No Profit can be Attributed if Commission Paid  to Ricardo India is Adjusted Against Profit Attributed to PE: Delhi HC [Read Order]

In a landmark decision, the Delhi High Court has ruled that no additional profit can be attributed to the Permanent Establishment (PE) of a UK-based company operating in India when adjusting the commission paid to its domestic subsidiary, Ricardo India Pvt. Ltd.

The appellant, the revenue department, sought to challenge the order dated 17.02.2021 passed by the Income Tax Appellate Tribunal (ITAT), which had a profound impact on the tax liability of the UK company operating in India.

The respondent, a UK-incorporated company engaged in providing testing services for automobile transmission systems, argued that its income from Indian clients was not taxable. However, the Assessing Officer (AO) concluded that the company had a Permanent Establishment (PE) in India through its subsidiary, Ricardo India Pvt. Ltd.

In a detailed hearing, the company appealed to the Commissioner of Income Tax (Appeals) and subsequently to the ITAT. The central issues included the attribution of profits at a rate of 50% to the Indian center, which the company deemed excessive, and an alternative plea regarding adequate compensation on an Arm's Length basis.

The ITAT, taking note of various legal precedents, ruled in favor of the respondent. It emphasized that reducing the commission/remuneration paid to Ricardo India Pvt. Ltd. from the profit attributed to the PE would eliminate any further taxable income.

Referring to established case law, including judgments such as DIT v. Morgan Stanley & Co. Inc. and E-Funds IT Solution Inc. v. DIT, the ITAT asserted that the addition made by the AO and confirmed by the CIT(A) was not sustainable in the eyes of the law.

The Tribunal's finding of fact, stating that no substantial question of law arises for consideration, led to the conclusion that no further profit could be attributed if the commission/remuneration paid to Ricardo India Pvt. Ltd. was adjusted against the profit attributed to the PE.

During the proceedings, the counsel for the UK-based company contended that the attribution of 50% of business profits to its Permanent Establishment (PE) in India was both unreasonable and excessive. The counsel put forth an alternative argument, maintaining that the company had been adequately compensated at arm's length and, therefore, no further profit attribution was justified. In support of this stance, reference was made to legal precedents such as DIT v. Morgan Stanley & Co. Inc., E-Funds IT Solution Inc. v. DIT, and DIT v. Honda Motors Co. Ltd.

A Division Bench of the Delhi High Court comprising Justices Rajiv Shakdher and Girish Kathpalia observed that the contentions presented by the counsel were valid and relied on the Tribunal's finding of fact that reducing the commission paid to the domestic subsidiary, Ricardo India Pvt. Ltd., from the profit attributed to the PE rendered no taxable income in the hands of the PE. Consequently, the court affirmed that the addition made by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals) was not sustainable in the eyes of the law, leading to the allowance of all appeals filed by the assessee.

In light of these considerations, Delhi HC ruled in favour of assessee, leading to the closure of the appeal. The judgment sets a precedent, providing clarity on the attribution of profits for international companies with a PE in India, potentially impacting similar cases in the future.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates