2007 (10) TMI 415 - AT - Income Tax

Non-Resident company - notice that out of the sum 3, 30, 000 DM (60 per cent of 5, 21, 000 DM) attributed to as income of the branch office the assessee has already offered 1, 30, 000 DM in assessment year 1999-2000 65, 000 DM in assessment year 2000-2001 to tax. The assessee in the present assessment year has offered DM 1, 35, 000 received in the P.Y. to tax. It is only this income that should be brought to tax in this assessment year. The other income received and offered to tax in the earlier A.Ys cannot be brought to tax in this A.Ys

Summary

Issues Involved:
1. Attribution of income between the head office and the branch office.
2. Applicability of Section 44C of the Income Tax Act regarding head office expenses.
3. Correctness of the assessment of income for the relevant assessment year.

Issue-Wise Detailed Analysis:

1. Attribution of Income Between the Head Office and the Branch Office:
The primary issue revolves around the attribution of service charges between the head office in Germany and the branch office in India. The assessee claimed that 60% of the total commission received from MAN Ronald should be attributed to the branch office, while the remaining 40% should be attributed to the head office. This allocation was based on the roles played by both entities in procuring the order and providing after-sales services.

The Assessing Officer, however, held that the entire commission should be attributed to the branch office in India, as all operations were conducted in India. This was contested by the assessee, who provided detailed explanations of the roles played by both the head office and the branch office.

Upon appeal, the CIT(A) partially agreed with the assessee, stating that 75% of the service charges should be attributed to the branch office and 25% to the head office. The CIT(A) recognized the significant role of the head office in finalizing contracts and coordinating with suppliers, which justified a portion of the income being attributed to the head office.

The Tribunal, after considering the submissions and the roles played by both entities, concluded that the original allocation of 60% to the branch office and 40% to the head office was justified. The Tribunal noted that the head office was responsible for negotiating and concluding contracts, which required substantial effort and coordination, while the branch office provided logistical support and after-sales services.

2. Applicability of Section 44C of the Income Tax Act Regarding Head Office Expenses:
The second issue pertains to the applicability of Section 44C of the Income Tax Act, which limits the deduction of head office expenses for non-resident companies. The Assessing Officer applied this provision, allowing only 5% of the income as head office expenses.

The Tribunal acknowledged the assessee's contention that the CIT(A) did not consider the ground of appeal on costs under Section 44C. Both parties agreed that the matter should be remanded to the Assessing Officer for a proper application of Section 44C, taking into account all relevant head office expenses incurred.

3. Correctness of the Assessment of Income for the Relevant Assessment Year:
The third issue involves the correct assessment of income for the relevant assessment year. The Assessing Officer added the entire balance commission of DM 3,26,000 to the income of the assessee, stating that the income was understated.

The Tribunal clarified that the assessee had already offered DM 1,30,000 in the assessment year 1999-2000 and DM 65,000 in the assessment year 2000-2001. For the current assessment year, the assessee had offered DM 1,35,000. The Tribunal held that only the income received in the current year should be taxed, and the income already offered in previous years should not be taxed again in the current year.

Conclusion:
The appeal by the assessee was partly allowed. The Tribunal upheld the original allocation of 60% of the commission to the branch office and 40% to the head office. The matter regarding the applicability of Section 44C was remanded to the Assessing Officer for a proper application, and the correct assessment of income was directed to consider only the income received in the current assessment year.