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TMI Blog2012 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... that, for the purposes of determining the profits of a permanent establishment, there shall be allowed deduction of expenses incurred for the purposes of the business of the permanent establishment including general administrative expenses but in accordance with the provisions and also subject to the limitations of the tax laws of that State. Therefore by this amendment in the Article the applicability of provisions of section 44C has been enforced, nevertheless with effect from 1st day of April-2008. Regarding previous year income - AO has noticed that as per Schedule XIV - notes to the accounts, the said claim was confirmed by Cairn India Pvt. Ltd. On the other hand, as per the assessee, the claim was still under dispute and the claim was not recognized by the said party - Held that: It is worth to note that the final payment was received from the said party in the F.Y. 2006-07 as per the TDS certificate given by the assessee and that fact has also been noted by the AO - once the admitted factual position is that the payment in question has actually been received in the F.Y. 2006-07, i.e. A.Y. 2007-08 and that fact has been noted by the AO himself, inter alia, further reaffirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the view that a substantial repair had undertaken for rig through which the earning capacity of the rig had increased. According to AO, considering the quantum of the repair expenses, the same will not fall in the category of recurring expenses and that the assessee had obtained the benefit of enduring nature. The AO has thereafter discussed the legal position in respect of the capital expenditure and the revenue expenditure. He has finally held that the expenditure was incurred as a part of plant machinery and, therefore, not a revenue expenditure but capital expenditure. The same was capitalized but depreciation was granted consequently the balance amount was taxed. In all the three years, the matter was carried before the first appellate authority. 3. The ld. CIT(A) has considered the legal as well as factual aspect of the case and thereafter on receiving the comments of the AO in the form of Remand Report, he has finally held as under:- "2.3 I have gone through the asst. order, written submissions by the appellant, the remand report and the reply of the appellant in response to the remand report. I find from the submission of the Counsel of the appellant that the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Having heard the submissions of both the sides, we are of the view that the AO has not correctly appreciated the nature of the expenditure incurred. It is a long list of repairs and maintenance having several items of pecuniary in nature and some of the items, although substantial in quantum, but do not reflect that an asset had come into existence. We have been informed that the equipments had already been installed earlier and thereafter the expenditure in question was purely towards repairs and maintenance of the same. The expenditure was towards procurement of stores, spares, consumables, etc. The small items were stated to be drilling consumables, electrical consumables and mechanical consumables. Those consumable items otherwise also did not have substantial life and to be replaced frequently. Therefore, the expenditure was purely towards upkeep and maintenance of drilling rig and auxiliary equipments. Further, it was incorrect on the part of the Revenue to allege that the impugned expenditure was incurred prior to the commencement of the business due to the reason that acquisition was performed on 13/05/2003 and as per the details of expenditure, placed in the compila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head office expenditure amounting to Rs. 1,00,72,251/- (for A.Y. 2006-07 - Rs. 79,59,698/-) on the ground that such expenditure is not allowable u/s.37 of the Act. 8.1 The assessee was asked to justify the claim of Head Office expenditure in the light of provisions of Section 44C of the IT Act. The expenditure pertains to general administrative expenditure, such as, salary, travelling, etc. The assessee has submitted that the expenditure was not claimed u/s.44C of IT Act, but u/s.37 of IT Act. It was submitted that the assessee's claim is eligible as per India - U.A.E. DTAA. The assessee has placed reliance on Metchem Canada Inc. 100 ITD 251. As per AO, u/s.44C the assessee was entitled only for the prescribed limit of expenditure. There was a discussion of Article 26 for the purpose of non-discrimination clause of India - U.A.E. DTAA. Assessee's argument was that the provisions of section 44C should not be applied and the Head Office expenditure should be allowed in full on the ground of non-discrimination. However, the AO was not convinced and restricted the claim by applying the provisions of section 44C of IT Act. The matter was carried before the first appellate authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re certain head office expenditure which were accounted for by the assessee in the books of accounts for the years under consideration. Due to this reason, the AO has invoked the provisions of Section 44C of I.T. Act, for ready reference reproduced below:- "Deduction of head office expenditure in the case of non-residents: 44C. Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be made, in computing the income chargeable under the head "Profits and gains of business of profession", in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely; - ( a ) an amount equal to five per cent of the adjusted total income; or ( b ) ** ** ** ( c ) The amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India, Whichever is the least: Provided that in a case where the adjusted total income of the assessee is a loss, the amount under clause (a) shall be computed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by the foreign head office insofar as such expenses can be related to the business in India having regarded to the fact that foreign companies operating through branches in India, sometimes try to reduce the incidence in tax in India by inflating their claims in respect of head office expenses. On reading this section, an interpretation is possible that where an assessee does not have any business overseas and the entire operations are carried out in India only, the question of allocating a part of the expenditure to the business carried on in India cannot arise. But if there is overseas business and the expenditure is in the nature of head office expenditure, then naturally the expenditure which are not entirely for the PE in India but also pertains to the foreign enterprise head office, then should be restricted under the Act. 12.3 This interpretation is visible in the case of CIT v. Emirates Commercial Bank Ltd. 262 ITR 55 (Bom.), wherein the Hon'ble Court has finely elaborated the provisions of section 44C and thereupon opined that this section is applicable in the cases of those non-residents who carry on business in India through their branches. The said sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave also be simultaneously discussed by the Courts. This aspect is buttressed by the fact that while deciding the case of CIT v. Deutsche Bank A.G. 284 ITR 463 the Hon'ble Bombay High Court has held that though the provisions of section 44C overrides the provisions of section 37 but in case the working of section 44C fails, then consequently if the expenditure is attributable to the business in India, then the assessee would become entitle for full deduction u/s.37(1) of IT Act. Rather, in the case of Metchem Canada Inc. 100 ITD 251 (Mum.) the Tribunal has finally held that the head office expenses to the extent the same could be fairly allocable to the PE would be admissible as deduction u/s.37(1) of IT Act. This case has been relied upon by the appellant and, therefore in the light of the discussion made hereinabove, we are not accepting the view expressed by the ld. CIT(A) that the provisions of section 37(1) became redundant in view of the restrictions u/s.44C of IT Act. In our humble opinion, clause(c) of section 44C has also indicated the same principle that the amount of so much of the expenditure being in the nature of head office expenditure if attributable to the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide a protocol amending the agreement between the Government of the Republic of India and the Government of the United Arab Emirates vide Notification No.282/2007 dated 28/11/2007 which is effective from 1st day of April-2008, paragraph 3 of Article 7 (Business Profits) has been replaced by the following:- "3. In determining 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 executive and general administrative expenses so incurred, whether 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 tax laws of that State." (emphasis given) 14.1 In view of the aforesaid amendment, now the admitted legal position is that the admissibility of expenditure is to be governed by Article 7(3) of the Treaty up to the date from which the new amended provisions of the Treaty shall be applicable i.e. w.e.f. 1.4.2008. It can, inter alia , be summed-up that the contracting States have kept in mind the provisions of the tax laws of the contracting States and to avoid a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision of the Act is more beneficial to the person then that shall be granted under the Act, meaning thereby "Treaty override the Act" phrase used therein. Article 26(2) provides that except where the provisions of paragraph(3) of Article 7 (Business Profits) apply, the taxation of a PE of an enterprise of a contracting State shall not be less favourable. The Respect Bench has examined the decision of Mumbai Tribunal of Metchem Canada ( supra ) and held that the crux of the decision is that restriction placed on the deduction of head office expenses under section 44C will not be applicable in the case of a Canadian Co. in view of Article 24 contained in the treaty between India and Canada. So arrived at the decision that for the reason that Article 24 of the treaty will have precedence over Article 7, which contain deductions of general nature, and if provisions in the Act come in conflict with the treaty, the provisions of the Act are applicable only to the extent they are more beneficial to the assessee; if not, the provisions of the treaty shall prevail. Later on, in the said decision, the Respected Special Bench has again addressed a question whether the provisions contained ..... X X X X Extracts X X X X X X X X Extracts X X X X
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