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TMI Blog2001 (1) TMI 974X X X X Extracts X X X X X X X X Extracts X X X X ..... r for an efficiency with ISGEC John Thomson ( ISGEC ) in July, 1982 through their engineering consultants Tata Projects Ltd. for a total cost of ₹ 165 lakhs. The boiler was to be installed at Patalganga for the DMT project of Bombay. The commissioning of the Boiler was to be completed by March, 1984 as per the letter dated 1-7-1982 written by Tata Projects Ltd. to ISGEC. Based on this letter Assessing Officer concluded that the boiler was in fact commissioned by March, 1984. In arriving at this conclusion, letter dated 22-3-1988 written by Bombay Dyeing to the Assessing Officer was also referred to total payment of ₹ 1,65,07,738 was made by Bombay Dyeing in respect of the boiler. On 23-3-1984 assessee passed a special resolution altering its Memorandum of Association (Memorandum for short). By the said alteration, assessee-company gave unto itself the power to carry on leasing business. The special resolution was approved by the Company Law Board vide its order dated 25-1-1985. On 18-9-1984 Bombay Dyeing sold the boiler to the assessee-company vide invoice No. DMT/1510/ MS/3 for a total sum of ₹ 165 lakhs inclusive of ₹ 15 lakhs as sales tax. On 26-9-1984 Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the boiler was not installed in March, 1984 as was stipulated but was installed in September, 1984. It was also pointed out that the initial lease period of eight years was extended twice for five years on each occasion to show that the asset was not ultimately sold to Bombay Dyeing at reduced price. The lease rentals earned by the assessee were subjected to tax till today and that the same were allowed as deduction to Bombay Dyeing in assessment years 1985-86 and 1986-87. Then onwards the same have been disallowed. 7. Certain clauses of the lease agreement were referred to by Mr. Dastur. As per clause 2.3 lessor (i.e., the assessee) was permitted to take away the equipment on termination of the agreement. As per clause 4.2, a name plate or some other mark was to be affixed to denote the exclusive ownership of the lessor. As per clause 4.17, lease was not permitted to claim any allowance, relief etc. available to the lessor either under the Income-tax Act, or any other law. As per clause 5.6, asset was to remain the personal property of the lessor notwithstanding that the same may have been affixed to any land or building. From page 17 of the paper book it was poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case. Moreover, the transaction was with a sister concern, and, therefore, the ratio in McDowell Co. Ltd. s case (supra) applied squarely. To give colour to the transaction sales tax was also paid by the assessee to Bombay Dyeing. Patalganga was a ₹ 100 crore project out of which only one asset was picked up and leased back to Bombay Dyeing. It was submitted that per se, there was no illegality about sale and lease-back transactions, but here there was a dubious motive. Entire case had to be seen in totality. The various terms in lease deed were deliberately inserted and that the point regarding damages was never raised before the CIT(A). Thus, according to Mr. Rajendra, CIT(A) had applied her mind and since the sole motive was to reduce tax, depreciation was rightly disallowed. 12. In his rejoinder, Mr. Dastur submitted that by raising the plea regarding taxability of lease rentals under the head Income from Other Sources no new ground was sought to be raised. Distinction was drawn between a ground and an argument. It was not the plea of the assessee that rental income be taxed under the head other sources , but merely a plea was raised that if the leasing activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, not whether the transaction is not unreal and not prohibited by the statute, but whether the taxation is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it . The effect of McDowell Co. Ltd. s case (supra) was discussed at length by the Gujarat High Court in the case of Banyan and Berry s (supra). After noting the above conclusion, the High Court observed that in McDowell Co. Ltd. s case (supra) on the factual aspect, Supreme Court was consi-dering a case where in the going business a liability to pay duty which was, legally of the assessee and which on such payment was to become part of its cost of commodity sold by it and to become part of its selling price to the buyers, were as a result of arrangement between the sellers and buyer split into two, namely duty so far paid separately directly to the tax authorities and the balance so paid to the seller. The arrangement was existing solely for the purpose of not paying the tax and it is not a transaction in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. This, we emphatically state, is not intended by the decision McDowell Co. Ltd. s case (supra). In any case, considering the overall impact of the transaction spread over a number of years, it cannot be said that the arrangement has resulted in the reduction in tax liability of the assessee, it is merely incidental and a natural fallout of a genuine business transaction. As to how it is a genuine business transaction, we shall advert to it a little later. But till we are on the aspect of reduction of the tax liability, we may refer to the decision of the Mumbai Bench of the Tribunal in the case of Berlia Chemicals Traders (P.) Ltd. (supra) to which both of us are a party. 16. While dealing with this aspect in the said case, Tribunal observed that while striking a business deal, tax aspect will always be considered, because it directly affects the fund flow and cash flow situation of the business. Tax aspect is very much an integral part of the business decision which should not be looked down as a taboo. If tax aspect is not taken into consideration, it is quite unbusiness like for the businessman to do. As long as it is a genuine business transaction, any reduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all. There is no material to suggest that Bombay Dyeing itself must have borne the cost of project to the extent of 98%. It may have borrowed funds from various sources, the sale and lease back arrangement with the assessee being one of them. It is also fallacious to say that a businessman would resort to borrowing only when he faces financial stringency. We do not wish to give lessons in financial management, but suffice it to say that prudent deployment of funds at his disposal by the businessman may also entail borrowing irrespective of the quantum of borrowing and the form of borrowings. Thus, this argument has no basis. 20. Nothing much turns out of the argument that assessee had acted ultra vires its Memorandum of Association. The Assessing Officer himself mentions that even if alteration of Memorandum is debatable and even if we do not concern ourselves with the violation of Companies Act, the entire transaction is in the nature of a dubious for planning. Thus, though having discussed the issue at length, ultimately Assessing Officer rested his conclusion more on the alleged dubious character of the transaction and not on alleged violation of Companies Act. Otherwise a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n controlling the activities in India. Thus, according to the Assessing Officer, income earned by the assessee in Tanzania was attributable to the permanent establishment in Tanzania and hence such income was taxable as business profits earned in India. 24. CIT(A) upheld the action of the Assessing Officer without any discussion except adding that in earlier year assessee itself had shown loss arising in Tanzania and was taken into consideration for computing total income. 25. Mr. Dastur referred to Article 7(1) of the DTAA and submitted that since the branch of the assessee-company i.e., the permanent establish-ment is in Tanzania, profits arising therefrom will be taxed in Tanzania only and not in India. It was submitted that the assessee-company was an enterprise of India and reference was made to Article 3(g) of the DTAA also. Reliance was placed on the decision of the Madras High Court in CIT v. V.R.R.M. Ramaswamy Chettiar [1995] 211 ITR 368. Mr. Rajendra strongly supported the orders of the lower authorities. 26. We have considered the rival contentions and perused the material on record. We have also perused the DTAA between India and Tanzania. For immediate referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, which has a permanent establishment in the other Contracting State, sells goods or merchandise of the same or similar kind as those sold by the permanent establishment or renders services of the same or similar kind as those rendered by the permanent establishment, the profits of such activities may be attributed to the permanent establishment unless the enterprise proves that such sales or services are not attributable to the activity of the permanent establishment. The above Article clearly indicates that if the assessee carried on the same activities as are carried out by the PE, the profits of such activities may be attributed to the PE. It is for the assessee to prove that its activities are not attributable to the activity of the PE, Reading Article 7(1) and 7(2) also makes it clear that profits of a PE can be taxed in both the countries. 28. Now, we come to Article 7(3) which is as follows and which strengthens our view : Article 7(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 establishme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was that this would result in double taxation of the same profits which would be against the very purpose and spirit of DTAA. We cannot agree with this argument because, DTAA itself provides for the mechanism to eliminate double taxation. Article 25 of DTAA provides for granting credit against Indian tax where tax has been paid in both the countries. Assessee itself has admitted of this position. It is the uncontroverted finding of the CIT(A) that in the earlier year assessee had taken into consideration the loss from Tanzanian PE while computing its income. When queried, it was submitted by Mr. Dastur that what the department does most of the time, assessee has done it this time that is, taking the Heads I win, tails you lose stand. We are more than convinced that the Tanzanian income is rightly included in the total income. It may also be noted that corrective measures have been taken by the Tribunals and Courts whenever it has come to their notice of any party having adopted the Head I win, tail you lose stand. 31. While arriving at the conclusion we have arrived at, we have kept in view the basic principles of double tax avoidance while interpreting the Tanzanian Treaty. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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