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TMI Blog2010 (4) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... ome tax Act, 1961. - IT APPEAL NOS. 3703 (MUM.) OF 2005 AND 5459 (MUM.) OF 2006 - - - Dated:- 5-4-2010 - B. RAMAKOTAIAH ACCOUNTANT MEMBER J. D.K. AGARWAL JUDICIAL MEMBER J. Appellant by : Shri S.M. Kesh Kamat Respondent by : Shri Narayan Atal ORDER Per D.K. AGARWAL (JM). These two appeals preferred by the revenue are directed 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 involved are 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 commission and meketing agent in respect of textile machineries manufactured by the Staubli Group entities, to customers in India. The Staubli 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 installation of the mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er : - 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/arm s 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 CBDT s Circular No.23 dated 23.07.1969 which lays down that If the agent s 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 arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcular No.01 of 2004 also provides that when core 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 circular No.23 of 1969 without looking into the entire context. h) It would make principles of force of attraction inapplicable in India. i) Without prejudice to the above, the assessee has not substantiated its claim that the agent has been paid at arm s length price. The AO after referring the assessee s nature of business activities further observed that there may be sales made directly by Staubli Group entities to the customers in India without the involvement of Staubli India and hence, the nature of business of assessee is something more than that of a Commission Agent . He further observed that the assessee is rendering after sales and maintenance services under the warranty period. Obviously, for such services, the assessee is not getting anything from the customers. He further observed that in case of supply of faulty products in India the cost is to be borne by the Indian Branch and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth commission to an agent extinguishes the assessment of the Non-resident Principle as laid down by CBDT in Circular No.23 dated 23 July, 1969. The assessee constitutes a Permanent Establishment (PE) of Staubli A.G. (Switzerland) in India under Article 5 of the Treaty and the PE s 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 restricted to cases of independent agents but also applies to dependent agents. It was further submitted that in its case other than the marketing activities, all activities relating to the sale are carried on from outside India and the sales are directly made between its Head Office/Group Entities and the Indian customers. As per Explanation (a) to section 9(1)(i) of the I.T. Act only such part of the income as is reasonably attributable to the operations carried out in India is deemed to accrue 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Rs.25,08,701/- made by the AO. 8. At the time of hearing, the ld. DR submits that for the reasons as mentioned in the assessment order, the ld. CIT(A) was not 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. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482(SC) and Ishikawajima-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 while reiterating the same submissions as submitted before the AO and the ld. CIT(A) further submits that the AO without considering the assessee's explanation appearing at page 1 to 31 and statement on oath recorded u/s.131 of Shri Somnath Ganguly, a Resident 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 further submits that the AO for the Assessment Years 2005-06 and 2007-08, after considering the nature of addition made in the impugned Assessment Ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the addition of Rs.25,08,701/- made by the Assessing Officer estimating the commission income at 10% on all sales 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 taxable 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 reasons mentioned hereinafter, profits arising from the activities of installation and commissioning were taxable at 10 per cent. of the payments relating to the said services/facilities carried out in Bombay High. Firstly, in the present case it is important to note that the accounts submitted by the assessee were rejected and the Assessing Officer had to invoke the provisions of the Act by way of best judgment assessment. Secondly, in the present case, the assessee themselves contended in the assessment proceedings that the Assessing Officer should have computed the income relating to Indian operations under section 44BB or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with a taxation statute, the legal fiction must be construed having regard to the object it seeks to achieve. 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 followed. (ii) That since the appellant carried on business in India through a permanent establishment it would clearly fall out of the applicability of article 12(5) of the Convention and fall within the ambit of article 7. In the Protocol to the Convention it was stated that the term directly 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 case had no role to play in the transaction of offshore supply, sought to be taxed, since the transaction took place abroad. (iii) That the second sentence of article 7(1) which allowed the State of the permanent establishment to tax business profits, but only so much of them as was attributable to the permanent establishment excluded the applicability of the principle that where there was a permanent establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld tax that particular part of the transaction. This principle helped determine where the territorial jurisdiction of a particular State lay and to determine its capacity to tax an event. Applying it to composite transactions which had some operations in one territory and some in the other, was essential to determine the taxability of various operations. Therefore, the concepts of profits of business connection and permanent establishment should not be mixed up. Whereas business connection was relevant for the purpose of application of section 9, the concept 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 profits 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, section 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 India as well as utilized in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Whereas in the case before us the facts and issue are entirely 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 the present case, therefore, the decision relied on by the ld. DR is distinguishable 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 the 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 income amounting to Rs.21,04,600/- and Rs.2,78,026/- respectively and also keeping in view that the AO has given no basis for making ad hoc addition we are of the view that the AO was not justifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dships have held 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 repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange. Thus, the adjustments in the actual cost are to be made irrespective of the date of actual payment in foreign currency made by the assessee.This position also finds place in the clarification issued by the Ministry of Finance dated January 4, 1967, which, inter 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, in terms of the unamended section 43A of the 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given 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 assets was 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 should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the unamended section 43A were " for making payment" and not " on payment" which is now brought in by amendment to section 43A, vide the Finance Act, 2002. 19. Recently the Hon ble Supreme Court in CIT vs. Maruti Udyog Ltd.(2010) 320 ITR 729(SC) following the above judgment held that the Tribunal was right in holding that the claim for depreciation on account of enhance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent 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 them 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 Hon ble Supreme Court in Woodward Governor India P. Ltd. supra, has held vide placitum 34 (Page 272 of the ITR) as under : Lastly, we are of the view that the amendment of section 43A by the Finance Act, 2002, with effect from April 1, 2003, is amendatory and not clarificatory. The amendment is in complete substitution of the section 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 indicated by the words at the time of making payment . In other words, under the unamended section 43A, " actual payment" was not a condition precedent for making necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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