No Profit Attribution if Ricardo India’s Commission Adjusted: Delhi HC

CIT (International Taxation) Vs Ricardo U.K. Limited (Delhi High Court)

Introduction: The recent judgment by the Delhi High Court in CIT (International Taxation) vs Ricardo U.K. Limited sheds light on the intricate matter of profit attribution concerning Permanent Establishment (PE). This article provides an in-depth analysis of the case, unraveling the key aspects and implications of the court’s decision.

Detailed Analysis

1. Background and Assessment Year: The appeal, centered around the Assessment Year 2016-17, involves the appellant/revenue challenging the Income Tax Appellate Tribunal’s order dated 17.02.2021.

2. Assessee and Business Operations: Ricardo U.K. Limited, a UK-based company, operates as a tax resident under the India-UK Double Taxation Avoidance Agreement. The core business involves providing testing services for automobile transmission systems at its U.K. centers.

3. Tax Declaration and Permanent Establishment (PE): The assessee declared its income as “nil,” asserting that income from Indian clients was non-taxable. The Assessing Officer (AO), however, concluded that the assessee had a PE in India through its subsidiary, Ricardo India Pvt. Ltd. The AO attributed 50% of business profits based on a global profit ratio.

4. Appeal and Tribunal’s Considerations: The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO’s view. The subsequent appeal to the Tribunal brought forth two primary arguments. Firstly, the attribution of profits at 50% to the Indian center was deemed unreasonable. Secondly, the alternative plea argued that reducing the commission paid to the assessee should negate further attribution.

5. Tribunal’s Findings and Supporting References: The Tribunal, analyzing the profits attributed to PE and commission paid on an Arm’s Length basis, noted a consistent pattern across assessment years. The finding of fact was that if the commission paid to Ricardo India was deducted from PE profits, no taxable income remained.

6. Legal Precedents and Tribunal’s Decision: The Tribunal referenced judgments, including those of the Supreme Court, supporting the principle that reducing commission from attributed profits precludes additional attribution. The Tribunal, aligning with its earlier decisions, ruled in favor of the assessee, emphasizing that no taxable income was left in the hands of PE after adjusting the commission.

7. High Court’s Stand and Conclusion: The Delhi High Court, respecting the Tribunal’s factual findings, declined interference. The court held that no substantial question of law arose, affirming the deletion of additions made by the AO and CIT(A). The appeal was accordingly closed.

Conclusion

The Delhi High Court’s decision in CIT vs Ricardo U.K. Limited underscores the significance of adjusting commissions against profits attributed to Permanent Establishments. The court’s alignment with established legal precedents reinforces the principle that reasonable compensation, on an Arm’s Length basis, should be a determining factor in profit attribution. This analysis provides insights into the complexities of international taxation, PE, and the pivotal role of commissions in preventing unwarranted tax burdens.

FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT

1. This appeal concerns Assessment Year (AY) 2016-17.

2. Via the instant appeal, the appellant/revenue seeks to assail the order dated 17.02.2021 passed by the Income Tax Appellate Tribunal [in short, “Tribunal”].

3. To adjudicate upon the instant appeal, the following broad facts are required to be noticed:

4. The respondent/assessee is a company which was incorporated under the laws of United Kingdom (UK). The respondent/assessee is a tax resident of UK, in terms of Article 4 of the India and UK Double Taxation Avoidance Agreement [in short, “DTAA”].

5. The core business of the respondent/assessee concerns providing testing services to its clients, concerning transmission systems designed for automobiles at its centers located in U.K.

6. In the period in issue, the respondent/assessee had filed its Return of Income (ROI) in which it declared its income as “nil”. The stand taken by the respondent/assessee was that the income earned by it from customers located in India was not taxable.

7. The record shows that the Assessing Officer (AO) concluded that the respondent/assessee had a Permanent Establishment (PE) in India in the form of its subsidiary, i.e., Ricardo India Pvt. Ltd. [hereafter referred to as “Ricardo India”].

8. Based on this, the AO proceeded to attribute 50% of the business profits by applying the global profit ratio.

9. The respondent/assessee being aggrieved, carried the matter in appeal to the Commissioner of Income Tax (Appeals) [in short, “CIT(A)”]. The CIT(A), however, sustained the view taken by the AO.

10. It is in this background that the respondent/assessee preferred an appeal with the Tribunal. Before the Tribunal, the respondent/assessee had, inter alia, expanded two submissions.

10. First, that the attribution of profits at the rate of 50% to the India centre was unreasonable and excessive.

11. Second [which was an alternative plea made without prejudice to the first submission] that the respondent/assessee had been adequately compensated/remunerated on an Arm’s Length basis.

11.1 In other words, the argument was that if the commission/remuneration paid to the assessee is reduced from the profits attributed to the PE, no further attribution could be made.

11.2  In support of this plea, reference was, inter alia, made to the following judgments:

(i) BIT v. Morgan Stanley & Co. Inc., 292 ITR 416 (SC).

(ii) E-Funds IT Solution Inc. v. BIT, 399 ITR 34 (SC).

(iii) BIT v. Honda Motors Co. Ltd., 255 taxman 72 (SC).

12. As far as the second issue is concerned, the Tribunal made note of the following information furnished on behalf of the respondent/assessee with regard to the profits attributed to the PE in the AY in issue and those that preceded the same and the commission/remuneration paid to it on Arm’s Length basis:

13. The record shows that the Tribunal has returned a finding of fact that the respondent/assessee does not dispute that it had a fixed place PE in India in the form of Ricardo India.

14. Inter alia, what persuaded the Tribunal to rule in favour of the respondent/assessee is the other aspect which was that if the commission/remuneration paid to Ricardo India was reduced from the profit attributed to the PE, then no further attribution could have been made. 1 In this regard, the following finding of fact returned by the Tribunal being apposite is extracted hereafter:

“15. So, we are of the considered view that when we deduct commission/remuneration from, the RIPL from the profits attributed to the PE, no taxable income left in the hands of PE. Consequently, addition made by the A O/CIT (A) is not sustainable in the eyes of law.

16. Decision rendered by the coordinate Bench of the Tribunal in case of Amadeus Global Travel Distribution S.A. (supra), affirmed by the Hon’ble Delhi High Court, by relying upon the decision in case of DIT vs. Galileo International Inc. (supra) has been further followed by the coordinate Bench of the Tribunal in assessee’s own case bearing ITA No.4906/Del/2010 for AY 2007-08 vide order dated 26.10.2020.

17. In view of what has been discussed above, we are of the considered view that when RIPL, a domestic subsidiary company, has already been warranted. Even otherwise by following the order passed by the coordinate Bench of the Tribunal in assessee’s own case for AY 2007-08 (supra), when we deduct the remuneration/commission paid to RIPL from the amounts of profit attributed to the PE as detailed in para 11 of this order, no taxable income left in the hands of the PE. Consequently, additions made by the AO and confirmed by ld. CIT(A) are ordered to be deleted being not sustainable in the eyes of law. Consequently, all the appeals filed by the assessee are hereby allowed.”

15. Given the finding of fact returned by the Tribunal that no further profit could be attributed if commission/remuneration paid to Ricardo India is adjusted against the profit attributed to the PE, we are not inclined to interfere with the impugned order.

16. According to us, no substantial question of law arises for our consideration.

17. The appeal is, accordingly, closed.

18. Consequently, the pending application shall also.