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2010 (4) TMI 690 - AT - Income TaxComputation of income - Arms length price - Depreciation - Addition - distinction between a business connection and a permanent establishment - Held that - business connection is relevant for the purpose of application of section 9, the concept of permanent establishment is relevant for assessing the income of a non-resident under the Double Taxation Avoidance Agreement - the assessee shown, in its Profit and Loss Account, maintained in India, Audited as per Companies Act, income from services and other income amounting to Rs.21,04,600/- and Rs.2,78,026/- respectively - the AO was not justified in making addition of Rs.25,08,701/- Decided in the favour of the assessee Regarding depreciation - Exchange differences arising on repayment of liabilities -Held that - Hon ble Supreme Court in CIT vs. Maruti Udyog Ltd.(2009 -TMI - 34852 - SUPREME COURT) held that the Tribunal was right in holding that the claim for depreciation on account of enhanced cost of depreciation due to fluctuation in foreign exchange rate was admissible for deduction u/s.37 of the Income tax Act, 1961.
Issues Involved:
1. Estimation of commission income by the Assessing Officer (AO). 2. Disallowance of depreciation on capitalization of exchange control fluctuation. Detailed Analysis: Issue 1: Estimation of Commission Income Facts: The assessee, a branch office in India of Staubli A.G., Switzerland, acts as a commission and marketing agent for textile machineries. The AO estimated the commission income at 10% of total sales made by Staubli Group in India, resulting in an addition of Rs. 25,08,701/- for AY 2001-02 and Rs. 41,74,155/- for AY 2003-04. AO's Observation: - The AO observed that the assessee is assuming risks in respect of the sales of products made by the Head Office/Staubli Group Entities. - The profits arising from such risks assumed by the Indian Branch should be considered the income of the branch. - The AO referred to various circulars and commentaries, concluding that the payment to the agent and the profit of the assessee from business operations in India are separate and cannot be compared. Assessee's Argument: - The assessee argued that it receives service charges for after-sales support and warranty services, which are over and above the commission on sales. - It was contended that the AO incorrectly applied the India-Singapore Tax Treaty instead of the Indo-Swiss Tax Treaty. - The assessee maintained that the arm's length commission extinguishes the assessment of the Non-resident Principal as per CBDT Circular No.23 dated 23 July 1969. CIT(A)'s Decision: - The CIT(A) deleted the estimated addition, observing that the arm's length nature of the commission earned by the appellant is ascertainable and the arbitrary recourse to Rule-10 of the I.T. Rules by the AO is unwarranted. Tribunal's Decision: - The Tribunal upheld the CIT(A)'s decision, noting that the AO had not rejected the books of account maintained by the assessee. - The Tribunal found no basis for the AO's ad hoc addition and concluded that the AO was not justified in making the addition. Issue 2: Disallowance of Depreciation on Capitalization of Exchange Control Fluctuation Facts: The AO disallowed the assessee's claim of depreciation on capitalization of exchange control fluctuation arising on foreign currency borrowing from its Head Office related to fixed assets acquired in India, amounting to Rs. 37,399/- for AY 2001-02 and Rs. 18,636/- for AY 2003-04. AO's Observation: - The AO argued that the definition of WDV excludes "the charge in the rate of exchange of currency" and that section 43A of the Act, which talks about acquisition of assets outside India, is not applicable in this case. Assessee's Argument: - The assessee contended that the exchange fluctuation should be added to the written down value of the block of assets, and thus, depreciation should be allowed on the enhanced cost. CIT(A)'s Decision: - The CIT(A) allowed the claim of the assessee, observing that there would be a case to claim the full amount of exchange fluctuation as revenue loss. Tribunal's Decision: - The Tribunal referred to the Supreme Court's decision in CIT vs. Woodward Governor India P. Ltd. and CIT vs. Maruti Udyog Ltd., which held that the claim for depreciation on account of enhanced cost due to fluctuation in foreign exchange rate is admissible. - For AY 2003-04, the Tribunal remanded the matter back to the AO to apply the Supreme Court's decision and allow due relief after providing a reasonable opportunity of being heard. Conclusion: The Tribunal dismissed the revenue's appeal for AY 2001-02 and partly allowed the appeal for AY 2003-04 for statistical purposes, directing the AO to re-examine the depreciation claim in light of the Supreme Court's rulings.
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