Bengaluru Income Tax Appellate Tribunal Define New Ratio on Permanent Establishment

Bengaluru Income Tax Appellate Tribunal Define New Ratio on Permanent Establishment

The Bengaluru Bench of Income-tax Appellate Tribunal (ITAT), in the case of Arrow Electronic India Limited (Liaison office) (the taxpayer), has held that where the Liaison Office (LO) of the multinational company carries out activities which are not in the nature of ‘preparatory and auxiliary’ constitutes a Permanent Establishment (PE). The Tribunal ruled in favour of the Revenue on 40 per cent profit attribution to Indian operations of the taxpayer, however, restricts the Transfer Pricing adjustment to 40 per cent of net sales, so attributed.

Stated that the taxpayer had filed returns u/s 148 for its LO, declaring income on the basis of cost plus mark-up basis, the Tribunal holds that taxpayer itself has admitted to income having arisen in India from LO operations and the indirect existence of PE. The Tribunal upheld the attribution of profits (40 per cent) undertaken by the Assessing Officer (AO) by considering sectoral weightage of 50:25:25 for functions performed, assets employed and risks involved and a further intra-sectoral ratio of 70:30 for functions and 10:90 each towards assets and risks between Head Office (HO) and LO. In addition, by acknowledging the requirement for working capital adjustment while arriving at the arm’s length price the Tribunal upheld the grant of working capital adjustment by CIT (Appeals).

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