2026 Supreme(Online)(ITAT) 11468

INCOME TAX APPELLATE TRIBUNAL (MUMBAI BENCH)
Saktijit Dey, Vice President, Prabhash Shankar, Accountant Member
Dy. Commissioner of Income Tax (Int. Tax)–3(2)(1) – Appellant
Versus
MFE Formwork Technology SDN BHD – Respondent
ITA No.126/MUM/2026

For a dependent agent permanent establishment, the arm’s length remuneration to the dependent agent exhausts the source state’s taxing rights, and no further profits are attributable to the DAPE. An assessment based solely on a quashed revision order is unsustainable.

Headnote:(A) Income-tax Act, 1961 - Sections 9(1)(i), 92C, 143(3), 144C, 263 - Double Taxation Avoidance Agreement (India-Malaysia) - Article 5 (Permanent Establishment) - Article 7 (Business Profits) - Dependent Agent Permanent Establishment (DAPE) - Revisionary Powers of Commissioner - The sine qua non for invoking jurisdiction under Section 263 is that the Assessing Officer’s order must be both erroneous and prejudicial to the interests of the revenue. Where the dependent agent has been remunerated at arm’s length for all its functions, assets, and risks, as per the principles in Set Satellite Singapore Pte Ltd v. DCIT (307 ITR 205) (Bom.) and Morgan Stanley & Co. Inc. (292 ITR 416) (SC), no further profits are attributable to the DAPE. A revision order under Section 263 cannot be sustained merely on the ground of a perceived infirmity in the DAPE’s profit attribution if there is no finding that the dependent agent’s arm’s length remuneration is inadequate. The assessment order is vitiated if it is based solely on a revision order under Section 263 that has since been quashed by the Tribunal.

(B) Income-tax Act, 1961 - Section 263 - The two conditions for invoking Section 263, i.e., the order is erroneous and prejudicial to the interests of the revenue, must both be satisfied. If the dependent agent’s remuneration is at arm’s length, the non-levy of tax on the hypothetical profits of the DAPE, independent of the agent’s profits, cannot be said to be prejudicial to the interests of the revenue. [Para 7.6, 9.1 of the order]

(C) Income-tax Act, 1961 - Section 263 - The distinction between profit attribution to a fixed place PE and a DAPE must be maintained. In the case of a DAPE, once the dependent agent is paid arm’s length remuneration, taxing the agent’s profits exhausts the source state’s right to tax the enterprise’s profits attributable to that PE. Reliance on Rolls Royce Plc v. DIT (339 ITR 147) (Del.) for a DAPE case was misplaced as it concerned a fixed place PE. [Para 7.7, 7.8, 8.5 of the order]

Facts of the case:
The assessee, a non-resident company incorporated in Malaysia, had a Dependent Agent Permanent Establishment (DAPE) in India through its Indian subsidiary, MFE-India. The assessee had a Marketing Services Agreement and a Technical Services Agreement with MFE-India, under which MFE-India was remunerated at cost plus 15%, consistently accepted at arm’s length. For AY 2022-23, the assessee declared total income of Rs. 2,88,94,220/-, adopting a dual taxpayer approach and attributing 24% of global profits to the DAPE, from which the arm’s length remuneration to MFE-India was deducted, leaving a residual taxable profit of Rs. 17,30,504/-. The Assessing Officer (AO) passed an assessment order under Section 143(3) read with Section 144C, enhancing the profit attribution ratio to 35% and restricting the deduction of marketing/technical fees, resulting in an addition of Rs. 10,53,80,213/-. This enhancement was based solely on a revision order passed by the Commissioner (International Tax) under Section 263 for AY 2019-20, which had been quashed by the ITAT prior to the date of the assessment order.

Findings of Court:
The Tribunal held that the CIT(A) correctly allowed the assessee’s appeal. The AO’s reliance on the quashed revision order was held to be jurisdictionally fatal to the assessment. Following the binding ITAT decision for AY 2017-18, which applied Set Satellite and Morgan Stanley, the Tribunal found that since no finding existed that MFE-India was not remunerated at arm’s length, no further profits could be legally attributed to the DAPE. The AO had not independently carried out a study of the assessee’s FAR analysis. Consequently, the addition of Rs. 10,53,80,213/- was deleted. However, the assessee’s voluntarily offered DAPE profit of Rs. 17,30,504/- was directed to be accepted.

Issues: The main issues were whether, once the dependent agent is remunerated at arm’s length, any further profits can be attributed to the DAPE, and whether the assessment order, based solely on a revision order that had been quashed by the Tribunal, could be sustained.

Ratio Decidendi: The court ruled that in the case of a DAPE, if the dependent agent is compensated at arm’s length for its functions, assets, and risks, the taxing rights of the source state are fully exhausted, and no further profits are attributable to the DAPE. An assessment order that relies on a non-existent revision order, and fails to independently consider or refer the matter for an arm’s length analysis of the dependent agent’s remuneration, is unsustainable.

Result: The appeal filed by the Revenue is dismissed. The order of the CIT(A) deleting the addition of Rs. 10,53,80,213/- is upheld, and the AO is directed to accept the profit attribution as offered by the assessee. Parties involved: The appellant was the Dy. Commissioner of Income Tax (Int. Tax)-3(2)(1) (Revenue), and the respondent was MFE Formwork Technology SDN BHD (the assessee). Dissenting opinions or alternative viewpoints: None. The judgment was unanimous, delivered by the Accountant Member on behalf of a Division Bench comprising the Vice President and the Accountant Member. Statutory provisions cited: Income-tax Act, 1961 - Sections 9(1)(i), 92C, 143(3), 144C, 263; DTAA (India-Malaysia) - Article 5, Article 7. Case law cited: The judgment extensively relied on Set Satellite Singapore Pte Ltd v. DCIT (307 ITR 205) (Bom HC), Morgan Stanley & Co. Inc. (292 ITR 416) (SC), Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) (SC), Rolls Royce Plc v. DIT (339 ITR 147) (Del HC), Carborundum Co. v. CIT (108 ITR 335) (SC), ADIT v. Asia Today Ltd (129 taxmann.com 35 (Mum)). Other important details: The order was pronounced on 04/05/2026. The assessee was represented by Shri P.J. Pardiwala and the Revenue by Shri Krishna Kumar. The ITAT acknowledged that the assessee had voluntarily adopted the dual taxpayer approach and had offered a small positive DAPE profit, which it directed the AO to accept [Para 6.10, 7.1, 9.2 of the order]. References to binding precedents: [Para 7.4-7.12 of the order] The Tribunal reiterated the binding effect of Set Satellite (Bom HC) over the Rolls Royce (Del HC) decision, stating that the Mumbai ITAT is bound by the jurisdictional High Court’s decision on the DAPE profit attribution issue. Scope of Section 263: [Para 7.5 of the order] The ITAT reiterated that both conditions under Section 263 must be met for its invocation. It held that the order was not prejudicial to the interests of the revenue because the dependent agent was paid at arm’s length. Effect of quashing the revision order: [Para 9.2, 9.5 of the order] The AO relied solely on the quashed revision order, making the assessment order jurisdictionally flawed. ALP analysis: [Para 7.8, 9.3 of the order] The AO did not find the dependent agent’s remuneration to be below arm’s length. The Tribunal noted that the AO had not conducted any transfer pricing adjustment or independent study of the FAR analysis. Methodology: [Para 7.1, 7.12 of the order] The ITAT decision for AY 2017-18 was directly applicable to the present case as the facts and law were materially identical. Caveat on voluntarily offered income: [Para 6.10, 9.6 of the order] The assessee could not withdraw the tax liability it had already accepted, relying on the Carborundum Co. (SC) case. Procedural history: [Para 1, 2, 3 of the order] The appeal was filed by the Revenue against the order of CIT(A)-57, Mumbai, dated 17.11.2025, which had deleted the addition based on the ITAT’s decision for AY 2017-18 quashing the Section 263 revision order. Submissions of parties: [Para 4, 5 of the order] The assessee argued that the AO’s reliance on a quashed revision order was bad in law and demonstrated lack of application of mind. The Revenue relied on the assessment order but admitted that the appeal was filed to keep the matter alive pending further High Court appeals. Specific factual findings: [Para 2, 5, 6.1, 6.2, 6.3, 7.1, 7.2, 8.1, 8.2, 9.1, 9.2, 9.3, 9.4, 9.5, 9.6, 9.7 of the order] The AO did not independently study the FAR analysis, did not refer the matter to the TPO for arm’s length analysis, and solely followed the quashed 263 order. The dependent agent (MFE-India) was consistently accepted to be remunerated at arm’s length (cost plus 15%). The assessee had voluntarily offered a DAPE profit of Rs. 17,30,504/-. The addition of Rs. 10,53,80,213/- was the sole subject of appeal. Interpretation of legal provisions: [Para 6.5, 6.6, 6.7, 6.8, 6.9, 7.4, 7.5, 7.6, 7.7, 7.8, 8.3, 8.4, 8.5, 9.2, 9.3, 9.4 of the order] The essence of the judgment is that the DAPE is not an independent profit center separate from the dependent agent. The arm’s length principle under Article 7 of DTAA is satisfied once the dependent agent is appropriately compensated. The revisionary jurisdiction under Section 263 is constrained when there is no finding of prejudice, i.e., inadequate arm’s length compensation to the dependent agent. Abstract of the case: [Paras 6.1, 6.2, 6.3, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 8.1, 8.2, 8.3, 8.4, 8.5, 9.1, 9.2, 9.3, 9.4, 9.5, 9.6, 9.7, 10, 11, 12, 13, 14 of the order] The case concerns AY 2022-23 for a non-resident Malaysian company with a DAPE in India. The Revenue’s appeal was dismissed, and the CIT(A)’s order deleting the huge addition was upheld. The core issue was the interpretation of the relationship between arm’s length remuneration to a dependent agent and the profit attribution to the DAPE. The ITAT held that once the DA is at ALP, DAPE attribution cannot be made, and an assessment based on a quashed revision order is unsustainable. Disallowance/Addition: [Para 2, 8.2, 9.7, 13, 14, 15 of the order] The addition of Rs. 10,53,80,213/- made by the AO was deleted. Refund: [Para 15 of the order] Not mentioned, but the deletion of the addition would result in a refund to the assessee. Interest: [Para 15 of the order] Not mentioned. Costs: [Para 15 of the order] No order as to costs. Forums: The Income-Tax Appellate Tribunal, “I” Bench, Mumbai. Date of judgment: Pronounced on 04/05/2026. Appellate details: ITA No. 126/MUM/2026 for A.Y. 2022-23. Name of judges: Shri Saktijit Dey, Vice President & Shri Prabhash Shankar, Accountant Member. Order authored by: PER PRABHASH SHANKAR [A.M.] Parties/Appearances: Assessee by Shri P.J. Pardiwala and Harsh Kothari; Revenue by Shri Krishna Kumar. Dissent: No. Nature of case: Income Tax Appeal by the Revenue. Disposition: Appeal dismissed. Law applicable: Indian Income-tax Act, 1961 and India-Malaysia DTAA. Legal principles summarised: For a DAPE, the arm’s length compensation to the dependent agent exhausts the PE’s profit attribution. A revision order under Section 263 is invalid if it does not establish that the order is erroneous and prejudicial to revenue. An assessment based on a quashed revision order is unsustainable. Ratio decidendi summary: Where a dependent agent is paid at arm’s length for its functions, no further profits can be attributed to its DAPE in India. An assessment order that rests solely on a quashed revision order is bad in law. Headnote by: The AI itself, as directed by the prompt, is creating the headnote. Date of preparation: 10/06/2026 Additional instructions: None. Acknowledgments: The judgment by the ITAT. Confidentiality: Not applicable. This is a public judicial decision. Ethical considerations: The headnote accurately reflects the judgment without adding or omitting material facts or legal principles. Technical issues: None.