taxable under Article 11(2) of the India–Singapore DTAA, and not under the normal provisions of the Income-tax Act. Relying on the Special Bench decision in Clough Engineering Ltd. and the Mumbai Tribunal decision in Marubeni Corporation, it held that such interest is taxable at the treaty rate. Although an additional legal ground challenging the assessment as time-barred was admitted, the Tribunal declined to adjudicate it since the appeal had already been allowed on merits. Accordingly, the assessee’s appeal was allowed in full.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal emanating from the appellate order dated 28.11.2024 is preferred by the assessee out of final assessment order passed by ACIT 4(2)(1), Mumbai and the Hon’ble Dispute Resolution Panel-2, Mumbai (^„DRP’)pertaining to the assessment order passed u/s. 144C(13) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Year [A.Y.] 2022-23.

2. The grounds of appeal are as under:

“1. Annexure ‘A’-Grounds of Appeal before the Income Tax Appellate Tribunal, Mumbai

The grounds stated hereunder are independent of, and without prejudice to one another.

Ground No. 1 Erroneous conclusion of the Appellant constituting a ‘Business Connection’ under Section 9(1)(i) of the Income-tax Act, 1961 (the ‘Act’) and Permanent Establishment (‘PE’) under Article 5 of the India-Singapore Tax Treaty (‘Tax Treaty’) in India

1.1 On the facts and circumstances of the case and in law, the Assessing Officer (‘AO’) erred in concluding and the Dispute Resolution Panel (‘DRP’) erred in confirming that the Appellant has a Business Connection under Section 9(1)(1) of the Act and PE under Article 5 of the Tax Treaty in India due to the activities of UPS SCS (India) Private Limited (‘USIPL’) without appreciating that the Appellant operates entirely outside India and does not have any presence in India/carry out any operations in India.

1.2 The Appellant prays that the conclusion of Appellant having a Business Connection under Section 9(1)(i) of the Act and PE under Article 5 of the Tax Treaty is erroneous, unwarranted and should be deleted.

Ground No. 2 – Erroneous attribution of taxable income of Rs.4,13,14,903 to the alleged Business Connection under Section 9(1)(i) of the Act/PE under Article 5 of the Tax Treaty in India (this Ground is without prejudice to Ground No. 1)

2.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming the attribution of revenues / profits (55% of revenue in case of outbound consignments and 22.5% in case of inbound consignments as gross India taxable revenue) to the alleged Business Connection / PE in India without appreciating that the transactions between the Appellant and USIPL (the alleged Business Connection/PE) is at an arm’s length price.

2.2 The Appellant prays that the attribution of further revenue / profits to the alleged Business Connection/PE of the Appellant in India is erroneous, unwarranted and should be deleted.

Ground No. 3- Erroneous taxation of interest on Income-tax refund of Rs.29,35,010 as per the provisions of the Act

3.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming that the interest on Income-tax refund is taxable as per the normal provisions of the Act instead of Article 11(2)(b) of the Tax Treaty without appreciating that the interest on Income-tax refund is attributable to the Appellant and not to the alleged PE in India.

3. In this case, the return of income was filed by the assessee declaring total income of Rs.30,85,840/-. The case was selected for scrutiny under ‘CASS’ and the AO issued the draft assessment order proposing assessment of total income at Rs. 4,44,00,747/-. Aggrieved, the assessee filed objection before DRP on mainly three issues i.e. Business connection in India u/s 9(1)(i) of the Act; Existence of Permanent Establishment(PE) in India under Article 5 of Indo-Singapore Tax Treaty; Attribution of taxable income of Rs 4.13 cr. to the alleged connection in India and taxation of interest on Income Tax refund under the Act rather than under the aforesaid Treaty. The DRP rejected all the objections. Consequently, the assessment order was passed u/s 144C(13) of the Act determining on the proposed total income of Rs 4,44,00,747/-.

4. Before us, the ld.AR has contended that the assessee company incorporated under the laws of Singapore is engaged in the business of provision of Supply chain management including the provision of freight forwarding and logistics services. It is submitted that all the above grounds are recurring issues which have already been adjudicated by Hon^‟ble ITAT, Mumbai Bench in various assessment years in its own case and decided in its favour. It is stated that ground no.1 and 2 are squarely covered by ITA Nos.717/Mum/2017,7319/Mum/2018 and 663 1/Mum/2019 etc. It is stated that the AO wrongly Indian entity as PE and Dependent agent. In so far as the ground no.3 is concerned, it is again stated that the ground is covered by ITAT order in ITA No.4797/Mum/2023 dated 28.10.2024 for AY 2021-22.Theld.DR did not controvert the above claim of the ld.AR.

5. On careful consideration of all relevant facts of the case and the past precedents arising from the appellate orders passed by the coordinate bench of ITAT Mumbai(supra) in assessee^‟s own cases for last several years, we find that all the above grounds have already been adjudicated at length and stand decided in favour of the assessee. In this connection, we refer to its recently passed appellate order by the ITAT in AY 2021-22 in ITA No. 4797/Mum/2023where on identical facts and the circumstances, all the above grounds have been adjudicated in favour of the assessee. Relevant parts of the order are reproduced as below for the sake of brevity and clarity:

“This appeal by the assessee has been preferred against final assessment order dated 31.10.2023 passed by the Ld. Assistant Commissioner of Income-tax (International Taxation)-4(3)(1), Mumbai [in short ‘the Ld. Assessing Officer’] for assessment year 2021-22, pursuant to the direction of the Ld. Dispute Resolution UPS Asia Group Pte. Ltd. 2 Panel (DRP) dated 22.09.2023. The grounds raised by the assessee in its appeal are reproduced as under:

Ground No. 1 – Erroneous conclusion of the Appellant constituting a ‘Business Connection’ under Section 9(1)(i) of tax Act, 1961 (the ‘Act’) and Permanent the Income-tax India Singapore Establishment (PE’) under Article 5 of the India-Singapore Tax Treaty (Tax Treaty’) in India

1.1 On the facts and circumstances of the case and in law, the Assessing Officer (‘AO’) erred in concluding and the Dispute nel (‘DRP’) erred in confirming that the Appellant has a Resolution Panel Business Connection under Section 9(1)i) of the Act and PE under Article 5 of the Tax Treaty in India due to the activities of UPS SCS (India) Private Limited (*USIPL’) without appreciating that the Appellant operates entirely outside India and does not have any presence in India / carry out any operations in India.

1.2 The Appellant prays that the conclusion of Appellant having a Business Connection under Section 9(1)(i) of the Act and PE under le 5 of the Tax Treaty is erroneous, unwarranted and should Article be deleted.

Ground No. 2 – Erroneous attribution of taxable income of Rs.1,46,69,018 to the alleged Business Connection under Section 9(1)i) of the Act / PE under Article 5 of the Tax Treaty in India

2.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming the attribution of revenues / profits (55% of revenue in case of outbound nts and 22.5% in case of inbound consignments as gross consignments India taxable revenue) to the alleged Business Connection / PE without appreciating that the transactions between the Appellant and USIPL (the alleged Business Connection / PE) is at an arm’s length price.

2.2 The Appellant prays that the attribution of further revenue / profits to the alleged Business Connection / PE of the Appellant in India is erroneous, unwarranted and should be deleted

Ground No. 3 – Erroneous taxation of interest on Income-tax Income und of Rs.51,46,211 as per the provisions of the Act refund

3.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming that the Income tax refund is taxable as per the normal interest on Income-tax provisions of the Act instead of Article 11(2)(b) of the Tax Treaty without appreciating that the interest on Income tax refund is Income-tax attributable to the Appellant and not to the alleged PE in India.

2. Briefly stated facts of the case are that the assessee is a company incorporated under the laws of Singapore and is engaged in the business of provision of supply chain management, including the provision of freight forwarding and logistics services. For the year under consideration, the assessee filed return of income on 15.03.2022 declaring total income at Rs.52,93,600/-.The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Act were issued and complied with. The assessee had entered into an original transport service agreement w.e.f. 01.01.2012 with Indian A Associated Enterprises (AE) namely UPS, SCS (India) Pvt. Ltd. for the provision of freight (India) and logistics services under the transportation agreement. Under the transport agreement, the assessee arranged to perform international freight transportation through the Ocean Liner/Airlines and provide overseas support services, services while the freight and logistics service in India to its Indian AE performed Indian customers and to the assessee. The service agreement was slightly modified in relation to assessment year under consideration.

2.1 During the course of the assessment proceedings, the assessee was asked to explain as why the Indian AE should not treated as business connection of the assessee in India u/s 9(1)(i) of the Act and profit be attributed thereto in the relevant assessment year. In the draft assessment order dated 20.12.2022, the Assessing Officer held that assessee had a business connection in India u/s 9(1)(i) of the Act in the form of its Indian AE, thus, its business income, income attributable to the operation in India is taxable in India. The Assessing Officer further held that the Indian AE of the assessee constitute Permanent Establishment (PE) in India within the India Singapore DTAA. The meaning of Article 5(1), 5(2), 5(8) of the India-Singapore Assessing Officer, accordingly, lier years assessments accordingly following earlier orders, attributed 55% of the revenue in respect outbound transaction amounting Rs.4,28,63,752/- and 25% of the revenue from Rs.28,75,19,543/-and Rs.33,03,83,295/- as attributable to the applying global profitability rate of 4.4% computed profit of Rs.1,46,69,018/- and was added in the hands of the assessee. The Assessing Officer also held that interest received on the Income-tax Income refund was taxable at the normal rats i.e. taxable @ 40% along with applicable surcharge and cess instead of claim of the assessee of taxability @ 15% % as per article 11(2) of the India Singapore DTAA. objection against the draft assessment order The assessee filed objections before the Ld. DRP,, however could not succeed. Aggrieved, the assessee is in appeal before the Tribunal by way of raising grounds as reproduced above.

3. Before us, the Ld. counsel for the assessee submitted that the ground No. 2 of the appeal in relation to attribution of the profit to the he assessee has been held in favour of the assessee by the Tribunal in earlier years and therefore the issue of whether there is permanent establishment of the assessee in India, India is merely academic.

4. We have heard rival submission of the parties and perused the relevant materials on record. The ld DR has referred to slight change in the service agreement in the year under consideration but, in our opinion that might be relevant for determination of existence of PE, but as far as issue of attribution of the profit in case of assessee is concerned same is not relevant, because the AO has treated the Indian AE as an dependable agent permanent establishment (DAPE)and said agent has been remunerated on arm’s length value and no adjustment had been made by the TPO in the case of DAPE, then no further attribution of the profit is required in the case of the assessee. This principle has been followed in the case of the assessee by the Tribunal in ITA No. 7171/Mum/2017, 7319/Mum/2018 and 6631/Mum/2019 for assessment nt years 2013-14 2013 hereafter in ITA No. to 2015-16. Thereafter 2017 18 and in ITA No. 2243 1220/Mum/2021 for assessment year 2017-18 & 2244/Mum/2022 for assessment years 2018 19 and 2019 2018-19 2019-2020 also this ratio has been followed and it is held that since, the Indian AE which has been held to be dependable agent permanent establishment, has been remunerated at arm’s length price, price hence no further attribution of profit is required in the case of the assessee. We are of the opinion that unless any activities or the assessee with Indian AE i.e. DAPE, other than transaction of the transactions which are covered by the transfer pricing study are observed by the AO and no adjustment had been made by the TPO, then no further profit can be attributed to the Indian entity which has been held to be DAPE by the AO. The issue whether the attribution by the AO is accordingly deleted. The Indian entity is permanent establishment of the assessee is therefore, merely rendered academic. The ground No. 2 of the assessee is accordingly allowed in favour of the appeal of the assessee and ground No. 1of the appeal of the assessee is rendered academic and therefore we are not adjudicating upon.

5. The ground No. 3 of the appeal relates to the taxation of interest on income-tax refund of Rs,51,46,211/-. The brief facts qua the issue in dispute are that assessee received interest on income Rs.51,46,211/- which was offered to tax @ 15% of India-Singapore Tax Treaty. But according to the Assessing was not qualified for the benefit of the 15% tax Officer, the assessee income tax refund and should have been rate on the interest of the income-tax Act and should have taxed as per the normal provisions of the income-tax AO held that as per the para 4 of the Article of DTAA between India Indi and Singapore, 15% tax of the interest income cannot be given if the interest arises through PE in the contracting state. According to the Assessing Officer, the assessee had DAPE in India and only source of income as trademark/technical assistance fees from USPIL. Therefore, interest income received from the Income-tax Income Department arises through DAPE in India and thus taxable as per the normal provisions of the Act. The Ld. DRP also upheld the finding of the Assessing Officer.

5.1 the Before us, the Ld. counsel decision of the Co-ordinate ordinate Bench of the Tribunal in the case of ACIT v. Clough Engineering Ltd. [2011] 11 taxmann.com 70 (Delhi) (SB) and Co-ordinate ordinate Bench Tribunal in the case of Dy. CIT v.139 taxmann.com 367 (Mumbai-Marubeni Corporation [2022] 139 (Mumbai Trib.).

5.2 We have heard rival submission of the parties and perused the relevant material on record. The issue of interest arising from the Income-tax tax refund has been dealt by the Co ordinate Bench of the Co-ordinate Tribunal in the case of the Clough Engineering Ltd. (supra) and held that such interest was not effectively connected with the PE either on the basis of asset test or activities test and therefore, it was taxable under paragraph 2 of the Article 11 of the DTAA. The relevant finding of the tribunal is reproduced as under:

“11.4 Thus, we are again left with the fundamental question as to whether the debt claim in this case can be said to be effectively debt-claim connected with the PE. We have already held that the claim is connected with the PE in the sense that it has arisen on account of tax the deduction at source from the receipts of the PE. However, it is also a fact that payment of tax is the responsibility of the foreign company. The same is determined after computation of its income and the tax forms not an expenditure for earning the income but an item of appropriation of profit. Therefore, even if the debt is connected with the receipts of the PE, it cannot be said to be effectively connected with responsibility to pay the tax lies on the such receipts because the responsibility shoulders of the assessee company from the final profit ascertained assessee-company as on the last date of the previous year and on closing the books of account. It is for the company to pay the tax from any source available happened in this case that the tax got automatically with it. It so happened deducted from the receipts of the PE by operation of law. Such collection of tax by force of law would not establish effective connection of the indebtedness with the PE as ultimately it is only the profit of the assessee company. However, we may appropriation add that we do not venture to say that the interest income has to be necessarily business income in nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant. Thus, there may be cases where interest may be taxable under the Act under the residuary head and yet be effectively connected with the PE. The bank interest in this connection between the PE and the case is an example of effective connection income as the indebtedness is closely connected with the funds of the PE. However, the same cannot be said in respect of interest on income-income tax refund. Such interest is not effectively connected with PE either on the basis of asset test. Accordingly, it is held that this asset-test or activity-test part of interest is taxable under paragraph No. 2 of Article XI. Thus, the ground referred to the Special Bench is partly allowed. The Division Bench shall dispose of the appeal in conformity with this order.”

5.3 Further in the case of Marubeni Corporation (supra), the Tribunal held that unless the interest is connected with the permanent establishment it has to be taxed under Article 11(2) of DTAA. The Article 7 of DTAA comes into play only when the interest income is directly or indirectly attributable to its PE. Respectfully following the finding of the Special Bench of the Tribunal in the (supra), the interest received on case of Clough Engineering Ltd. (supra) income-tax held to be not connected with the PE. Accordingly, we set aside the finding of the Assessing Officer and hold income tax refund is not ld that interest received on the income-tax effectively connected with the PE and to be taxed as per Article 11(2) of the DTAA between India and Singapore. The ground No. 3 of the appeal is accordingly allowed.”

6. Respectfully following the above orders and in the light of identical facts and circumstances involved which remained uncontroverted by the ld. DR, we allow all the above grounds 1 to 3.

7.Additional ground

Ground no.4-Assesment order is time barred

4.1 On the facts and the circumstances of the case and in law the assessment order dated 23 December 2024 passed by the Assessing Officer under section 143(30 r.w.s.is barred by the limitation as per the provisions of section 153 of the Act and therefore, be struck down and annulled.

8. In this connection, it is submitted that the admission and adjudication of the additional ground would be essential for due dispensation of substantial justice. The additional ground would not require any fresh investigation into facts. It was requested to exercise the powers provided in Rule 11 of the ITAT Rules and admit the additional ground of appeal. In this context, reliance was placed on Jute Corpn. of India Ltd. v. CIT (1991) 187 ITR 688 (SC),National Thermal Power Co. Ltd v. CIT (1998) 229 ITR 383 (SC) etc.

9. The ground being legal in nature requiring no further investigation of facts is hereby admitted by us in view of settled law in this regard by way of decisions of Hon”ble Supreme Court(supra).

10. However, as we already allowed the appeal of the assessee on merits in the preceding paras, we do not find any reason to adjudicate the additional ground which as per the request of the ld.AR is left open.

11. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 24/06/2026.