IT Dept Cannot Raise Functions, Assets, & Risks Analysis Argument In Appeal Before Writ Court If Not Raised First Before ITAT: Delhi HC

While closing a series of appeals challenging a common order issued by the Income Tax Appellate Tribunal (ITAT) on profit attribution and taxation of an international entity, the Delhi High Court held that since the issue of Functions, Assets, and Risks Analysis (FAR analysis) had not been raised by the Revenue before the ITAT, it is not permissible to entertain the proposed questions of law in these appeals.

The Division Bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that “As regards the remaining proposed questions, Mr Bhatia says that Functions, Assets and Risks Analysis should not have been applied in ascertaining attribution of profit. According to Mr Bhatia, the statutory authorities have taken recourse to rule 10 of the Income Tax Rules, 1962. On being queried, Mr Bhatia does concede that this aspect was not urged before the statutory authorities. Since this aspect was not argued before the statutory authorities, we are of the opinion that in these appeals, the questions of law as proposed cannot be entertained”.

Advocate Ruchir Bhatia appeared for the Appellant, whereas Advocate Kavita Jha appeared for the Respondent.

The brief facts of the case were that the appeals in question had sought to challenge a common order passed by the ITAT, that the ITAT had erred in adopting a figure of 15% for determining the profit attributable to the Permanent Establishment (PE) of the assessee in India.

The counsel for the Revenue Department had challenged the action of the ITAT in allowing the appeal of the assessee concerning income from royalty under the head ‘income from Alten Suite; the action of the ITAT in determining that the booking fee received by the assessee is taxable as business income and not under the head of Royalty; the action of the ITAT to attribute only 15% of the revenue as income accruing/arising in India without considering the India-Spain Double Taxation Avoidance Agreement (DTAA); and the action of ITAT in not recognizing the rejection of FAR analysis by India, as outlined in the reservation of non-OECD countries in the OECD Model Tax Convention.

The counsel for the Revenue pointed out that the ITAT had erred in failing to appreciate that the allocation of income under Article 9 between Associated Enterprises (AEs) differs from the attribution of profit to the PE under Article 7, as the former applies FAR analysis whereas the latter does not and the ITAT had also failed to recognize that Indian DTAAs use formulary apportionment for determining the Arm's Length profit of the PE by following the ‘relevant business entity’ approach, rather than the ‘functionally separate entity’ approach, and the Income Tax Rule 10 is accordingly designed for this purpose.

After considering the submission, the Bench acknowledged that three questions had already been addressed in a previous decision, in the case of The Commissioner of Income Tax-International Taxation-1 v. Amadeus IT Group SA [2023: DHC: 4326-DB], and therefore, those questions did not require further consideration.

However, for the remaining questions, the Revenue’s counsel argued that FAR analysis should not have been applied, and the statutory authorities had relied on Rule 10 of the Income Tax Rules, 1962, for profit attribution.

The Bench however noted that these arguments regarding FAR analysis and Rule 10 were not presented before the statutory authorities during the proceedings.

Consequently, the High Court concluded that the proposed remaining questions could not be entertained in these appeals.

Cause Title: The Commissioner of Income Tax - International Taxation v. Amadeus IT Group SA [Neutral Citation: 2023: DHC: 6502-DB]

Click here to read/download the Order