Wednesday, 30 May 2018

ITAT : Daikin's Indian subsidiary constitutes DAPE; Attributes profits, TP-analysis not adequately reflecting FAR

Delhi ITAT rules that the wholly owned Indian subsidiary of Daikin Industries Ltd. (assessee, a Japanese company), constitutes assessee’s dependent agent PE for AY 2006-07; Holds that the entire activities of identifying customers, negotiating and finalizing prices with customers in India etc. were done by DAIPL (Indian subsidiary) not only for the products sold as distributor, but also for which assessee claimed to have made direct sales in India; Acknowledging the tremendous efforts required for effecting sale in highly competitive industry of air-conditioning and refrigeration equipments, ITAT remarks that “We fail to comprehend as to how the assessee came in contact with customers in India and made sales to them directly, when DAIPL, situated in India, had to spend a huge amount of selling and distribution expenses (of Rs. 14.38 cr.) for selling similar products in India.”; Thus, rejects assessee’s stand that DAIPL was acting only as a communication channel for its direct sales, considering assessee's failure to demonstrate its direct involvement from Japan in making sales to Indian customers and e-mails exchanged between assessee and DAIPL demonstrating that DAIPL was negotiating and finalizing deals with Indian customers; ITAT then rejects assessee’s argument that since TPO had considered the international transaction of commission paid by assessee to DAIPL for market support services to be at ALP in case of DAIPL, no further income could have been attributed to assessee's operations in India; Notes that assessee had neither reported any international transaction in Form 3CEB nor conducted any benchmarking exercise, further, the benchmarking of commission for DAIPL was done only with respect to 2 functions [forwarding customers’ request to assessee and forwarding assessee’s quotations to the customers] and thus, other functions performed (negotiating and finalizing contracts on behalf of assessee) remained excluded from the process of ALP-determination; Also lays down that ratio decidendi of Morgan Stanley ruling would not apply and assessee’s case would fall within the exception laid down by SC [i.e. if TP-analysis does not adequately reflect FAR of the enterprise, there would be a need to attribute profits to the PE for those functions/risks not considered]; On attribution of profits to PE, ITAT upholds 10% net profit rate as reasonable and then determine net profit attributable to the marketing activities in India at 30% of the net profit so determined at 10% of sales in India:ITAT

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