ATTRIBUTION OF PROFITS TO PE
1. Section 9(1)(i) – clause (a) of Explanation – profits reasonably attributable to operations carried out in India taxable in India.
a. Carborandum Co. v. CIT 108 ITR 335 (SC) – Onus is on the revenue to prove existence of operations in India;
b. CIT v. Toshuku Ltd 125 ITR 525 (SC) – If no operations are carried in India, deeming concept cannot apply.
2. Rule 10 – If profits cannot be definitely ascertained, AO may calculate as follows:
a. As a reasonable percentage of turnover;
b. Total profits in the ratio of Indian receipts to total receipts;
c. Such other manner as the AO may deem suitable.
3. Once a method is selected u/r 10, reassessment cannot be made merely because other method gives higher profits – 105 ITR 212 (SC), 180 ITR 442 (Cal), 180 ITR 47 (Cal).
4. Proportionate profits ratio – can go business wise – observations in 141 ITR 69 (Bom)
5. CIT v. Saudi Arabian Airlines 155 ITR 65 (Bom) – where Rule 10(ii) is applied, limitation on allowance of HO expenses provided in section 44C cannot be applied.
6. Article 7.2 of DTAA – Profits attributable to the PE is chargeable. Such profits are to be computed as if:
a. PE were a distinct and separate enterprise;
b. Engaged in same or similar activities;
c. Under the same or similar conditions; and
d. Dealing wholly independently with the FE of which it is a PE.
7. Under Article 7.2 only those profits which have “economic nexus” with the PE in India are taxed in India – CIT v. Morgan Stanley 292 ITR 416, 442 (SC).
8. Transfer Pricing Analysis – FAR analysis – equally applicable for computation of profits attributable to PE. – 292 ITR 416 (SC)
9. Arms length profits are not real profits but are hypothetical profits that are taxed – DCIT v. Roxon 291 ITR 275, 103 TTJ 891 (Mum)
10. Accounting principles would be equally relevant for determining the starting point of computation of profits attributable to PE. Appropriate adjustments may be made thereto for incorporating the ALP principles. – CIT v. Hyundai Heavy Industries Co. 291 ITR 482 (SC)
11. Transfer of inventory:
a. From HO outside India to PE in India
ALP of inventory to be considered for determining the profits of the Indian PE
b. From PE in India to HO outside India
ALP of inventory to be considered for determining the profits of the Indian PE
c. From HO in India to PE outside India
Consolidated profits taxed in India (barring exceptions). Hence internal transactions to be eliminated. As a result, profits taxed in India could be more than the profits taxed in the country of PE. Issues on tax credit?
d. From PE outside India to HO in India
Consolidated profits taxed in India (barring exceptions). Hence internal transactions to be eliminated. As a result, profits taxed in India could be more than the profits taxed in the country of PE. Issues on tax credit?
12. Transfer of capital equipments
a. From HO outside India to PE in India
Actual Cost for depreciation as per Explanation 11 to section 43(1)
b. From PE in India to HO outside India
Should the PE reduce the WDV on the basis of ALP of the equipments transferred? Is such transfer liable to capital gains?
c. From HO in India to PE outside India
Consolidated profits taxed in India (barring exceptions). Hence internal transactions to be eliminated. The same block continues.
d. From PE outside India to HO in India
Consolidated profits taxed in India (barring exceptions). Hence internal transactions to be eliminated. As a result, same block continues.
13. Under Article 7.3 of UN Model, following deductions are allowable in computing the profits attributable to a PE:
a. Expenses incurred for the purposes of the business of the PE;
b. Executive and General Administrative expenses; (a & b allowed irrespective of place where the expenses are incurred). Some DTAAs – “subject to the limitations under the domestic laws”.
c. Expenses specifically incurred for the PE cannot be regarded as General Administrative Expenses & hence should be allowed in full - 19 ITD 793, 262 ITR 55.
d. Royalties, fees or other similar payments for use of IPRs not allowed (except reimbursement of actual expenses);
e. Commission, Management fees not allowed (except reimbursement of actual expenses);
f. Interest on moneys lent (except banks) not allowed;
14. Agency PE:
a. If the Agent is remunerated on an ALP basis, nothing further survives to be attributed to the PE to be taxed in the hands of the foreign enterprise:
i. 292 ITR 416 (SC);
ii. SET Setellite (Singapore) Pte Ltd v. DDIT (Bom)
iii. Circular 23 of 23-7-1969 since rescinded by Circular No. 9 of 2009 dated October 22, 2009.
iv. OECD Report (2006) on Attribution of Profits to PE – there could be profits attributable to PE even after deduction of an ALP reward for the agent.
15. Past unabsorbed losses of the PE in State S already set off against profits of the HO in State R – Q: Whether such losses should be allowed against future profits of the PE in State S? – DCIT v. Patni Computers 109 TTJ 742 (Pune) & Van Oord Dredging v. DDIT 105 ITD 97 (Mum).
