DHL OPERATIONS B.V, THE NETHERLANDS ( NOW POST MERGER, DHL INTERNATIONAL GMBH), MUMBAI v. DCIT (IT) 1(2), MUMBAI

ITA 183/MUM/2010 | 2003-2004
Pronouncement Date: 21-09-2011 | Result: Allowed

Appeal Details

RSA Number 18319914 RSA 2010
Assessee PAN AAACD7306H
Bench Mumbai
Appeal Number ITA 183/MUM/2010
Duration Of Justice 1 year(s) 8 month(s) 12 day(s)
Appellant DHL OPERATIONS B.V, THE NETHERLANDS ( NOW POST MERGER, DHL INTERNATIONAL GMBH), MUMBAI
Respondent DCIT (IT) 1(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 21-09-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted L
Tribunal Order Date 21-09-2011
Date Of Final Hearing 14-09-2011
Next Hearing Date 14-09-2011
Assessment Year 2003-2004
Appeal Filed On 08-01-2010
Judgment Text
1 ITA 181/ M/1010 DHL OPERATIONS B.V. THE NETHERL ANDS IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L BEFORE SHRI D.K. AGARWAL J.M. AND SHRI R.K. PANDA A.M. ITA NO. 183/MUM/2010 ASSESSMENT YEAR 2003-04 M/S DHL OPERATIONS B.V. THE NETHERLANDS (NOW POST MERGER DHL INTERNATIONAL GMBH) PWC HOUSE PLOT 18A GURU NANAK ROAD STATION ROAD BANDRA (WEST) MUMBAI - 50. PAN AAACD 7306 H VS. DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION_ - 1(2) SCINDIA HOUSRE BALLARD ESTATE MUMBAI. APPELLANT RESPONDENT APPELLANT BY SHRI MADHUR AGARWAL RESPONDENT BY SMT. MALATHI SRIDHARAN DATE OF HEARING 14.9.2011 DATE OF PRONOUNCEMENT 21.9.2011 ORDER PER R.K. PANDA A.M. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DT. 13.11.2009 OF THE CIT(A)- 10 MUMBAI RELATING TO A.Y. 2003-04. 3. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: - 1. NO MISTAKE APPARENT FROM RECORDS UNDER SECTION 154 OF INCOME TAX ACT 1961 (THE ACT). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE ORDER PASSED BY THE LEARNED DEPUTY DIRECTOR OF INCO ME TAX (THE LEARNED ASSESSING OFFICER) UNDER SECTION 154 OF TH E ACT IS BAD IN LAW 2 ITA 181/ M/1010 DHL OPERATIONS B.V. THE NETHERL ANDS IN SO FAR AS THE CHANGE IN TAXABILITY OF INTEREST O F INCOME TAX REFUND IS NOT A MISTAKE APPARENT FROM THE RECORDS. 2. WITHOUT PREJUDICE INTEREST ON INCOME TAX REFUND IS NOT EFFECTIVELY CONNECTED TO THE ALLEGED PE. WITHOUT PREJUDICE TO THE ABOVE ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED A SSESSING OFFICER ERRED IN HOLDING THAT THE INTEREST ON INCOME TAX RE FUND IS EFFECTIVELY CONNECTED TO THE PE; THEREBY ERRED IN HOLDING THAT THE SAME IS TAXABLE AT THE RATES APPLICABLE TO BUSINESS INCOME BY VIRTUE OF ARTICLE 7 OF THE INDIA-NETHERLANDS TAX TREATY (THE TREATY ) INSTEAD OF RATE SPECIFIED IN ARTICLE 11(2) OF THE TREATY. 3. WITHOUT PREJUDICE INTEREST ON INCOME TAX REFUND EFFECTIVELY CONNECTED TO THE ALLEGED PE SHOULD BE TAXABLE ON NE T BASIS. WITHOUT PREJUDICE TO THE GROUND 1 & 2 ABOVE ON TH E FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LE ARNED ASSESSING OFFICER ERRED IN APPLYING THE TAX RATE OF 41% ON TH E GROSS AMOUNT OF THE INTEREST ON INCOME TAX REFUND INSTEAD OF INCLU DING THE INTEREST INCOME SIMPLY AS ONE ELEMENT INTO THE TOTAL INCOME ATTRIBUTION OF THE ALLEGED PE AND APPLYING THE PES PROFIT MARGIN OF 1 .8% (AS HELD BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FO R THE SUBJECT YEAR IN THE APPELLANT OWN CASE) TO THE SAME. 2. FACTS OF THE CASE IN BRIEF ARE THAT THE RETURN F ILED BY THE ASSESSEE FOR A.Y. 2003-04 WAS ASSESSED U/S 143(3) ON 3.2.2006 DETERMI NING TAXABLE INCOME AT ` 1323.17 LAKHS. IN THE SAID ASSESSMENT ORDER THE A .O. HAS HELD THAT PROVISIONS OF SECTION 5(1) AND 5(2) ARE APPLICABLE TO THE ASSE SSEE AND HENCE THE ASSESSEE WAS DEEMED TO HAVE A PE IN INDIA. THOUGH BUSINESS INCOME OF THE ASSESSEE WAS TAXED @41% BUT THE INTEREST INCOME OF ` 1 13 13 177/- BEING INTEREST ON INCOME TAX REFUND RECEIVED BY THE ASSESSEE DURING T HE YEAR UNDER CONSIDERATION WAS TAXED @10% INSTEAD OF CORRECT APP LICABLE RATE OF 41% SINCE THE ASSESSEE HAD PE IN INDIA. IN VIEW OF THE ABOVE THE A.O. ISSUED NOTICE U/S 154 OF THE ACT REQUIRING THE ASSESSEE TO EXPLAIN IT S CASE. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE THE A.O. HELD T HAT SINCE THE ASSESSEE WAS HAVING PE IN INDIA AND THE INTEREST INCOME WHICH AR OSE WAS ON ACCOUNT OF 3 ITA 181/ M/1010 DHL OPERATIONS B.V. THE NETHERL ANDS EXCESS PAYMENT OF TAXES RELATING TO BUSINESS INCOME THEREFORE THE SAME WAS EFFECTIVELY CONNECTED WITH SUCH PE FOR WHICH PROVI SIONS OF PARA 7 OF ARTICLE 11 RELATING TO INCOME FROM BUSINESS WAS APPLICABLE. T HE A.O. ACCORDINGLY TAXED THE INTEREST INCOME AT 41% AS APPLICABLE TO BUSINES S INCOME ALONG WITH SURCHARGE @ 5%. 2.1 IN APPEAL THE LD. CIT(A) UPHELD THE VALID ITY OF THE ORDER PASSED BY THE A.O. U/S 154 OF THE I.T. ACT. HE FURTHER HELD THAT THE INTEREST RECEIVED BY THE ASSESSEE ON INCOME TAX REFUND AMOUNTING TO ` 1 13 13 177/- IS ATTRIBUTABLE TO THE BUSINESS ACTIVITY OF THE ASSESSEE AS PER ARTICL E 11(7) OF THE TREATY. THEREFORE THE INTEREST RECEIVED BY THE ASSESSEE IS EFFECTIVELY CONNECTED WITH THE PE FOR WHICH PROVISIONS OF ARTICLE 11(7) RELATING T O TAXABILITY OF BUSINESS INCOME SHALL APPLY AND THEREFORE INTEREST INCOME WOULD BE TAXABLE @ 40% PLUS SURCHARGE 5%. HE ALSO REJECTED THE CLAIM OF THE AS SESSEE THAT THE NET PROFIT RATIO OF 1.8% BEING PROFIT RATIO OF EXPRESS DIVISIO N OF DEUTSCHE POST AG (ULTIMATE PARENT COMPANY) SHOULD BE APPLIED. AGGRI EVED WITH SUCH ORDER OF THE LD. CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 3. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE BEING DEBATABLE ONE THE ORDER PASSED U/S 154 SHOULD BE H ELD AS VOID. ON MERIT HE SUBMITTED THAT THE ISSUE STANDS DECIDED IN FAVOUR O F THE ASSESSEE BY THE DECISION OF THE DELHI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. CLOUGH ENGINEERING LTD. [2011] 9 ITR (TRIB) 618 [SB ]. 4. THE LD. D.R. ON THE OTHER HAND FAIRLY CONCEDED THAT THE ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DELHI SPEC IAL BENCH OF THE TRIBUNAL. 5. WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH T HE SIDES PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CONSIDE RED THE DECISION OF THE 4 ITA 181/ M/1010 DHL OPERATIONS B.V. THE NETHERL ANDS SPECIAL BENCH OF THE TRIBUNAL CITED BEFORE US. WE F IND THE QUESTION BEFORE THE SPECIAL BENCH OF THE TRIBUNAL IS WAS UNDER:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE INTEREST ON INCOME-TAX REFUND AND FIXED DEPOSITS WITH THE BA NK IS LIABLE TO TAX WITH REFERENCE TO ARTICLE 7 READ WITH PARAGRAPH (4) OF ARTICLE 11 OR PARAGRAPH (2) OF ARTICLE 11 OF THE INDO-AUSTRALIA DOUBLE TAXATION AVOIDANCE AGREEMENT. 5.1 WE FIND THE TRIBUNAL WHILE DECIDING THE ISSUE I N FAVOUR OF THE ASSESSEE HAS HELD AS UNDER:- (SHORT NOTES) HELD (I) THAT THE GIST OF THE PROVISION IN SECTION 90(2) OF THE INCOME- TAX ACT 1961 IS THAT IN A CASE WHERE THE PROVISIO NS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT APPLY TO AN ASSESSEE THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. APPLICATION OF THE PROVISION CAN BE MADE AFTER ASCERTAINING: (I) TAX PAYABLE BY THE ASSESSEE UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT AND (II) TAX PAYABLE B Y THE ASSESSEE UNDER THE INCOME-TAX ACT. IF TAX PAYABLE UNDER THE ACT IS LESS THAN THE TAX PAYABLE UNDER THE DTAA IT CAN BE CONCLUDED THAT THE PROVISIONS OF THE ACT ARE MORE BENEFICIAL TO THE AS SESSEE. HOWEVER IF THE TAX PAYABLE BY THE ASSESSEE UNDER THE DTAA IS L ESS THAN THE TAX PAYABLE UNDER THE ACT HE SHALL HAVE THE BENEFIT OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. IF THE INCOME OF THE ASSESSEE WAS COMPUTED UNDER THE HEAD OTHER SOURCES THE NET IN COME BY WAY OF INTEREST RECEIVED FROM THE INCOME TAX DEPARTMENT WO ULD AMOUNT TO RS 61 04 944. THIS AMOUNT WOULD BE TAXED AT THE RAT E APPLICABLE TO A FOREIGN COMPANY WHICH IS MORE THAN 15 PER CENT. TH EREFORE ON MAKING THE ASSESSMENT OF TAX UNDER THE DTAA AND UND ER THE ACT IT COULD BE FOUND THAT TAX PAYABLE UNDER THE ACT WAS M ORE THAN THE TAX PAYABLE UNDER THE DTAA. ACCORDINGLY THE AFORESAID PROVISION WOULD COME TO THE AID OF THE ASSESSEE TO COME TO AN AUTOM ATIC CONCLUSION WITHOUT EXERCISE OF ANY OPTION THAT IT SHOULD GET THE BENEFIT UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT. (II) THAT ARTICLE 11(1) OF THE DOUBLE TAXATION AVO IDANCE AGREEMENT PROVIDES THAT THE INTEREST ARISING IN INDIA TO WHIC H THE ASSESSEE IS BENEFICIALLY ENTITLED MAY BE TAXED IN AUSTRALIA. PA RAGRAPH (2) PROVIDES THAT SUCH INTEREST MAY ALSO BE TAXED IN INDIA ACCO RDING TO THE LAWS OF INDIA BUT THE TAX SO CHARGED SHALL NOT EXCEED 1 5 PER CENT OF THE GROSS AMOUNT OF THE INTEREST. PARAGRAPH (3) DEFINES THE TERM INTEREST TO INCLUDE WITHIN ITS AMBIT INTEREST FRO M THE GOVERNMENT SECURITIES OR FROM BONDS OR DEBENTURES AND INTEREST FROM ANY OTHER FORM OF INDEBTEDNESS AS WELL AS ALL OTHER INCOME AS SIMILATED TO INCOME FROM MONEY LENT BY THE LAW RELATING TO TAX IN INDIA. PARAGRAPH (4) PROVIDES EXCEPTIONS TO THE CONTENTS O F PARAGRAPHS (1) AND (2). IT IS PROVIDED THAT THESE PARAGRAPHS SHALL NOT APPLY IF THE 5 ITA 181/ M/1010 DHL OPERATIONS B.V. THE NETHERL ANDS ASSESSEE CARRIES ON BUSINESS IN INDIA IN WHICH THE INTEREST ARISES THROUGH A PERMANENT ESTABLISHMENT SITUATED IN INDIA AND THE INDEBTEDNESS IN RESPECT OF WHICH THE INTEREST IS PA ID IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISHMENT. IN SUC H A CASE THE PROVISIONS OF ARTICLE 7 SHALL APPLY. THE DEBT CLAIM WAS CONNECTED WITH THE PERMANENT ESTABLISHMENT IN THE SENSE THAT IT HA D ARISEN ON ACCOUNT OF TAX DEDUCTION AT SOURCE FROM THE RECEIPT S OF THE PERMANENT ESTABLISHMENT. HOWEVER IT WAS ALSO A FAC T THAT PAYMENT OF TAX WAS THE RESPONSIBILITY OF THE FOREIGN COMPAN Y. THE SAME IS DETERMINED AFTER COMPUTATION OF ITS INCOME AND THE TAX FORMS NOT AN EXPENDITURE FOR EARNING THE INCOME BUT AN ITEM OF A PPROPRIATION OF PROFIT. THEREFORE EVEN IF THE DEBTS WERE CONNECTED WITH THE RECEIPTS OF THE PERMANENT ESTABLISHMENT IT COULD NOT BE SAI D TO BE EFFECTIVELY CONNECTED WITH SUCH RECEIPTS. IT SO HAPPENED IN THI S CASE THAT THE TAX GOT AUTOMATICALLY DEDUCTED FROM THE RECEIPTS OF THE PERMANENT ESTABLISHMENT BY OPERATION OF LAW. SUCH COLLECTION OF TAX BY FORCE OF LAW WOULD NOT ESTABLISH EFFECTIVE CONNECTION OF THE INDEBTEDNESS WITH THE PERMANENT ESTABLISHMENT AS ULTIMATELY IT WAS ON LY APPROPRIATION OF PROFIT OF THE ASSESSEE-COMPANY. THERE MAY BE CAS ES WHERE INTEREST MAY BE TAXABLE UNDER THE ACT UNDER THE RESIDUARY HE AD AND YET BE EFFECTIVELY CONNECTED WITH THE PERMANENT ESTABLISH MENT. BANK INTEREST WAS AN EXAMPLE OF EFFECTIVE CONNECTION BET WEEN THE PERMANENT ESTABLISHMENT AND THE INCOME AS THE INDEB TEDNESS IS CLOSELY CONNECTED WITH THE FUNDS OF THE PERMANENT E STABLISHMENT. HOWEVER THE SAME CANNOT BE SAID IN RESPECT OF INTE REST ON INCOME- TAX REFUND. SUCH INTEREST IS NOT EFFECTIVELY CONNEC TED WITH PERMANENT ESTABLISHMENT EITHER ON THE BASIS OF ASSET-TEST OR ACTIVITY-TEST. ACCORDINGLY THIS PART OF INTEREST WAS TAXABLE UNDE R OF ARTICLE 11(2). 5.2 RESPECTFULLY FOLLOWING THE DECISION OF THE SPEC IAL BENCH OF THE TRIBUNAL CITED SUPRA AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE WE HOLD THAT THE INTEREST ON INCOME-TAX REFUND IS NOT EFFECTIVELY CONNECTED WITH PERMANENT ESTABLISHMENT EITHER ON THE BASIS OF ASSE T-TEST OR ACTIVITY-TEST. ACCORDINGLY IT IS HELD THAT THIS PART OF THE INTERE ST IS TAXABLE UNDER PARA 2 OF ARTICLE 11. GROUND NO. 2 RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. SINCE THE ASSESSEE SUCCEEDS ON GROUND NO. 2 THE OTHER GR OUNDS ARE NOT BEING ADJUDICATED BEING ACADEMIC IN NATURE. 6 ITA 181/ M/1010 DHL OPERATIONS B.V. THE NETHERL ANDS 6. IN THE RESULT APPEAL FILED BY THE ASSESSEE IS A LLOWED. ORDER PRONOUNCED ON 21.9.2011. SD/- SD/- (D.K. AGARWAL) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED 21.9.2011. RK COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 10 MUMBAI 4. THE DIT (INTERNATIONAL TAXATION) MUMBAI 5. THE DR BENCH L 6. MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT MUMBAI 7 ITA 181/ M/1010 DHL OPERATIONS B.V. THE NETHERL ANDS DATE INITIALS 1 DRAFT DICTATED ON 15.9.11 19.9.11 SR. PS 2 DRAFT PLACED BEFORE THE AUTHOR 16.11.11 19.9.11 SR. PS 3 DRAFT PLACED BEFORE THE SECOND MEMBER 4 APPROVED DRAFT COMES TO THE SR. PS SR. PS 5 KEPT FOR PRONOUNCEMENT ON SR. PS 6 FILE SENT TO THE BENCH CLERK SR. PS 7 DATE ON WHICH FILE GOES TO THE HEAD CLERK 8 DATE ON WHICH FILE GOES TO THE AR 9 DATE OF DISPATCH OF ORDER