2007 (3) TMI 420 - AT - Income Tax

Admission of additional ground of appeal - Powers and functions of the Appellate Tribunal - non-resident company - Permanent establishment in India Or Not - revenues from inbound and outbound consignments - treated as royalty and/or fees for technical services - whether it can be open to this Tribunal to consider the questions which even the Assessing Officer or the Commissioner (Appeals) have not examined when they were in seisin of the proceedings - HELD THAT - We find that section 255(1) of the Act provides that powers and functions of the Tribunal are to be exercised and performed by the benches constituted by the President from among the members thereof. Section 255(3), inter alia , further provides that the President may constitute a special bench for disposal of a particular case . It is therefore clear that it is the bench so formed which will exercise the powers of the Tribunal, unless, of course, reference to the Special Bench itself restricts powers of such a Special Bench, as may be expedient and necessary, to deal only with a limited aspect of the appeal. In our considered view, therefore, once this Special Bench comes be in seisin of the entire appeals, it is for this bench to decide whether or not to admit the grounds of appeal; all the powers of the Tribunal, so far as these appeals are concerned, are to be exercised by the Special Bench alone. The objection taken by the assessee respondent to the effect that this Special Bench has no powers to admit an additional ground of appeal, in this view of the matter, is devoid of legally sustainable merits. We reject the same. We agree that the Tribunal does indeed have the powers of admitting an additional ground of appeal which may not arise out of the orders of the authorities below. There is no longer any dispute or controversy about the powers of the Tribunal to admit an additional ground of appeal, as has been laid down by the Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. 1996 (12) TMI 7 - SUPREME COURT . However, whether, in a particular situation, the Tribunal should exercise such powers or not, would essentially depend on the facts of such a case, as there cannot be any, and there is no, straight jacket formula of universal application to decide the question of admission of additional grounds, or a criterion for admission thereof, which operates de hors the peculiarities of a fact situation. Whether admission of these two additional grounds of appeal will require any fresh investigation of facts - In our considered view, the admission of additional ground of appeal on the question of taxability of assessee s revenues on gross basis as royalty and as fees for technical services would require a fresh investigation of facts inasmuch as this aspect of the matter has not been examined by any of the authorities below, including the Assessing Officer. In our considered view, this is purely a factual matter and it would require reappraisal of facts, on the touchstone of the legal principles set out in the definitions of royalties and fees for technical services as set out under the Act and the applicable Indo Dutch tax treaty. In our considered view, by way of raising the second and third additional grounds of appeal, the subject-matter of tax proceedings is being sought to be enlarged by the Assessing Officer. In our considered view, the shift of subject-matter of taxation from taxability of profit earned by the assessee from operations in India to the taxability of gross revenues generated by the Indian operations of the assessee, certainly amounts to expansion of subject-matter of tax proceedings, but then an additional ground of appeal cannot enlarge the subject-matter of tax proceedings. In case, however, we are to admit the last two additional grounds of appeal, we will end up enlarging the scope of tax proceedings in this case. We, therefore, deem it fit and proper to only admit first additional ground of appeal. We decline to admit the remaining two additional grounds of appeal. As regards all other revised grounds of appeal and the letters filed by the Assessing Officer appellant from time to time, these were not pressed by the learned Departmental Representative. In any event, neither any specific reasons are cited justifying filing of these letters and revised grounds nor are we satisfied that it is necessary to admit these letters and revised grounds. We decline to admit the same. Thus, we deem it fit and proper to admit only the following additional ground of appeal and decline to admit the remaining two additional grounds of appeal That the learned CIT(A) has erred in law and on facts in concluding that the assessee has no permanent establishment in India. The appeal shall, accordingly, be heard on the merits on the ground raised in the original memorandum of appeal and the above additional ground of appeal.

Summary

Issues Involved:
1. Permanent Establishment (PE) in India
2. Taxability of Revenue as Royalties
3. Taxability of Revenue as Fees for Technical Services

Issue-Wise Detailed Analysis:

1. Permanent Establishment (PE) in India:

The primary issue revolves around whether the assessee, a non-resident company incorporated in the Netherlands, has a Permanent Establishment (PE) in India. The assessee's operations in India were conducted through an arrangement with Air Freight Limited (AFL), an Indian company, under which AFL handled the delivery of inbound shipments and the acceptance of outbound shipments.

The assessee contended that it did not have a PE in India, as its transactions with AFL were on a 'principal to principal' basis, and no part of its income accrued or arose in India. However, the Assessing Officer (AO) disagreed, relying on the assessment order for the assessment year 1990-91, and concluded that the assessee had a PE in India in the form of AFL. The CIT(A) upheld the assessee's contentions, stating that AFL could not be regarded as a PE of the assessee-company, and section 9(1)(i) of the Income-tax Act, 1961, did not apply as the relationship was on a 'principal to principal' basis.

The Division Bench of the Tribunal had earlier concluded that the assessee had a PE in India and that income from inbound shipments was partly taxable in India. The Special Bench was constituted to reconsider whether the assessee had a PE in India and if the income from inbound shipments could be attributed to such a PE.

2. Taxability of Revenue as Royalties:

The revenue appellant sought to raise an additional ground of appeal, contending that a part of the entire revenue arising to the assessee from inbound and outbound consignments was taxable in India as 'royalties' under section 9(1)(vi) of the Income-tax Act, 1961, read with Explanation 2(1)(i) and/or (iv) and Article 12 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA).

The Tribunal noted that this issue was not examined by the AO or the CIT(A) during the assessment proceedings. The Tribunal observed that admitting this additional ground would require a fresh investigation of facts, which had not been examined by the authorities below. The Tribunal concluded that the admission of this ground would lead to an expansion of the subject matter of tax proceedings and declined to admit this additional ground of appeal.

3. Taxability of Revenue as Fees for Technical Services:

The revenue appellant also sought to raise an additional ground of appeal, contending that the remaining part of the entire revenue arising to the assessee from inbound and outbound consignments was taxable in India as fees for technical services under section 9(1)(vii) read with Explanation 2 of the Income-tax Act, 1961, and Article 12 of the India-Netherlands DTAA.

Similar to the issue of royalties, the Tribunal observed that this issue had not been examined by the AO or the CIT(A) during the assessment proceedings. The Tribunal noted that admitting this additional ground would require a fresh investigation of facts and would lead to an expansion of the subject matter of tax proceedings. Therefore, the Tribunal declined to admit this additional ground of appeal.

Conclusion:

The Tribunal admitted the additional ground of appeal regarding the existence of a PE in India but declined to admit the additional grounds of appeal related to the taxability of revenue as royalties and fees for technical services. The appeal was to be heard on the merits of the original grounds of appeal and the admitted additional ground of appeal.