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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