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TMI Blog2011 (7) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, to which, learned Departmental Representative, Mrs. Malthi Shridharan, appearing on behalf of the Revenue, did not object to the submissions so made by the learned Counsel. Consequently, these appeals as well as the cross objections preferred by the assessee are dismissed as "not pressed". 3. In the result, all the appeals as well as the entire cross objections by the assessee are dismissed. 4. Now, we take up Revenue's appeals in ITA No.5086/Mum./2003, ITAs No.6370, 6371, 6372/Mum./2007, ITA no.7511/Mum./2007 and ITA No. 2322/Mum./2010, which are directed against the impugned separate orders passed by the Commissioner (Appeals), Mumbai, for assessment years 1999-00, 2000-01, 2002-03, 2003-04, 2004-05 and 2007-08 respectively. 5. The main issue, which is common in all the appeals preferred by the Revenue is, whether or not the Commissioner (Appeals) was justified in holding that only 10% of the fee received by the Head Office for services rendered in India through independent surveyors is attributable to PE ignoring the facts that such services are not effectively connected with the PE as required under Para-5 of the Article 12 of the treaty between India and Japan and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year, independent surveyors, appointed by Head Office (HO) in pursuance of agreements, raised invoices on the customers for the survey carried out by them. The invoices included an amount equivalent to 30 per cent which was accrued/received, retained and utilised for the purpose of business by the Branch and accordingly recognised as income in the profit and loss accounts of the Branch. However, with effect from 1st April 1998, pursuant to global changes effected by the H.O. in the manner of carrying out business and to ensure better control over billings, realisations, etc. invoices for work carried out by the said independent surveyors, to whom technical support is provided by the H.O. are raised by the H.O. on foreign customers directly. The H.O. collects the debts, retains 45 per cent and pays the balance to the independent surveyors. In view of this and as in the earlier years, as no substantial services are rendered by the Branch to the customers, no portion to the survey fees is attributable to the Branch and accordingly no income is recognised in the profit and loss account of the Branch and no provision for tax is considered necessary." 2.3 As the appellant did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the ship is berthed and carry out the survey as per the ship owners request and the instructions of the P.E. After completing the survey work the acting surveyor prepares a class survey record highlighting the details of survey carried out and number of hours put into carry out the survey. Later, the Acting Surveyor prepares his proforma invoice and forward it to the P.E. On receiving the proforma invoice from the acting surveyor, for communication and any other direct expenses incurred for communication and any other direct expenses and sends a request for billing survey fees to the H.O. The H.O. forwards their bill to the ship owners who pays to the H.O. The H.O. later pay the Acting Surveyor his share and reimburse the expenses incurred by the P.E. and retain their share of 45 per cent of fees. It can be seen from the above facts that P.E. has only some procedural role to play in carrying out the survey. It is further stated that H.O. of NKK which is situated in Japan has a major role to pay in the business of surveying, inspecting and servicing ships for the compliances with the requirement of NK class vessels. The H.O. is the person who gets the major source of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that the P.E. has a procedural role to play, when acting surveyors conduct survey. He referred to Article-12(5) of the Indo-Japan DTAA and as the FTS is effectively connected with the P.E., provisions of Articles-12(1) and 12(2), do not apply and that the provisions of Article-7 are attracted. Once he had come to a conclusion that the provisions of Article-7 are attracted, the Commissioner (Appeals) determined 10 per cent of the income as that which is attributable to the P.E. He further directed that no further expenditures should be allowed to the assessee, except consequential allowance of Head Office expenses under section 44C of the Income-tax Act, 1961 (for short "the Act"). 10. Insofar as the issue of write-off of advance rent is concerned, the Commissioner (Appeals) accepted the contentions of the assessee and on the ground that the recovery is quite bleak and loss of advance rent is in the revenue field, held that the same is allowable under the Act. Aggrieved, the Revenue is in appeal before the Tribunal. 11. Learned Departmental Representative took this Bench through the facts of the case and submits that it was the case of the assessee before the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue raised an alternative contention without prejudice to her claim that the entire amount should be taxed in terms of Article-12(2) of the DTAA, that if 10 per cent of the amount is treated as business profit and taxed under Article-7, then the balance 35 per cent should be considered as taxable under Article-12(2). 13. Learned Counsel for the Revenue, referring to ground no.2, submits that the loss is contingent in nature as litigation was carried on. She refers to arbitration award and points out that ultimately the assessee has received back a substantial amount. She further argued that the expenditure is in the capital field. While concluding her arguments, she prayed that the order passed by the Assessing Officer be restored and that of the Commissioner (Appeals) be reversed. 14. Learned Counsel for the assessee submits that the P.E. has an effective connection with the services rendered by the independent acting surveyors. He explained in detail the procedure adopted by the organization and points out that it is the P.E. which entrusted the acting surveyor with a particular job and thereafter, not only plays a liaison role but also has a monitoring role to play. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he acting surveyor to the P.E. which in turn, adds its expenses incurred for communication, etc., and forwards the bill to the Head Office. The expenses incurred by the P.E. are reimbursed. Thus, it cannot be denied that the P.E. has a functional connection, though limited wherever survey work is assigned to the acting surveyor. The issue to be adjudicate is, whether the P.E. can be said to have effective connection with this activity for survey. The assessee admits that the Branch does not render substantial services to the customers wherever independent surveyor are appointed but fact remains that even before the Assessing Officer it is not stated by the assessee that no service was rendered by the Branch to the customers. There is a difference between the words "substantial services" used by the assessee by filing a note dated 31st March 1999 and the words "effective connection" used in Article-12(5). The note, in our considered opinion, has been mis-interpreted by the Assessing Officer. 18. Coming to the issue as to whether the FTS is effectively connected with the P.E., we find that the commentaries relied upon by the learned Departmental Representative discuss the issue of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel. 12(5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply." 20. Perusal of Article-12(5), takes us to a conclusion that when the payment for FTS is effectively connected with the P.E., in such case, provisions of Article-7 will apply. In view of our factual finding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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