The adoption methodology of the taxable income is a dispute, which has to be decided first by the Dispute Resolution Panel and thereafter, to issue direction to the Assessing Officer to complete the assessment as contemplated under Section 144C(5). After all, it is the draft assessment order placed before the Dispute Resolution Panel and thus a suitable direction issued by the Panel would bind the Assessing Officer.

JUDGMENT :

(Prayer: Writ petition filed under Article 226 of the Constitution of India for issuance of a writ of Certiorari to call for the records comprised in the impugned draft assessment order passed by the respondent under Section 143(3) read with Section 144C(1) of the Income Tax, 1961 for Assessment Year 2016-17 in PAN: AABCE3484E dated December 31, 2018 and quash the same.)

The challenge made in this writ petition is against the draft assessment order passed under Section 143(3) read with Section 144C(1) of the Income Tax, 1961 for Assessment Year 2016-17 dated 31.12.2018.

2. The case of the petitioner is as follows:

(a) The Petitioner Company operates as an Indian Branch office of EOS GmbH Electro Optical Systems, Germany ('EOS Germany' or 'Head Office'). The petitioner is a Permanent Establishment of EOS Germany in India as per the Act and India-Germany Double Tax Avoidance Agreement ('DTAA'). The petitioner is engaged in the business of rendering agency support services along with technical support services to EOS Germany.

(b) The petitioner filed its return of income as a Permanent Establishment in India under Section 139 of the Act for the assessment year 2016-17 on 30.11.2016. The international transaction of the petitioner with its Head Office was duly reported in the Accountant's Report in Form 3CEB filed in accordance with the provisions of Indian Transfer Pricing Regulations contained in Sections 92, 92A to 92F of the Act. In the TP documentation, the petitioner conducted a detailed analysis of the Functions, Assets and Risks ('FAR') of the petitioner and its Head Office and Transactional Net Margin Method ('TNMM') for testing the arm's length results of the petitioner's international transaction. Based on the said TP analysis, the profit earned by the petitioner was found to be at arm's length as per the applicable TP regulations having regard to the FAR undertaken by the petitioner in its operations and the margins earned by the comparable companies found on the basis of the detailed benchmarking analysis. The income declared by the petitioner in its return of income was more than the profit arrived at based on the arm's length margin determined above. The return of income filed by the petitioner as a Permanent Establishment in India was selected for scrutiny assessment. The respondent issued notice under Section 143(2) of the Act on 18.09.2017. The respondent did not make a reference to the Transfer Pricing Officer (TPO) for verification of the FAR analysis and determination of arm's length nature of the petitioner's international transaction. After expiry of one year after selecting the case for scrutiny assessment, an inspection was conducted by the respondent at the premises of the petitioner on 31.10.2018, wherein sworn statement was obtained from the petitioner's employee.

(c) The respondent issued a show cause notice (SCN) on 13.12.2018. The respondent further assuming jurisdiction of the TPO, analyzed the FAR and proposed to attribute 100 percent of the global profits earned from the sales in India by EOS Germany to the petitioner.

(d) In the reply to the show cause notice dated 17.12.2018, the petitioner submitted that based on the detailed FAR and benchmarking analysis undertaken in its TP documentation, the profits earned by the petitioner is established to be at arm's length. Accordingly, no further profit attribution can be made to the petitioner's operations. The respondent disregarded the submissions made by the petitioner and passed the impugned draft assessment order dated 31.12.2018, by attributing 100 percent of EOS Germany's profits from India operations to the petitioner, as against the income declared by the petitioner in its return of income, which is established to be at arm's length.

(e) Explanation 3 to Section 9(1)(i) of the Act provides that only so much of income as is attributable to operations carried out in India shall be deemed to accrue or arise in India. Further, Article 7(2) of