DDIT (I.T) 2(1), MUMBAI v. M/s. STAUBLI A.G. (INDIA BRANCH OFFICE), MUMBAI

ITA 3703/MUM/2005 | 2001-2002
Pronouncement Date: 05-04-2010 | Result: Partly Allowed

Appeal Details

RSA Number 370319914 RSA 2005
Assessee PAN AACCS8973K
Bench Mumbai
Appeal Number ITA 3703/MUM/2005
Duration Of Justice 4 year(s) 10 month(s) 20 day(s)
Appellant DDIT (I.T) 2(1), MUMBAI
Respondent M/s. STAUBLI A.G. (INDIA BRANCH OFFICE), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 05-04-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted L
Tribunal Order Date 05-04-2010
Assessment Year 2001-2002
Appeal Filed On 16-05-2005
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L : MUMBAI BEFORE SHRI D.K. AGARWAL (JM) AND SHRI B. RAMAKO TAIAH (AM) ITA NO.3703/MUM/2005 ASSESSMENT YEAR : 2001-02 ITA NO.5459/MUM/2006 ASSESSMENT YEAR : 2003-04 DY. DIRECTROR OF INCOME TAX (INTERNATIONAL TAXATION)-2(1) ROOM NO.120 1 ST FLOOR SCINDIA HOUSE BALLARD ESTATE N.M. ROAD MUMBAI-400 038. ..( APPELLANT ) VS. M/S. STAUBLI A.G. INDIA BRANCH OFFICE B-407 FLORAL DECK PLAZA CENTRAL MIDC ROAD NO.23 SEEPZ ANDHERI(E) MUMBAI-400 093. ..( RESPONDENT ) P.A. NO. (AACCS 8973 K) APPELLANT BY : SHRI S.M. KESH KAMAT RESPONDENT BY : SHRI NA RAYAN ATAL O R D E R PER D.K. AGARWAL (JM). THESE TWO APPEALS PREFERRED BY THE REVENUE ARE DIRECT ED AGAINST THE SEPARATE ORDERS DATED 31.1.2005 AND 11.7. 2006 PASSED BY LD. CIT(A) FOR THE ASSESSMENT YEARS 2001-02 AND 2003-04 RESPECTIVELY. SINCE FACTS ARE IDENTICAL AND ISSUES INVOLVE D ARE ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 2 COMMON BOTH THESE APPEALS ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. BRIEFLY STATED THE FACTS EXTRACTED FROM ITA NO.3703/M/2005 FOR ASSESSMENT YEAR 2001-02 ARE THAT THE ASSESSEE IS A BRANCH OFFICE IN INDIA OF STAUBLI A.G. SWITZERLAND. IT ACTS AS A COMMI SSION AND MEKETING AGENT IN RESPECT OF TEXTILE MACHINERIES MANUFA CTURED BY THE STAUBLI GROUP ENTITIES TO CUSTOMERS IN INDIA. THE ST AUBLI GROUP ENTITIES DIRECTLY SELL/INVOICE AND SHIP THE MACHINERIES TO THE INDIAN CUSTOMERS. THE ASSESSEE DOES NOT ENTER INTO A SALES CONTRACT WITH THE CUSTOMERS. THE ASSESSEE ALSO ASSISTS THE CUSTOMERS IN INSTALLATIO N OF THE MACHINERIES AT THE CLIENTS SITE. THE MACHINERIES SUPP LIED BY THE STAUBLI GROUP ENTITIES ARE SOLD BY THEM UNDER A WARRA NTY TWELVE MONTHS FROM THE DATE OF MANUFACTURE. THE ASSESSEE RENDE RS AFTER SALES AND MAINTENANCE SERVICES UNDER THE WARRANTY PERIOD TO THE CUSTOMERS IN INDIA FOR WHICH IT RECEIVES SERVICE FEES AT AGREED RATES OVER AND ABOVE ITS COMMISSION ON SALES OF MACHINERIES. BESI DES THIS THE ASSESSEE ALSO RENDERS SERVICES TO LOCAL CUSTOMERS AFTER TH E WARRANTY PERIOD AND BILLS THEM LOCALLY FOR THE SERVICES RENDERED. FOR THE ASSESSMENT YEAR IN QUESTION THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME AT RS.17 32 730/-. HOWEVER AFT ER MAKING CERTAIN ADDITIONS/DISALLOWANCES THE A.O. PASSED THE ASSESSMEN T ORDER U/S.143(3) OF THE I.T. ACT 1961(THE ACT) DATED 19 TH MARCH 2004 ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 3 DETERMINING THE TAXABLE INCOME AT RS.42 78 830/-. ON APPEAL THE LD. CIT(A) DELETED THE ADDITION AND DISALLOWANCE OF DEPRE CIATION MADE BY THE AO IN TOTO AND ACCORDINGLY ALLOWED THE APPEAL. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) T HE REVENUE IS IN APPEAL BEFORE US. 4. GROUND NO.1 READS AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DIRECTING TO DELETE THE ADDITION OF RS.25 08 701/- MADE BY THE ASSESSIN G OFFICER BY ESTIMATING THE COMMISSION INCOME @ 10% WITHOUT APPRECIATING THE FACT THAT: I. THE ASSESSEE IS ASSUMING RISKS IN RESPECT OF THE SALES OF PRODUCTS MADE BY THE HEAD OFFICE/STAUBLI GROUP ENTITIES. II. THE PROFITS ARISING ON ACCOUNT OF SUCH RISKS ASSUMED BY THE INDIAN BRANCH IS THE INCOME OF THE BRANCH AND NOT OF THE HEAD OFFICE/ STAUBLI GROUP ENTITIES. III. THE ARMS LENGTH PAYMENT OF COMMISSION TO THE INDIAN BRANCH BY THE HEAD OFFICE/STAUBLI GROUP ENTITIES(PRINCIPALS) DOES NOT EXTINGUISH THE ASSESSMENT OF THE PRINCIPALS IN INDIA. 5. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT DURING T HE COURSE OF ASSESSMENT IT WAS INTERALIA OBSERVED BY THE AO THAT THE ASSESSEE HAS ONLY SHOWN INCOME BY WAY OF COMMISSION FROM STAUBLI AG (HO) AND SERVICE REVENUES FROM MANUFACTURING GROUP OF COMPANIES. IT ALSO EARNS COMMISSION ON SALE OF SPARE PARTS TO THE CUSTOMERS IN INDIA. IN RESPONSE TO VARIOUS QUERIES RAISED BY THE AO WITH REGARD TO THE ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 4 JUSTIFICATION OF COMMISSION SHOWN BY THE ASSESSEE THE ASSESSEE SUBMITTED DETAILED REPLIES WHICH WERE SUMMARISED BY THE AO IN PARA-3 OF THE ASSESSMENT ORDER AS UNDER : - AS PER ARTICLE 5(2) THE ASSESSEE BEING AN INDIAN BRANCH OF STAUBLI A.G. IT CONSTITUTES A PERMANENT EXTABLISHMENT (PE) OF STAUBLI A.G. IN INDIA. - THE PE WOULD BE LIABLE TO BE TAXED N INDIA IN RESPECT OF INCOME DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO IT. THIS RIGHT TO TAX DOES NOT EXTEND TO PROFITS THAT STAUBLI A.G. MAY DERIVE OTHERWISE THAN THROUGH THE PE. - ALL ACTIVITIES OTHER THAN MARKETING ACTIVITY SUCH AS MANUFACTURING SALES MANAGERIAL CONTROL ETC. CARRIED OUTSIDE INDIA. CONSIDERING THE ACTIVITIES CARRIED IN INDIA AND THE RISK BORNE BY THE BRANCH OFFICE IN INDIA THE BRANCH HAS MADE ADEQUATE/REASONABLE/ARMS LENGTH PROFITS. - WITHOUT PREJUDICE TO THE ABOVE STAUBLI A.G. WOULD BE LIABLE TO PAY TAX ONLY ON THE INCOME WHICH ACCRUES ARISES OR RECEIVED OR DEEMED TO ACCRUE ARISE OR RECEIVE IN INDIA. - RELIANCE HAS BEEN PLACED ON CBDTS CIRCULAR NO.23 DATED 23.07.1969 WHICH LAYS DOWN THAT IF THE AGENTS COMMISSION FULLY REPRESENTS THE VALUE OF THE PROFIT ATTRIBUTABLE TO HIS SERVICES IT SHOULD PRIMA FACIE EXTINGUISH THE ASSESSMENT. SINCE STAUBLI A.G. HAS MADE SALES IN INDIA ON PRINCIPAL-TO-PRINCIPAL BASIS AND HAS COMPENSATED THE INDIAN BRANCH ON AN ARMS LENGTH BASIS IT IS FULLY COVERED BY THE SAID CIRCULAR AND THEREFORE NO FURTHER INCOME OF STAUBLI A.G. IS TAXABLE IN INDIA. - RELIANCE WAS FURTHER PLACED ON THE FOLLOWING JUDGMENTS IN RESPECT OF ITS SUBMISSION THAT NO FURTHER PROFITS CAN BE ATTRIBUTABLE TO THE INDIA BRAN CH A. ADDL. CIT VS. SKODA EXPORT PRAHA 172 ITR 358(AP). B. CIT(A) VS. TATA CHEMICALS LTD. 94 ITR 85 (BOM.) ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 5 C. CIT(A) VS. AHMEDBHAI UMARBHAI & CO. 18 ITR 72 (SC) - ATTENTION HAS BEEN INVITED TO THE CBDTS CIRCULAR NO.1 DATED 02.01.2004 WHICH IS IN RESPECT OF THE TAXATION OF BUSINESS PROCESS OUTSOURCING UNITS IN INDIA. - THE RATES OF COMMISSION BY THE INDIA BRANCH IS MUCH MORE THAN ITS COUNTERPARTS IN OTHER COUNTRIES. - THE FINANCIAL STATEMENTS FOR THE F.Y. 2001/2000 SHOW THAT STAUBLI A.G. HAS EARNED LESS THAN 2% NET PROFITS. THE AO CONSIDERED THE ASSESSEE'S SUBMISSION IN THE LIGHT OF T HE BOARD CIRCULAR 23 OF 1969 ARTICLE OF 7(2) OF THE SINGAPOR E TREATY COMMENTARY OF LD. AUTHOR KLAUS VOGEL (ARTICLE 5 PARA -71) RULE-10 OF INCOME TAX RULES CIRCULAR NO.1 OF 2004 DATED 2.1.2004 THEORY OF DEPENDENT AGENT AND INDEPENDENT AGENT OECD DISCUSSION DRAFT MEANING OF BUSINESS OF AGENT AND BUSINESS OF PRINCIPAL RULE OF FORCE OF ATTRACTION APPLICABILITY OF ARMS LENGTH PRICE AN D OBSERVED THAT THE TP REGULATION IS APPLICABLE FOR ASSESSMENT YEAR 2002-03 ONWARDS AND FURTHER OBSERVED THAT THE CLAIM OF THE ASSESSEE THAT IF PAYMENT TO THE AGENT IS MADE AT ARMS LENGTH THEN THE NON-RESIDENT I S NOT LIABLE TO TAX (HYPOTHESIS) IS NOT ACCEPTABLE FOR THE FOLLOWING RE ASONS:- A) THE PAYMENT TO THE AGENT AND PROFIT OF THE ASSESSEE FROM BUSINESS OPERATIONS IN INDIA ARE TWO SEPARATE THINGS WH ICH CANNOT BE COMPARED. B) THE HYPOTHESIS IS APPLICABLE ONLY IN THE CASE OF INDEP ENDENT AGENTS WHERE NO ASSETS/CAPITAL OF NR ARE USED IN INDIA NO RISK IS ASSUMED BY THE NR IN INDIA AND NO OTHER ACTIVITY IS CARR IED OUT BY THE NR IN INDIA. IT IS SO IN DTAA WITH USA AND SINGAPORE. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 6 C) THE DRAFT DISCUSSION PAPER OF OECD ALSO SUGGEST APPORTI ONMENT BASIS FOR DETERMINATION OF PROFITS ATTRIBUTABLE TO PE WHICH IS SIMILAR TO THE PROVISIONS OF RULE 10 OF THE I.T. RULES. D) NO SUCH CATEGORICAL STATEMENT/HYPOTHESIS HAS BEEN SUGGESTE D BY THE OECD OR ANY OTHER COMMENTARY. E) IT WOULD ALSO NOT BE IN ACCORDANCE WITH THE STATUTOR Y PROVISIONS LIKE SECTION 44B OF THE ACT WHICH IS A SELF CONTAINED CODE. F) THE CIRCULAR NO.01 OF 2004 ALSO PROVIDES THAT WHEN CO RE ACTIVITIES OF THE BUSINESS OF THE ASSESSEE IS OUTSOURCED THEN THERE WOULD BE SUBSTANTIAL PROFIT OF THE PRINCIPAL WOULD BE THE INCOME OF THE NON-RESIDENT TAXABLE IN INDIA. G) THERE HAS BEEN UNDUE RELIANCE ON ONE LINE OF THE CI RCULAR NO.23 OF 1969 WITHOUT LOOKING INTO THE ENTIRE CONTEXT. H) IT WOULD MAKE PRINCIPLES OF FORCE OF ATTRACTION INA PPLICABLE IN INDIA. I) WITHOUT PREJUDICE TO THE ABOVE THE ASSESSEE HAS NOT SUBSTANTIATED ITS CLAIM THAT THE AGENT HAS BEEN PAID AT ARMS LENGTH PRICE. THE AO AFTER REFERRING THE ASSESSEES NATURE OF BUSINESS ACTIVITIES FURTHER OBSERVED THAT THERE MAY BE SALES MADE DIRECTLY BY STAUBLI GROUP ENTITIES TO THE CUSTOMERS IN INDIA WITHOUT THE IN VOLVEMENT OF STAUBLI INDIA AND HENCE THE NATURE OF BUSINESS OF ASSESSE E IS SOMETHING MORE THAN THAT OF A COMMISSION AGENT. HE FURTHER OBSERVED THAT THE ASSESSEE IS RENDERING AFTER SALES AND MA INTENANCE SERVICES UNDER THE WARRANTY PERIOD. OBVIOUSLY FOR SUCH SERVICES THE ASSESSEE IS NOT GETTING ANYTHING FROM THE CUSTOMERS. HE FU RTHER OBSERVED THAT IN CASE OF SUPPLY OF FAULTY PRODUCTS IN INDIA THE COST IS TO BE BORNE BY THE INDIAN BRANCH AND NOT THE HO HE NCE THE PROFIT ARISING OUT OF SUCH RISKS TAKEN BY THE INDIAN BRANCH IS THE INCOME OF THE BRANCH AND NOT OF THE AGENT. IN THE LIGHT OF TH E ABOVE THE AO CONCLUDED THAT HE HAS NO OPTION BUT TO ESTIMATE THE INC OME OF THE ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 7 INDIAN BRANCH. FURTHER NO EXPLANATION HAS BEEN OFFER ED BY THE ASSESSEE AS TO WHY THERE ARE VARYING RATES FOR SIMILAR PRO DUCTS AND ACCORDINGLY HE ESTIMATED 10% OF THE TOTAL SALES MADE BY STAUBLI GROUP IN INDIA AS THE PROFITS ATTRIBUTABLE TO THE PE IN INDIA I.E. THE ASSESSEE AND WORKED OUT THE EXTRA INCOME AT RS.25 08 701/ - AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 6. ON APPEAL BEFORE THE LD. CIT(A) THE ASSESSEE SUBMI TTED THAT THE AO HAS GROSSLY ERRED IN CONCLUDING THAT THE NATURE O F ITS BUSINESS IS SOMETHING MORE THAN THAT OF A COMMISSION AGENT DUE TO ASSUMING OF RISK RELATING TO RENDERING OF AFTER SALES AND MAINT ENANCE SERVICE IN THE WARRANTY PERIOD OF THE MACHINERY SUPPLIED BY TH E HEAD OFFICE/GROUP ENTITIES AND THIS NECESSITATES A HIGHER COMPENSATION/ATTRIBUTION OF ADDITIONAL PROFITS. IT WA S FURTHER SUBMITTED THAT THOUGH IT RENDERS AFTER SALES SUPPORT AND WARRANTY SERVICES TO CUSTOMERS IN INDIA IT RECEIVES SERVICE CHARGES FO R THE WORK PERFORMED WHICH IS OVER AND ABOVE THE COMMISSION ON SALES. FURTHER ANY SPARE PARTS ETC. REQUIRED FOR THIS PURPOSE IS FORWAR DED BY THE STAUBLI HEAD OFFICE/GROUP ENTITIES AND NO PART OF IT IS ON THE ASSESSEES ACCOUNT. IT DOES NOT BEAR ANY RISK OF AFTER SALE S AND MAINTENANCE SERVICES AS ALLEGED BY THE AO IN THE ASSESSMENT ORDER. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE SUBMITTED A BRIEF NOTE ON NATURE OF BUSINESS AND THE STATEMENT ON OATH RECORDED OF MR. S.N. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 8 GANGULI CLARIFYING THE ABOVE FACTUAL POSITION AND IN SUPPORT BREAK-UP OF THE SERVICE INCOME AS REFLECTED IN THE AUDITED FINANCI AL STATEMENTS OF THE PREVIOUS YEAR WAS ALSO FILED TO SHOW DISTINCT RECEI PTS FROM HEAD OFFICE/GROUP ENTITIES FOR PROVIDING THE SAID WARRANTY SERVICES. IT WAS FURTHER SUBMITTED THAT IN CONCLUDING THE ASSESSMENT THE AO HAS PLACED RELIANCE ON THE INDIA-SINGAPORE TAX TREATY INST EAD OF INDO- SWISS TAX TREATY. THE ASSESSEE IS A BRANCH OF STAUBLI A.G. WHICH IS A SWISS ENTITY AND TAX RESIDENT IN SWITZERLAND AND THERE FORE THE APPLICABLE TAX TREATY SHOULD BE INDO-SWISS TAX TREATY ( DTAA OR THE TREATY) AND NOT THE INDIA-SINGAPORE TAX TREATY APPL IED BY THE AO. IT WAS FURTHER SUBMITTED THAT AN ARMS LENGTH COMMISSION TO AN AGENT EXTINGUISHES THE ASSESSMENT OF THE NON-RESIDENT PRINCIPLE A S LAID DOWN BY CBDT IN CIRCULAR NO.23 DATED 23 JULY 1969. TH E ASSESSEE CONSTITUTES A PERMANENT ESTABLISHMENT (PE) OF STAUBLI A.G. (SWITZERLAND) IN INDIA UNDER ARTICLE 5 OF THE TREATY AND THE PES PROFITS NEEDS TO BE TAXED AS A DISTINCT AND SEPARATE ENTERPRISE DEALING WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PE AS PER ARTICLE 7(2) OF THE TREATY. THE CBDT CIRCULAR NO.23 IS NOT RESTRICTE D TO CASES OF INDEPENDENT AGENTS BUT ALSO APPLIES TO DEPENDENT AGEN TS. IT WAS FURTHER SUBMITTED THAT IN ITS CASE OTHER THAN THE MARK ETING ACTIVITIES ALL ACTIVITIES RELATING TO THE SALE ARE CARRIED ON FROM OUTSIDE INDIA AND THE SALES ARE DIRECTLY MADE BETWEEN ITS HEAD OFFICE/ GROU P ENTITIES ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 9 AND THE INDIAN CUSTOMERS. AS PER EXPLANATION (A) TO SE CTION 9(1)(I) OF THE I.T. ACT ONLY SUCH PART OF THE INCOME AS IS REASONAB LY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA IS DEEMED TO ACCR UE OR ARISE IN INDIA. IT WAS FURTHER SUBMITTED THAT A NOTE ON THE OVER VIEW OF THE TEXTILE INDUSTRY IN INDIA WAS FILED BEFORE THE AO TO SHOW THE COMMISSION DERIVED BY THE INDIAN COMMISSION AGENTS AND THE RANGE OF RATES EARNED BY THESE AGENTS WHICH WERE THE SAME AS TH OSE RECEIVED BY THE ASSESSEE FROM ITS HEAD OFFICE. IT WAS FURTH ER SUBMITTED THAT THE TRANSFER PRICING STUDY CONDUCTED FOR L ATER YEARS CONFIRMED ARMS-LENGTH NATURE OF ALL TRANSACTIONS BETWE EN THE ASSESSEE AND ITS HEAD OFFICE DURING WHICH THE COMMISSION RATES WERE SAME AS IN THE PREVIOUS YEAR UNDER CONSIDERATION. IT WA S FURTHER SUBMITTED THAT THE CBDT CIRCULAR NO.1 DATED 2 JANUARY 2004 WHICH REITERATED THE PRINCIPLES LAID DOWN IN THE EARLIER CI RCULAR NO.23 (SUPRA) THAT IF THE PRICE CHARGED IN RESPECT OF SUCH SERVICES BY THE PE IS AN ARMS-LENGTH/FAIR MARKET PRICE THEN NO INCOME SHALL SE PARATELY ACCRUE OR ARISE TO THE NON-RESIDENT PRINCIPAL IN INDIA (THE SA ID CIRCULAR IS NOW WITHDRAWN BY CIRCULAR NO.5 OF 2004 DATED 28 SEPTEMB ER 2004 ON ACCOUNT OF OTHER CONTROVERSIES). IT WAS FURTHER SUBMITTED THAT THE FINANCIAL STATEMENTS FOR THE YEAR 2000 OF STAUBLI A. G. ARE SHOWING NET PROFIT OF LESS THAN 2%. THUS EVEN ON THIS COUNT ATTRIB UTION OF HIGHER PROFITS TO THE ASSESSEES ACTIVITIES IN INDIA WAS NOT JUSTIF IED. IT WAS ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 10 FURTHER SUBMITTED THAT A LETTER DATED 30 JANUARY 2 004 FROM STAUBLI A.G. WAS FILED BEFORE THE AO SHOWING THEIR PRACTICE OF PAYMENT OF COMMISSION TO ITS AGENTS IN THE TEXTILE MACHINERY DIVISIO N WORLDWIDE CONFIRMING THAT THE COMMISSION RECEIVED BY THE ASSESSEE WAS MUCH MORE THAN ITS COUNTERPART IN OTHER COUNTRIES. IT WAS FU RTHER SUBMITTED THAT THE CIRCULAR NO.742 DATED 2 MAY 1996 REFERRED B Y THE AO DEALS WITH THE TAXATION OF FOREIGN TELECASTING COMPANIES CAN NOT BE APPLIED TO THE ASSESSEES CASE. IT WAS FURTHER SUBMITTED THAT THE J UDGMENT OF THE HONBLE SUPREME COURT IN ANGLO FRENCH TEXTILE COM PANY (1953) 23 ITR 101 (SC) RELIED ON BY THE AO IS MISPLACED AS THE SAID JUDGMENT MERELY LAYS DOWN THAT IN CASES OF BUSINESS CONNECTION THROU GH AGENTS A PORTION OF PROFITS ATTRIBUTABLE TO THE INDIAN OPER ATIONS CAN BE TAXED IN INDIA. MOREOVER IN THE AFORESAID CASE THERE WAS A COMPLETE DENIAL IN RESPECT OF LIABILITY TO TAX IN INDIA WHICH IS NOT T HE ASSESSEES CASE. 7. THE LD. CIT(A) AFTER CONSIDERING THE ASSESSEE'S SUBMISSION AND THE MATERIAL AVAILABLE ON RECORD WHILE OBSERVING THAT THE ARMS LENGTH NATURE OF COMMISSION EARNED BY THE APPELLANT IS VERY M UCH ASCERTAINABLE AND THE ARBITRARY RECOURSE TO RULE-10 OF THE I.T. RULES BY THE AO IS TOTALLY UNWARRANTED AND HENCE HE DELETED TH E ESTIMATED ADDITION OF RS.25 08 701/- MADE BY THE AO. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 11 8. AT THE TIME OF HEARING THE LD. DR SUBMITS THAT FO R THE REASONS AS MENTIONED IN THE ASSESSMENT ORDER THE LD. CIT(A) WAS N OT JUSTIFIED IN DELETING THE ADDITION OF RS.25 08 701/- MADE BY THE AO. THE RELIANCE WAS ALSO PLACED ON THE DECISION IN CIT AND ANOTHER VS. HY UNDAI HEAVY INDUSTRIES CO. LTD. (2007) 291 ITR 482(SC) AND ISHIKA WAJIMA-HARIMA HEAVY INDUSTRIES LTD. VS. DIRECTOR OF INCOME TAX MUMBAI (2007) 288 ITR 408(SC). HE THEREFORE SUBMITS THAT THE ADDITION MADE BY THE AO BE RESTORED. 9. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSESSEE W HILE REITERATING THE SAME SUBMISSIONS AS SUBMITTED BEFORE TH E AO AND THE LD. CIT(A) FURTHER SUBMITS THAT THE AO WITHOUT CONSIDER ING THE ASSESSEE'S EXPLANATION APPEARING AT PAGE 1 TO 31 AND STAT EMENT ON OATH RECORDED U/S.131 OF SHRI SOMNATH GANGULY A RESID ENT DIRECTOR APPEARING AT PAGE 54-61 OF THE ASSESSEE'S PAPER BOOK HAS MADE AN ADHOC ADDITION OF RS.25 08 701/- ON PRESUMPTION BASIS AND THE LD. CIT(A) WAS FULLY JUSTIFIED IN DELETING THE SAME. HE F URTHER SUBMITS THAT THE AO FOR THE ASSESSMENT YEARS 2005-06 AND 2007-08 AF TER CONSIDERING THE NATURE OF ADDITION MADE IN THE IMPUG NED ASSESSMENT YEAR HAS MADE NO ADDITION IN THIS REGARD VIDE ASSESSMENT ORDERS FOR THE ASSESSMENT YEARS 2005-06 AND 2007-08 DATED 20.11.200 7 AND 21.01.2010 RESPECTIVELY PASSED U/S.143(3) OF THE ACT. I N SUPPORT HE ALSO PLACED ON RECORD THE COPY OF THE SAID ASSESSMENT ORDER S. HE ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 12 THEREFORE SUBMITS THAT THE ORDER PASSED BY THE LD. CIT (A) IN DELETING THE ADDITION BE UPHELD. 10. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE R IVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIN D THAT THE FACTS ARE NOT IN DISPUTE INASMUCH AS THE ASSESSEE HAS SHOWN REVENU E AS A COMMISSION ON SALE OF MACHINERY AND SPARES. APART FROM TH IS THE ASSESSEE HAS ALSO SHOWN RECEIPTS FROM SERVICE CHARGES FROM (I) L OCAL CUSTOMERS (POST WARRANTY) RS.1 29 000/- AND (II) GROUP STAUBLI RS.19 75 600/- AGGREGATING TO RS.21 04 600/-. WE F URTHER FIND THAT IT IS NOT THE CASE OF THE AO THAT THE ASSESSEE HAS NOT MAIN TAINED REGULAR BOOKS OF ACCOUNT OR HAS NOT FURNISHED AUDITED F INANCIAL STATEMENTS ALONG WITH TAX AUDIT REPORT. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSE SSEE ARE NOT IN TERMS OF THE PROVISIONS OF SEC.145(1) OF THE ACT. IN OTHER WORDS THE AO HAS NOT REJECTED THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. THE LD. CIT(A) AFTER CONSIDERING THE FACTUAL MA TRIX OF THE CASE HAS DELETED THE ADDITION VIDE FINDING RECORDED IN PARA 4.14 OF HIS ORDER WHICH IS REPRODUCED AS UNDER: 4.14 I HAVE CAREFULLY CONSIDERED THE ABOVE SUBMISSIONS OF THE APPELLANT AND INCLINED TO SUBSC RIBE TO THE VIEW THAT THE COMMISSION EARNED BY THE APPELLAN T IS AT ARMS LENGTH COMMENSURATE TO ITS OPERATIONS IN INDIA AND AS LAID DOWN BY THE CBDT CIRCULAR NO.23 AS ARM S LENGTH COMMISSION TO THE AGENT EXTINGUISHES THE ASSESSMENT OF THE PRINCIPLES IN INDIA. IN CONCLUD ING HIS ASSESSMENT THE A.O. HAS PLACED RELIANCE ON RULE 10 OF ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 13 THE INCOME TAX RULES 1962. I TEND TO AGREE WITH T HE APPELLANTS CONTENTIONS THAT THE PROVISIONS OF RUL E 10 APPLY ONLY TO CASES WHERE INCOME CHARGEABLE TO TAX IN INDIA CANNOT BE ASCERTAINED DEFINITELY. THE APPELL ANT MAINTAINS ACCOUNTS IN INDIA ON MERCANTILE BASIS AND THE SAME ARE ALSO AUDITED UNDER THE COMPANIES ACT 1956. THUS THE ARMS LENGTH NATURE OF COMMISSION EARNED BY THE APPELLANT IS VERY MUCH ASCERTAINABLE. THEREFOR E THE ARBITRARY RECOURSE TO RULE 10 OF THE I.T. RULES BY THE A.O. IS TOTALLY UNWARRANTED. IN VIEW OF ABOVE I HOLD T HAT THE ADDITION OF RS.25 08 701/- MADE BY THE ASSESSING OF FICER ESTIMATING THE COMMISSION INCOME AT 10% ON ALL SALE S ON AN ADHOC BASIS IS UNWARRANTED AND BE DELETED. 11. IN HYUNDAI HEAVY INDUSTRIES CO. LTD. SUPRA IT HAS BEEN OBSERVED AND HELD BY THEIR LORDSHIPS AT PLACITUM 13 AT PAGE 494 OF THE ITR THAT: NOW COMING TO THE QUESTION OF THE QUANTUM OF TAXAB LE PROFITS ATTRIBUTABLE TO THE INDIAN PERMANENT ESTABLISHMENT OF THE ASSESSEE RELATING TO THE WORK OF INSTALLATION AND COMMISSIONING OF THE PLATFORMS IN BOMBAY HIGH WE ARE OF THE VIEW THAT FOR THE REASON S MENTIONED HEREINAFTER PROFITS ARISING FROM THE ACT IVITIES OF INSTALLATION AND COMMISSIONING WERE TAXABLE AT 1 0 PER CENT. OF THE PAYMENTS RELATING TO THE SAID SERVICES/FACILITIES CARRIED OUT IN BOMBAY HIGH. FIRS TLY IN THE PRESENT CASE IT IS IMPORTANT TO NOTE THAT THE A CCOUNTS SUBMITTED BY THE ASSESSEE WERE REJECTED AND THE ASSESSING OFFICER HAD TO INVOKE THE PROVISIONS OF T HE ACT BY WAY OF BEST JUDGMENT ASSESSMENT. SECONDLY IN TH E PRESENT CASE THE ASSESSEE THEMSELVES CONTENDED IN THE ASSESSMENT PROCEEDINGS THAT THE ASSESSING OFFICER S HOULD HAVE COMPUTED THE INCOME RELATING TO INDIAN OPERATI ONS UNDER SECTION 44BB OR UNDER INSTRUCTION NO. 1767 IS SUED BY THE CENTRAL BOARD OF DIRECT TAXES DATED JULY 1 1987. THIRDLY IT IS IMPORTANT TO NOTE THAT CHAPTER IV OF THE ACT CONTAINS PROVISIONS FOR PRESUMPTIVE TAXATION OF BUS INESS INCOME IN CERTAIN CASES AS PRESCRIBED IN SECTIONS 4 4B 44BB 44BBA AND 44BBB OF THE ACT. IN THE SCHEME OF PRESUMPTIVE TAXATION THE ASSESSEE IS PRESUMED TO H AVE EARNED INCOME AT THE RATE OF A CERTAIN PERCENTAGE O F HIS TOTAL TURNOVER OR GROSS RECEIPTS. IF THE ASSESSEE A GREES TO BE TAXED ON PRESUMED INCOME HE IS NOT REQUIRED TO MAINTAIN BOOKS OF ACCOUNT. IF HOWEVER HE CLAIMS T HAT HIS ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 14 INCOME IS LESS THAN THE PRESUMED FIGURE HE IS REQU IRED TO SUPPORT HIS CLAIM BY PRODUCING BOOKS OF ACCOUNT. IN THE PRESENT CASE AS INDICATED ABOVE THE ASSESSING OFF ICER HAS REJECTED THE ACCOUNTS SUBMITTED BY THE ASSESSEE . THIS HAS NOT BEEN CHALLENGED. MOREOVER THE ASSESSE E APPEARED BEFORE THE DEPARTMENT AND SUBMITTED THAT I TS INCOME FROM INDIAN OPERATIONS BE COMPUTED UNDER SECTION 44BB OR UNDER INSTRUCTION NO. 1767 ISSUED B Y THE CENTRAL BOARD OF DIRECT TAXES. UNDER THE SAID INSTR UCTION IN CASES WHERE THE SALES TAKE PLACE OUTSIDE AS IN THIS CASE ONLY 10 PER CENT. OF THE GROSS RECEIPTS IN RE SPECT OF THE ACTIVITIES OF INSTALLATION COMMISSIONING ETC. PERFORMED IN INDIA WILL BE TAXABLE. IN VIEW OF THE STAND TAKEN BY THE ASSESSEE WE ARE OF THE VIEW THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS RIGHT IN COMPUTING THE TAXABLE PROFITS AT 10 PER CENT. OF TH E GROSS RECEIPTS IN RESPECT OF THE ACTIVITIES OF INSTALLATI ON COMMISSIONING ETC. PERFORMED IN INDIA. WHEREAS IN THE CASE BEFORE US IT IS NOT THE CASE OF THE R EVENUE THAT THE AO HAS REJECTED THE BOOKS OF ACCOUNT AND INVOKED TH E PROVISIONS OF SEC.145(3) OF THE ACT FURTHER IT IS NOT THE CASE THAT PRESUMPTIVE TAXATION OF BUSINESS AS PRESCRIBED UNDER THE RELEVANT PROVISIONS OF THE ACT ARE APPLICABLE TO THE ASSESSEE OR THE ASSESSEE HAS AGREED TO BE TAXED ON PRESUMED INCOME WITHOUT MAINTAINING BOOKS OF ACCOUNT. FOR THESE REASONS THE DECISION RELIED ON BY THE LD. DR IS D ISTINGUISHABLE AND NOT APPLICABLE TO THE PRESENT CASE. 12. IN ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. (SUPRA) IT HAS BEEN HELD (PAGE 411 414 OF HEAD NOTES OF 288 ITR): (I) THAT SECTION 9 OF THE INCOME-TAX ACT 1961 RA ISES A LEGAL FICTION ; BUT HAVING REGARD TO THE CONTEXTUA L INTERPRETATION AND IN VIEW OF THE FACT THAT THE COU RT IS DEALING WITH A TAXATION STATUTE THE LEGAL FICTION MUST BE CONSTRUED HAVING REGARD TO THE OBJECT IT SEEKS TO A CHIEVE. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 15 THE LEGAL FICTION CREATED UNDER SECTION 9 MUST ALSO BE READ HAVING REGARD TO THE OTHER PROVISIONS THEREOF. MARUTI UDYOG LTD. V. RAM LAL [2005] 2 SCC 638 FOLLO WED. (II) THAT SINCE THE APPELLANT CARRIED ON BUSINESS I N INDIA THROUGH A PERMANENT ESTABLISHMENT IT WOULD CLEARLY FALL OUT OF THE APPLICABILITY OF ARTICLE 12(5) OF THE CO NVENTION AND FALL WITHIN THE AMBIT OF ARTICLE 7. IN THE PROT OCOL TO THE CONVENTION IT WAS STATED THAT THE TERM DIRECTL Y OR INDIRECTLY ATTRIBUTABLE INDICATED THE INCOME THAT SHOULD BE REGARDED ON THE BASIS OF THE EXTENT APPROPRIATE TO THE PART PLAYED BY THE PERMANENT ESTABLISHMENT IN THOSE TRANSACTIONS. THE PERMANENT ESTABLISHMENT IN THIS C ASE HAD NO ROLE TO PLAY IN THE TRANSACTION OF OFFSHORE SUPPLY SOUGHT TO BE TAXED SINCE THE TRANSACTION TOOK PLAC E ABROAD. (III) THAT THE SECOND SENTENCE OF ARTICLE 7(1) WHIC H ALLOWED THE STATE OF THE PERMANENT ESTABLISHMENT TO TAX BUSINESS PROFITS BUT ONLY SO MUCH OF THEM AS WAS ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT EXCLUDE D THE APPLICABILITY OF THE PRINCIPLE THAT WHERE THERE WAS A PERMANENT ESTABLISHMENT THE STATE OF THE PERMANENT ESTABLISHMENT SHOULD BE ALLOWED TO TAX ALL INCOME D ERIVED BY THE ENTERPRISE FROM SOURCES IN THE STATE IRRESPE CTIVE OF WHETHER OR NOT SUCH INCOME WAS ECONOMICALLY CONNECT ED WITH THE PERMANENT ESTABLISHMENT. THE STATE OF THE PERMANENT ESTABLISHMENT WAS ALLOWED TO TAX ONLY THO SE PROFITS WHICH WERE ECONOMICALLY ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT I.E. THOSE WHICH RESULTED FROM THE PERMANENT ESTABLISHMENTS ACTIVITIES WHICH WER E ECONOMICALLY FROM THE BUSINESS CARRIED ON BY THE PERMANENT ESTABLISHMENT. IN THIS CASE THE PERMANEN T ESTABLISHMENTS NON-INVOLVEMENT IN THE TRANSACTION OF OFFSHORE SUPPLY EXCLUDED IT FROM BEING A PART OF T HE CAUSE OF THE INCOME ITSELF AND THUS THERE WAS NO BU SINESS CONNECTION. (IV) THAT FOR ATTRACTING THE TAX THERE HAD TO BE SO ME ACTIVITIES THROUGH THE PERMANENT ESTABLISHMENT. IF INCOME AROSE WITHOUT ANY ACTIVITY OF THE PERMANENT ESTABLISHMENT EVEN UNDER THE CONVENTION THE TAXATI ON LIABILITY IN RESPECT OF OVERSEAS SERVICES WOULD NOT ARISE IN INDIA. SECTION 9 SPELLED OUT THE EXTENT TO WHICH TH E INCOME OF A NON-RESIDENT WOULD BE LIABLE TO TAX IN INDIA. SECTION 9 HAD A DIRECT TERRITORIAL NEXUS. RELIEF UN DER A DOUBLE TAXATION AVOIDANCE TREATY HAVING REGARD TO THE PROVISIONS CONTAINED IN SECTION 90(2) WOULD ARISE ONLY IN THE EVENT TAXABLE INCOME OF THE ASSESSEE AROSE IN O NE CONTRACTING STATE ON THE BASIS OF ACCRUAL OF INCOME IN ANOTHER CONTRACTING STATE ON THE BASIS OF RESIDENCE . SO ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 16 FAR AS ACCRUAL OF INCOME IN INDIA WAS CONCERNED TAX ABILITY MUST BE READ IN TERMS OF SECTION 4(2) READ WITH SEC TION 9 WHEREUPON THE QUESTION OF SEEKING ASSESSMENT OF SUC H INCOME IN INDIA ON THE BASIS OF THE DOUBLE TAXATION TREATY WOULD ARISE. PARAGRAPH 6 OF THE PROTOCOL TO THE CONVENTION WAS NOT APPLICABLE BECAUSE FOR THE PRO FITS TO BE ATTRIBUTABLE DIRECTLY OR INDIRECTLY THE PERMA NENT ESTABLISHMENT MUST BE INVOLVED IN THE ACTIVITY GIVI NG RISE TO THE PROFITS. (V) THAT THE FACT THAT THE CONTRACT WAS SIGNED IN I NDIA WAS OF NO MATERIAL CONSEQUENCE SINCE ALL ACTIVITIES IN CONNECTION WITH THE OFFSHORE SUPPLY WERE OUTSIDE IN DIA AND THEREFORE INCOME COULD NOT BE DEEMED TO ACCRUE OR ARISE IN THE COUNTRY. (VI) THAT WHERE DIFFERENT SEVERABLE PARTS OF A COMP OSITE CONTRACT WERE PERFORMED IN DIFFERENT PLACES AS IN THIS CASE THE PRINCIPLE OF APPORTIONMENT COULD BE APPLI ED TO DETERMINE WHICH FISCAL JURISDICTION COULD TAX THAT PARTICULAR PART OF THE TRANSACTION. THIS PRINCIPLE HELPED DETERMINE WHERE THE TERRITORIAL JURISDICTION OF A P ARTICULAR STATE LAY AND TO DETERMINE ITS CAPACITY TO TAX AN E VENT. APPLYING IT TO COMPOSITE TRANSACTIONS WHICH HAD SOM E OPERATIONS IN ONE TERRITORY AND SOME IN THE OTHER WAS ESSENTIAL TO DETERMINE THE TAXABILITY OF VARIOUS OPERATIONS. THEREFORE THE CONCEPTS OF PROFITS OF B USINESS CONNECTION AND PERMANENT ESTABLISHMENT SHOULD NOT B E MIXED UP. WHEREAS BUSINESS CONNECTION WAS RELEVANT FOR THE PURPOSE OF APPLICATION OF SECTION 9 THE CONCEP T OF PERMANENT ESTABLISHMENT WAS RELEVANT FOR ASSESSING THE INCOME OF A NON-RESIDENT UNDER THE CONVENTION. (VII) THAT IN THIS CASE THE ENTIRE TRANSACTION WAS COMPLETED ON THE HIGH SEAS AND THEREFORE THE PROF ITS ON SALE DID NOT ARISE IN INDIA. ONCE EXCLUDED FROM THE SCOPE OF TAXATION UNDER THE INCOME-TAX ACT APPLICATION OF THE DOUBLE TAXATION AVOIDANCE TREATY WOULD NOT ARISE. (VIII) THAT IN RELATION TO OFFSHORE SERVICES SECT ION 9(1)(VII)(C) REQUIRED TWO CONDITIONS TO BE MET : TO BE TAXABLE IN INDIA THE SERVICES WHICH WERE THE SOURCE OF THE INCOME SOUGHT TO BE TAXED HAD TO BE RENDERED IN IND IA AS WELL AS UTILIZED IN INDIA. IN THIS CASE BOTH THESE CONDITIONS WERE NOT SATISFIED SIMULTANEOUSLY THERE BY EXCLUDING THE INCOME FROM THE AMBIT OF TAXATION IN INDIA. THUS FOR A NON-RESIDENT TO BE TAXED ON INCOME FOR SERVICES SUCH A SERVICE HAD TO BE RENDERED WITHIN INDIA AND HAD TO BE PART OF A BUSINESS OR PROFESSION CARR IED ON BY SUCH PERSON IN INDIA. THE APPELLANTS HAD PROVIDE D SERVICES TO PERSONS RESIDENT IN INDIA AND THOUGH T HEY HAD BEEN USED HERE THEY HAD NOT BEEN RENDERED IN I NDIA. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 17 (IX) THAT WHATEVER WAS PAYABLE BY A RESIDENT TO A N ON- RESIDENT BY WAY OF TECHNICAL FEES WOULD NOT ALWAYS COME WITHIN THE PURVIEW OF SECTION 9(1)(VII). IT MUST HA VE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FU RNISH A BASIS FOR IMPOSITION OF TAX. (X) THAT EVEN IN RELATION TO SUCH INCOME VIZ. INC OME FROM OFFSHORE SERVICES THE PROVISIONS OF ARTICLE 7 OF THE CONVENTION WOULD BE APPLICABLE AS SERVICES RENDERE D OUTSIDE INDIA WOULD HAVE NOTHING TO DO WITH THE PERMANENT ESTABLISHMENT IN INDIA. THUS IF ANY SERV ICES HAD BEEN RENDERED BY THE HEAD OFFICE OF THE APPELLA NT OUTSIDE INDIA ONLY BECAUSE THEY WERE CONNECTED WIT H THE PERMANENT ESTABLISHMENT EVEN IN RELATION THERETO T HE PRINCIPLE OF APPORTIONMENT WOULD APPLY. (XI) THERE EXISTS A DISTINCTION BETWEEN A BUSINESS CONNECTION AND A PERMANENT ESTABLISHMENT. THE PERMANENT ESTABLISHMENT CANNOT BE EQUATED TO A BUSINESS CONNECTION SINCE THE FORMER IS FOR THE PU RPOSE OF ASSESSMENT OF INCOME OF A NON-RESIDENT UNDER A DOUBLE TAXATION AVOIDANCE AGREEMENT AND THE LATTER IS FOR THE APPLICATION OF SECTION 9 OF THE INCOME-TAX ACT. CLAUSE (A) OF EXPLANATION 1 TO SECTION 9(1)(I) STAT ES THAT ONLY SUCH PART OF THE INCOME AS IS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA ARE TAXABLE IN IND IA. THE EXISTENCE OF A PERMANENT ESTABLISHMENT WOULD NOT CONSTITUTE SUFFICIENT BUSINESS CONNECTION AND TH E PERMANENT ESTABLISHMENT WOULD BE THE TAXABLE ENTITY . THE FISCAL JURISDICTION OF A COUNTRY WOULD NOT EXTE ND TO TAXING THE ENTIRE INCOME ATTRIBUTABLE TO THE PERMAN ENT ESTABLISHMENT. THERE EXISTS A DIFFERENCE BETWEEN THE EXISTENCE OF A BUSINESS CONNECTION AND THE INCOME ACCRUING OR ARIS ING OUT OF SUCH BUSINESS CONNECTION. IN CONSTRUING A CONTRACT THE TERMS AND CONDITIONS THEREOF ARE TO BE READ AS A WHOLE. A CONTRACT MUST BE CONST RUED KEEPING IN VIEW THE INTENTION OF THE PARTIES. NO DO UBT THE APPLICABILITY OF THE TAX LAWS WOULD DEPEND UPON THE NATURE OF THE CONTRACT BUT THE SAME SHOULD NOT BE CONSTRUED KEEPING IN VIEW THE TAXING PROVISIONS. THE CONCEPTS OF PROFITS OF BUSINESS CONNECTION AND PERMANENT ESTABLISHMENT SHOULD NOT BE MIXED UP. WHEREAS BUSINESS CONNECTION IS RELEVANT FOR THE PUR POSE OF APPLICATION OF SECTION 9 THE CONCEPT OF PERMANE NT ESTABLISHMENT IS RELEVANT FOR ASSESSING THE INCOME OF A NON-RESIDENT UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 18 WHEREAS IN THE CASE BEFORE US THE FACTS AND ISSUE ARE ENTI RELY DIFFERENT INASMUCH AS THE LD. DR HAS FAILED TO SHOW AS TO HOW THE RATIO OF THE ABOVE JUDGMENT IS APPLICABLE TO THE FACTS OF T HE PRESENT CASE THEREFORE THE DECISION RELIED ON BY THE LD. DR IS DI STINGUISHABLE AND NOT APPLICABLE TO THE PRESENT CASE. 13. IN THIS VIEW OF THE MATTER AND IN THE ABSENCE OF ANY CONTRARY MATERIAL BROUGHT ON RECORD BY THE REVENUE AGAINST TH E FINDING OF THE LD. CIT(A) AND KEEPING IN VIEW THAT THE ASSESSEE HAS ALSO SHOWN IN ITS PROFIT AND LOSS ACCOUNT INCOME FROM SERVICES AND OTHER INCO ME AMOUNTING TO RS.21 04 600/- AND RS.2 78 026/- RESPECTIV ELY AND ALSO KEEPING IN VIEW THAT THE AO HAS GIVEN NO BASIS FOR MAK ING ADHOC ADDITION WE ARE OF THE VIEW THAT THE AO WAS NOT JUSTI FIED IN MAKING ADDITION OF RS.25 08 701/- AND HENCE WE ARE INCLINED T O UPHOLD THE ORDER OF THE LD. CIT(A) IN DELETING THE SAID ADDITIO N MADE BY THE AO. THE GROUND TAKEN BY THE REVENUE IS THEREFORE REJECTED . 14. GROUND NO.2 READS AS UNDER : 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN HOLDING TH AT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING DEPRECIATION OF RS.37 399/- ON CAPITALIZATION OF EX CHANGE CONTROL FLUCTUATION ARISING ON FOREIGN CURRENCY BOR ROWING FROM ITS HEAD OFFICES RELATABLE TO FIXED ASSETS ACQU IRED IN INDIA WITHOUT APPRECIATING THAT SECTION 43A IS NOT APPLICABLE IN THE PRESENT CASE. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 19 15. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT IT WAS O BSERVED BY THE AO THAT IN THE NOTES TO THE COMPUTATION OF INCOME THE ASSESSEE HAS STATED THAT ADDITIONS TO THE FIXED ASSETS INCLUDE LOSS OF FOREIGN EXCHANGE RATES AT THE YEAR-END WHICH IS ADDED TO THE W RITTEN DOWN VALUE OF THE BLOCK OF ASSETS. THIS ADJUSTMENT PERTAININ G TO FIXED ASSETS I.E. (PREMISES) ACQUIRED IN INDIA OUT OF FOREIGN CU RRENCY LOANS. THE ASSESSEE WAS ASKED AS TO WHY SUCH CLAIM SHOULD NOT BE DISALLOWED. THE ASSESSEE HAS GIVEN A SIMILAR REPLY TO WH AT HAS BEEN STATED ABOVE. HOWEVER THE AO DID NOT ACCEPT THE ASSESSEE'S EXPLANATION. THE AO WAS OF THE VIEW THAT FROM THE D EFINITION OF WDV IT IS QUITE CLEAR THAT IT ONLY INCLUDES ACTUAL COST TO TH E ASSESSEE OR ACTUAL COST LESS DEPRECIATION. THEREFORE THE DEFINITION OF WDV ITSELF EXCLUDES THE CHARGE IN THE RATE OF EXCHANGE OF CURRENCY TO BE PART OF IT. FURTHER SECTION 43A OF THE ACT TALKS ABOUT ACQUISIT ION OF ASSETS OUTSIDE INDIA AND IS THEREFORE NOT APPLICABLE IN TH IS CASE. ACCORDINGLY HE DISALLOWED THE EXCESS CLAIM OF DEPRECIATION OF RS.37 39 9/-. ON APPEAL THE LD. CIT(A) WHILE OBSERVING THAT PERHAPS T HERE WOULD BE A CASE TO CLAIM FULL AMOUNT OF EXCHANGE FLUCTUATION AS REVE NUE LOSS ALLOWED THE CLAIM OF THE ASSESSEE OF DEPRECIATION ON ACCOUN T OF FOREIGN EXCHANGE REVALUATION. 16. AT THE TIME OF HEARING THE LD. DR SUPPORTS THE OR DER OF THE AO. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 20 17. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSESSEE R ELIED ON THE ORDER OF THE LD. CIT(A). 18. HAVING CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVA L PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECORD WE FIND THAT THE ISSUE RAISED IS NO LONGER RES INTEGRA . IN CIT VS. WOODWARD GOVERNOR INDIA P. LTD. (2009) 312 ITR 254(SC) THEIR LORDSHIPS HAVE HEL D VIDE PLACITUM 31 TO 33 (AT PAGE 270 TO 272 OF THE ITR) AS UNDER : AS HELD IN ARVIND MILLS` CASE [1992] 193 ITR 255 ( SC) (SUPRA) INCREASE OR DECREASE IN LIABILITY IN THE RE PAYMENT OF FOREIGN LOAN SHOULD BE TAKEN INTO ACCOUNT TO MOD IFY THE FIGURE OF ACTUAL COST IN THE YEAR IN WHICH THE INCR EASE OR DECREASE IN LIABILITY ARISES ON ACCOUNT OF THE FLUC TUATION IN THE RATE OF EXCHANGE. THUS THE ADJUSTMENTS IN THE ACTUAL COST ARE TO BE MADE IRRESPECTIVE OF THE DATE OF ACT UAL PAYMENT IN FOREIGN CURRENCY MADE BY THE ASSESSEE.TH IS POSITION ALSO FINDS PLACE IN THE CLARIFICATION ISSU ED BY THE MINISTRY OF FINANCE DATED JANUARY 4 1967 WHICH I NTER ALIA READS AS UNDER : ' 2. THE GOVERNMENT AGREES THAT FOR THE PURPOSES OF THE CALCULATION OF DEPRECIATION ALLOWANCE THE COST OF CAPITAL ASSETS IMPORTED BEFORE THE DATE OF DEVALUATION SHOULD BE WRITTEN OFF TO THE EXTENT OF THE FULL AMOUNT OF THE ADDITIONAL RUPEE LIABILITY INCURRED ON ACCOUNT OF DEVALUATION AND NOT WHAT IS ACTUALLY PAID FROM YEAR TO YEAR. THE PROPOSED LEGAL PROVISION IN THE MATTER IS INTENDED TO BE FRAMED ON THIS BASIS.' (EMPHASIS SUPPLIED) ONE MORE ASPECT NEEDS TO BE MENTIONED. SECTION 43(1 ) DEFINES ACTUAL COST FOR THE PURPOSE OF GRANT OF DEPRECIATION ETC. TO MEAN ' THE ACTUAL COST OF TH E ASSETS TO THE ASSESSEE' . TILL THE INSERTION OF THE UNAMEN DED SECTION 43A THERE WAS NO PROVISION IN THE INCOME-TA X ACT FOR ADJUSTMENT OF THE ACTUAL COST WHICH WAS FIXED O NCE AND FOR ALL AT THE TIME OF ACQUISITION OF THE ASSE T. ACCORDINGLY NO ADJUSTMENT COULD BE MADE IN THE ACT UAL COST OF THE ASSETS FOR PURPOSES OF GRANT OF DEPRECI ATION FOR ANY INCREASE/DECREASE OF LIABILITY SUBSEQUENTLY ARI SING DUE ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 21 TO EXCHANGE FLUCTUATION. CONSEQUENTLY SECTION 43A WAS INTRODUCED IN THE ACT BY THE FINANCE ACT 1967 WIT H EFFECT FROM APRIL 1 1967 IN THE ABOVE TERMS TO PROVIDE F OR ADJUSTMENT IN THE ACTUAL COST OF ASSETS PURSUANT TO CHANGE IN THE FOREIGN CURRENCY EXCHANGE RATES. AS A CONSEQUENCE OF THE INSERTION OF THE SAID SECTION I T BECAME POSSIBLE TO ADJUST THE INCREASE/DECREASE IN LIABILITY RELATING TO ACQUISITION OF CAPITAL ASSETS ON ACCOUNT OF EXCHANGE RATE FLUCTUATION IN THE ACTUAL COST OF THE ASSETS ACQUIRED IN FOREIGN CURRENCY AND FOR INTER ALIA DEPRECIATION TO BE ALLOWED WITH REFERENCE TO SUCH INCREASED/DECREASED COST. THIS POSITION IS ALSO MAD E CLEAR BY CIRCULAR NO. 5-P DATED OCTOBER 9 1967 ISSUED B Y THE CENTRAL BOARD OF DIRECT TAXES. ONE MORE POINT NEEDS TO BE MENTIONED. SECTION 43A (UNAMENDED) CORRESPONDS T O PARAGRAPH 10 OF AS-11 SIMILARLY PROVIDING FOR ADJUS TMENT IN THE CARRYING COST OF FIXED ASSETS ACQUIRED IN FO REIGN CURRENCY DUE TO FOREIGN EXCHANGE FLUCTUATION AT EA CH BALANCE-SHEET DATE. THE RELEVANT PARAGRAPH READS AS FOLLOWS : ' 10. EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR THE PURPOSE OF ACQUIRING F IXED ASSETS WHICH CARRIED IN TERMS OF HISTORICAL COST SHOULD BE ADJUSTED IN THE CARRYING AMOUNT OF THE RESPECTIVE FIXED ASSETS. THE CARRYING AMOUNT OF SUCH FIXED ASSETS SHOULD TO THE EXTENT NOT ALREADY SO ADJUSTED OR OTHERWISE ACCOUNTED FOR ALSO BE ADJUSTED TO ACCOUNT FOR ANY INCREASE OR DECREASE IN THE LIABILITY OF THE ENTERPRISE AS EXPRESSED IN TH E REPORTING CURRENCY BY APPLYING THE CLOSING RATE FO R MAKING PAYMENT TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSETS OR FOR REPAYMENT OF THE WHOLE OR A PART OF THE MONIES BORROWED BY THE ENTERPRISE FROM ANY PERSON DIRECTLY OR INDIRECTLY IN FOREIGN CURRENCY SPECIFICALLY FOR THE PURPOSE OF ACQUIRING THOSE ASSETS.' AS STATED ABOVE WHAT TRIGGERS THE ADJUSTMENT IN TH E ACTUAL COST OF THE ASSETS IN TERMS OF THE UNAMENDE D SECTION 43A OF THE 1961 ACT IS THE CHANGE IN THE RA TE OF EXCHANGE SUBSEQUENT TO THE ACQUISITION OF ASSET IN FOREIGN CURRENCY. THE SECTION MANDATES THAT AT ANY TIME THE RE IS CHANGE IN THE RATE OF EXCHANGE THE SAME MAY BE GIV EN EFFECT TO BY WAY OF ADJUSTMENT OF THE CARRYING COST OF THE FIXED ASSETS ACQUIRED IN FOREIGN CURRENCY. BUT FOR SECTION 43A WHICH CORRESPONDS TO PARAGRAPH 10 OF AS-11 SUCH ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIXED ASSE TS WAS ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 22 NOT POSSIBLE PARTICULARLY IN THE LIGHT OF SECTION 43(1). THE UNAMENDED SECTION 43A NOWHERE REQUIRED AS CONDITION PRECEDENT FOR MAKING NECESSARY ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIXED ASSET THAT THERE SHOUL D BE ACTUAL PAYMENT OF THE INCREASED/DECREASED LIABILITY AS A CONSEQUENCE OF THE EXCHANGE VARIATION. THE WORDS US ED IN THE UNAMENDED SECTION 43A WERE ' FOR MAKING PAYMENT' AND NOT ' ON PAYMENT' WHICH IS NOW BROUG HT IN BY AMENDMENT TO SECTION 43A VIDE THE FINANCE AC T 2002. 19. RECENTLY THE HONBLE SUPREME COURT IN CIT VS. MARU TI UDYOG LTD.(2010) 320 ITR 729(SC) FOLLOWING THE ABOVE JUDG MENT HELD THAT THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE CLAIM FOR DEPRECIATION ON ACCOUNT OF ENHANCED COST OF DEPRECIATION DUE TO FLUCTUATIO N IN FOREIGN EXCHANGE RATE WAS ADMISSIBLE FOR DEDUCTION U/S.37 OF THE INCOME TAX ACT 1961. 20. IN THE LIGHT OF THE SAID AUTHORITATIVE PRONOUNCEM ENT OF THE HONBLE SUPREME COURT AND KEEPING IN VIEW THAT THE A SSESSEE IS CLAIMING DEPRECIATION ONLY ON ACCOUNT OF ENHANCED COST DUE TO FLUCTUATION IN FOREIGN EXCHANGE RATE WE ARE OF THE V IEW THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN ALLOWING THE ASSESSEE'S CLAIM OF DEPRECIATION ON ACCOUNT OF FOREIGN EXCHANGE RE-VALUATI ON. THE GROUND TAKEN BY THE REVENUE IS THEREFORE REJECTED. ITA NO.5459/MUM/2006 (A. Y.2003-04) (REVENUES APPE AL): 21. GROUND NO.1 READS AS UNDER : 1. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DIRECTING TO DELETE THE ADDITION OF RS.41 74 155/- MADE BY THE ASSESSIN G ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 23 OFFICER BY ESTIMATING THE COMMISSION INCOME @ 10% WITHOUT APPRECIATING THE FACT THAT : (I) THE ASSESSEE IS ASSUMING RISKS IN RESPECT OF THE SALES OF PRODUCTS MADE BY THE HEAD OFFICE/STAUBLI GROUP ENTITIES. (II) THE PROFITS ARISING ON ACCOUNT OF SUCH RISKS ASSUMED BY THE INDIA BRANCH IS THE INCOME OF THE BRANCH AND NOT OF THE HEAD OFFICE/STAUBLI GROUP ENTITIES. (III) THE ARMS LENGTH PAYMENT OF COMMISSION TO THE INDIA BRANCH BY THE HEAD OFFICE/STAUBLI GROUP ENTITIES (PRINCIPALS) DOES NOT EXTINGUISHES THE ASSESSMENT OF THE PRINCIPALS IN INDIA. 22. AT THE TIME OF HEARING BOTH PARTIES HAVE AGREED THAT THE FACTS OF THE ABOVE ISSUE ARE THE SAME AS THE FACTS IN GROUND NO.1 FOR THE ASSESSMENT YEAR 2001-02 THEREFORE THE PLEA TAKEN BY TH EM FOR THE SAID ASSESSMENT YEAR MAY BE CONSIDERED WHILE DECIDING THE ABOVE GROUND FOR THE ASSESSMENT YEAR 2003-04. 23. THAT BEING SO AND IN THE ABSENCE OF ANY DISTINGUIS HING FEATURE BROUGHT ON RECORD BY THE PARTIES WE DIRECT THE AO TO F OLLOW OUR FINDING RECORDED IN PARAS -10 TO 13 OF THIS ORDER. WE HOLD AN D ORDER ACCORDINGLY. THE GROUND TAKEN BY THE REVENUE IS THERE FORE REJECTED. 24. GROUND NO.2 READS AS UNDER : 2. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN HOLDING TH AT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING DEPRECIATION OF RS.18 636/- ON CAPITALIZATION OF EX CHANGE CONTROL FLUCTUATION ARISING ON FOREIGN CURRENCY BOR ROWING FROM ITS HEAD OFFICE RELATABLE TO FIXED ASSETS ACQU IRED IN ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 24 INDIA WITHOUT APPRECIATING THAT SECTION 43A IS NOT APPLICABLE IN THE PRESENT CASE. 25. AT THE TIME OF HEARING BOTH PARTIES HAVE AGREED THAT THE FACTS OF THE ABOVE ISSUE ARE THE SAME AS THE FACTS IN GROUND NO.2 FOR THE ASSESSMENT YEAR 2001-02 THEREFORE THE PLEA TAKEN BY TH EM FOR THE SAID ASSESSMENT YEAR MAY BE CONSIDERED WHILE DECIDING THE ABOVE GROUND FOR THE ASSESSMENT YEAR 2003-04. 26. AFTER HEARING THE RIVAL PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECORD WE ARE OF THE VIEW THAT THE HONB LE SUPREME COURT IN WOODWARD GOVERNOR INDIA P. LTD. SUPRA HAS HELD VI DE PLACITUM 34 (PAGE 272 OF THE ITR) AS UNDER : LASTLY WE ARE OF THE VIEW THAT THE AMENDMENT OF S ECTION 43A BY THE FINANCE ACT 2002 WITH EFFECT FROM APRI L 1 2003 IS AMENDATORY AND NOT CLARIFICATORY. THE AMENDMENT IS IN COMPLETE SUBSTITUTION OF THE SECTIO N AS IT EXISTED PRIOR THERETO. UNDER THE UN-AMENDED SECTION 43A ADJUSTMENT TO THE ACTUAL COST TOOK PLACE ON THE HAPPENING OF CHANGE IN THE RATE OF EXCHANGE WHEREAS UNDER THE AMENDED SECTION 43A THE ADJUSTMENT IN THE ACTUAL COST IS MADE ON CASH BASIS. THIS IS INDICATE D BY THE WORDS ' AT THE TIME OF MAKING PAYMENT' . IN OTHER W ORDS UNDER THE UNAMENDED SECTION 43A ' ACTUAL PAYMENT' WAS NOT A CONDITION PRECEDENT FOR MAKING NECESSARY ADJUSTMENT IN THE CARRYING COST OF THE FIXED ASSET ACQUIRED IN FOREIGN CURRENCY HOWEVER UNDER THE AMENDED SECTION 43A WITH EFFECT FROM APRIL 1 2003 SUCH ACTUAL PAYMENT OF THE DECREASED/ ENHANCED LIABILITY IS MADE A CONDITION PRECEDENT FOR MAKING ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIXED ASSET. THIS INDICATES A COMPLETE STRUCTURAL CHANGE BROUGHT ABOUT IN SECTION 43A VIDE THE FINANCE ACT 2002. THEREFORE THE AMENDED SECTION IS AMENDATORY AND NOT CLARIFICATORY IN NATU RE. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 25 IN THE ABSENCE OF COMPLETE FACTS AS TO WHETHER THE ASSESSEE HAS ALSO CLAIMED ONLY DEPRECIATION ON THE WDV OR HAS ALSO MADE A CTUAL PAYMENT ON ACCOUNT OF DECREASED/ENHANCED LIABILITY OF FO REIGN EXCHANGE FLUCTUATION WE ARE OF THE VIEW THAT THE MAT TER SHOULD GO BACK TO THE FILE OF THE AO AND ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY THE REVENUE AUTHORITIES ON THIS ACCOUNT AND DI RECT THE AO TO APPLY THE RATIO OF THE DECISION OF THE HONBLE SUPREME COURT (SUPRA) AND ALLOW THE DUE RELIEF TO THE ASSESSEE AFTER PROVIDI NG REASONABLE OPPORTUNITY OF BEING HEARD. THE GROUND TAKEN BY THE REVENUE IS THEREFORE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 27. IN THE RESULT THE REVENUES APPEAL FOR ASSESSMENT YE AR 2001-02 IS DISMISSED AND THE APPEAL FOR THE ASSESSMENT YEAR 2003-0 4 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 5.4.2010. SD/- SD/- (B. RAMAKOTAIAH) ( D.K. AGARWAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED: 5.4.2010. JV. ITA NOS.3703 & 5459/M/05 & 06 A.Y:01-02 &03-04 26 COPY TO: THE APPELLANT THE RESPONDENT THE CIT CONCERNED MUMBAI THE CIT(A) CONCERNED MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR ITAT MUMBAI. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 26.3.10 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 29.3.10 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON 5.4.10 SR.PS/PS 7. FILE SENT TO THE BENCH CLERK 12.4.10 SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER