9911796707
TMI Blog2005 (12) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... a. The assessee has also objected to levy of interest under sections 234A, 234B and 234C of the Act. 2. Facts of the case leading to this dispute briefly are that the assessee is the branch of a company incorporated in the State of California in the United States of America and is a 100 per cent subsidiary of Virage Logic Corporation (hereinafter called 'VLC'). On March 5, 1999 the assessee obtained an approval from the Reserve Bank of India for setting up of an undertaking in India, hereinafter called the Indian Undertaking, for development and export of software. On September 23, 1999, the assessee obtained a further approval from the Software Technology Parks of India, Noida for establishing a unit there. The assessee filed return of income on 30-10-2001 for assessment year 2001-02 declaring nil income. The assessee disclosed an income of Rs. 1,08,77,823 but claimed the same as exempt under section 10A of the Act. According to the assessee, VLC was involved in the business of embedded memories in the form of semi-conductor for intellectual property for systems on chips, integrated circuit that power today's internet and high speed communications, computer and consumer products, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was whether transfer of software to its own Head Office constituted export. Just in the manner branch office cannot make sale to the Head Office, transfer of stock from branch to Head Office could not be treated as an export. The learned Assessing Officer, therefore, asked the assessee to clarify these aspects. In reply, the assessee argued that section 10A was a tax holiday provision based upon the location of the industrial undertaking. As long as the assessee was located in the notified zone and manufactured or produced an article or a thing or computer software, there was immunity from taxation. The only condition was that undertaking was new undertaking. The assessee was producing computer software within the meaning of Explanation 2 and was located in a Software Technology Park under a Scheme notified by Govt. of India, Ministry of Commerce and Industry. Thus, the assessee was entitled to 100 per cent benefit on the profits derived from export of computer software. Another condition was that the assessee should receive in or bring into India the proceeds of exports in convertible foreign exchange within a period of six months from the end of the previous year or within such e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computer software exported out of India were received in or brought into India by the assessee in convertible foreign exchange within the specified period. In the case of the assessee what had been received in India was only the remuneration fixed on man hour basis and not the sale proceeds of the software. Hence sale proceeds in foreign exchange were not received into India. As to the reliance placed by the assessee on Explanation 2 of section 80HHC, the learned Assessing Officer argued that it was a special provision crafted for the benefit of Indian resident who have a branch office or other office establishment outside India. Hence the value at which the Indian resident transferred its goods or merchandise to foreign branch was treated as exempt. Explanation 2 specifically stated that it was only for the purposes of section 80HHC. The deeming provision of that section was created for the specific purposes of that section only. From the Explanation it was apparent that in normal situation the transfer by one branch to another or to its Head Office shall not be treated as exports. Had there been any intention of the Legislature to extend the Explanation to other fields the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme. The assessee argued that for these reasons the profits of the Indian Undertaking were 100 per cent tax exempt in terms of section 10A. The assessee further argued that Explanation 2 of section 10A exempted profits and gains derived from on site development of computer software outside India. The certificate issued by Software Technology Parks of India supported the assessee's claim of exemption. The assessee also relied upon CBDT Notification No. 11521 dated 26-9-2000 wherein the CBDT had notified many services under definition of "computer software" which included back office operations, call centers, data processing, engineering and design. 9. According to the learned CIT (Appeals) the main ingredients of the provisions of section 10A were profits and gains derived by an undertaking from export. The assessee had raised invoices to its Head Office on the basis of man-hour. The learned CIT (Appeals) also reproduced the technical write up submitted by the assessee. From the invoices and the technical write up the learned CIT (Appeals) found that the Indian Undertaking had not sold any software independently in the open market to any third party. The contract document Nos. 5/5/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rketing requirements of the customers, further policy formulation, quality assurance and after sale service. The activities of profits of the Indian Undertaking were not comparable to that of the Head Office in USA. The learned CIT (Appeals) held that the Indian Undertaking was branch office of the parent company in the United States of America and, therefore, as per Article 5 para (2)(b) of DTAA, it was a Permanent Establishment of the U.S. company. That being so the income of the Indian Undertaking was to be computed in accordance with the provisions of Article 7 of the treaty. The profit of the PE was the income earned from the sale of software that was prepared in India. The assessee had not provided the actual sale consideration of the software. The amount which had been paid by the HO was not the sale consideration of the software. The payments were lump sum amounts. For example, in the Contract No. 05.05.99/A, it was written that the sum total of services that could be billed against the contract was not to exceed US$ 1 lakh. In Contract No. 12.01.00/A it was mentioned that the amount billed against the contract was not to exceed US$ 2 lakhs. That indicated that the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment/manufacture of computer software. The assessee was extended all the facilities and privileges admissible under the STP Scheme for the establishment of a new undertaking at Noida in the State of Uttar Pradesh for the development/manufacture and export of computer software. This permission was granted to the assessee, among other things on the condition that 100 per cent production of the assessee shall be exported against hard currency, except the sales in Domestic Tariff Area admissible as per entitlement. The learned counsel pointed out that there was no sale in Domestic Tariff Area. The learned counsel pointed out to the letter dated 8-10-2004 from STPI acknowledging that the assessee had duly certified the invoices and SOFTEX forms for the financial year 2000-01. The learned counsel argued that the assessee's presence in India was permitted and recognized by various government bodies as a 100 per cent Export Oriented Unit. 12. The learned counsel argued that the assessee was not making any end-product in India. The parent company was outsourcing only certain parts of operation from the assessee in India. Under these circumstances there could not be any known price for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. He pointed out that in terms of Article 5 of the Treaty, the assessee being a branch of VLI in India, is regarded as a Permanent Establishment in India. Clause (2) of Article 7 of the Treaty read as under :-- "Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise. . . ." Referring to the commentary of Klaus Vogel on "Double Taxation Convention", the learned counsel argued that while giving effect to the arm's length principle laid down in Article 7(2), the contractual arrangements between the permanent establishment and its Head Office, although non-existent as such under civil law, should for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med as an export. There was no force in the argument that globally the US company had incurred losses. The assessee was in software manufacturing business where there was little chance of any loss. The provisions of Article 7 required the profits of the assessee to be estimated as if it was an independent and self-contained organization. The fact of the matter was that the assessee was being controlled and subjugated to the authority of the Head Office. On such facts the amounts remitted by the Head Office at its sweetwill could not be accepted to be the fair remuneration/profit of the activities conducted in India. 17. The learned counsel in his rejoinder argued that on each remittance made, the assessee was given export realization certificate by Indian authorities. It was, therefore, contradictory to argue in the income-tax proceedings that there was no export. As to the pricing the learned counsel argued that while working out the export profit of Rs. 1,08,77,823 no cost was apportioned or ascribed to the India branch for any administrative expenditure or finance charges incurred by the Head Office/parent company in the United States. The parent company was engaged in colossal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. The estimate adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrary such profits are required to be determined by the same method year by year. Paragraph 2 of Article 7 above quoted lays down the basis that the profits attributable to the permanent establishment in India shall be the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length from the enterprise of which it is a permanent establishment. However, in case the correct amount of profits attributable is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. 19. Provisions of section 10A of the Income-tax Act, 1961 on the other hand grant deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, from the total income of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to the permanent establishment in India is incapable of determination on such basis or the determination thereof presents exceptional difficulties that the profits attributable to the permanent establishment may be estimated on some other reasonable basis. But for taking recourse to any other reasonable basis there has to be certain diligence for determination of the profits attributable to the permanent establishment on arm's length principle. We, therefore, consider it necessary to restore this issue to the Assessing Officer for determination of the profits attributable to the assessee in accordance with paragraph 2 of Article 7 of the Convention. It is only thereafter that the assessee's claim of deduction under section 10A can be properly considered. During the course of hearing before us it has been contended on behalf of the assessee that the assessee has been treated to be engaged in export by various Government authorities. On each remittance received from the USA, the assessee has been given export realization certificate by Indian authorities. The Assessing Officer shall be well advised to go into this aspect as well. If the relevant exercise for the issue in ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
