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TMI Blog2010 (3) TMI 1157X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeals by way of the impugned consolidated order dt. 19th Nov., 2008 (sic), for the sake of convenience. Accordingly, we take up all these appeals together, which are being disposed of by our this common order, for the sake of convenience. 4. In all these years, the common and identical issues involved are as under : (i) Whether the learned CIT(A) was justified in holding that the income of the assessee in India is taxable on accrual basis and not on cash basis ? (ii) Whether the learned CIT(A) was justified in holding that the assessee has a business connection in India or has a PE in India, and, therefore, the income earned by the assessee from supplies made to Indian customers is taxable in India ? (iii) Whether the learned CIT(A) was justified in attributing certain percentage of profit from sale of spares made to Indian customers, to the PE in India ? 5. The relevant facts giving rise to the aforesaid issues are being set out as under : 6. Rolls Royce Singapore (P) Ltd. (earlier known as Rolls Royce (P) Ltd. and hereinafter referred to as the company or the assessee) is a company incorporated under the laws of Singapore. The principal activities of the company ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sst. yr. 2000-01, notice under s. 148 was issued on 28th March, 2005. Return under s. 148 was filed on 21st July, 2005 declaring an income of ₹ 28,00,120. Notice under s. 143(2) was issued on 26th July, 2005. Order under s. 147/143(3) was passed on 28th March, 2006 making an addition of ₹ 51,35,140 towards business income and accepting the FTS income of ₹ 28,00,120 declared by the assessee. Appellant acquired the energy business from M/s Cameroon Energies (P) Ltd. only in financial year 1999-2000 and hence, this is the first year of operations. 11. For asst. yr. 2001-02 original return under s. 139(1) was filed by the assessee on 31st Dec., 2003 declaring an FTS income of ₹ 26,07,430. Notice under s. 148 was issued on 28th March, 2005. Return under s. 148 was filed on 17th July, 2005 declaring an FTS income of ₹ 26,07,430. Notice under s. 143(2) was issued on 1st Aug., 2005. Order under s. 147/143(3) was passed on 28th March, 2006 making an addition of ₹ 2,36,15,935 towards business income and holding the FTS income at ₹ 96,85,586. 12. For asst. yr. 2002-03 original return under s. 139(1) was filed by the assessee on 31st Dec., 2003 decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taxation of fee for technical services on mercantile basis and not on cash basis as claimed by the assessee. Notices under s. 148 of the Act were issued on the basis of information gathered in assessment of 2002-03 on the reasoning that incomes have escaped assessment as assessee has been following cash basis of accounting while fee for technical services is taxable on mercantile basis. 18. In the tax returns filed by the appellant, either voluntarily or in response to notice under s. 148, the appellant has been consistently offering its service fee income on cash basis as "fees for technical services" under s. 9(1)(vii) r/w s. 115A, s. 43(2) and s. 145 of the Act. However, income from supplies has been claimed as not taxable in India on the ground that the appellant does not have any permanent establishment (PE) in India. 19. The learned AO had made the following allegations : (a) The appellant has a business connection/PE in India. (b) The supplies and services are intricately and inextricably linked with each other. (c) The learned AO taxed business profits from supplies by attributing 100 per cent of the profit (and 75 per cent of the profits in asst. yr. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company as was noticed in the earlier assessment orders passed is declaring its income from India on receipt or cash basis. It was held in the detailed assessment orders passed in subsequent years, that the method of accounting of the assessee cannot be on cash basis and should have been on mercantile basis as per the IT law. The income of the assessee was accordingly recast in the subsequent assessment year. Therefore, for the current year also, the income of the assessee is to be taxed on accrual basis, irrespective of the fact that the same might have been received in subsequent year." 23. In asst. yrs. 2002-03 and 2004-05, the AO has given the following reasons : "1. Basis of recognizing 'FTS''Whether mercantile or cash The assessee has in its return of income declared the receipts received from Indian companies as fee for technical services and subjected it to tax under s. 115A(1)(b)(B) of the IT Act under the Indian IT Act. The chargeability of 'fee for technical services' is defined under s. 9(1)(vii) of the IT Act. The opening line of the definition specifically states that an amount payable. Payable refers to the amount which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a special provision for taxation of FTS whereas s. 145 is a general provision prescribing the method of accounting. It is a trite law that special provision overrides the general provision. Moreover, as has been discussed above, the assessee does not adopt cash basis for preparation and maintenance of this global account. It cannot account for one stream of income on cash basis and others on mercantile basis as per the existing provisions of law. Therefore, the contention of the assessee carries little force. The assessee has tried to point out its hardship in claiming the TDS certificates issued by Indian clients. The assessee claims to have received the TDS certificates only after close of the accounting year and even after that. So, it has stated that it does not have any option left in claiming the credit of TDS if it follows mercantile system of accounting. The argument of the assessee is flawed. It can claim credit for TDS certificate by following mercantile system of accounting. Even if TDS certificates are received late, it can claim the same in the return of income by filing the TDS subsequently provided that the period mentioned in the TDS certificate falls under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be assessed on cash basis only is not supported by any case law. The presumption in all these cases is that when a reference is made to a system of accounting whether cash or mercantile it refers to a situation where all the business receipts are being maintained and entered in the books of account and reflected in the final accounts. However, in case where the income has to be reflected in the computation on accrual basis (under s. 5) or deemed accrual basis (under s. 9), the appellant cannot claim that since he is maintaining accounts on cash basis, the income shall be offered only on receipt basis. Such a claim cannot be held to be in accordance with any of the case law mentioned by the appellant in its submissions. Even if rule of harmonious interpretation is adopted, it will not support the case of appellant because ss. 4 and 5 have to be read harmoniously with s. 9 of the Act. Even though the appellant claimed to follow harmonious interpretation it is not being adhered to by the appellant. Sec. 5 of the Act which refers to scope of incomes which form part of the income for any previous year specifically mentions in case of non-resident to include 'income which ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1959) 37 ITR 1(SC). The Supreme Court observed that income even in commercial sense would require computation by taking into consideration of expenditure actually incurred or liability in respect thereof as accrued even though it may have to be discharged at some further date. Where the expenditure or liability does not relate to the year for which income is computed the accounts should treat such amount as prepaid and shown as an asset. It may also at the same time be seen that accrual of income is a legal concept and mercantile system of accounting income accrues only when there is a right to receive such income whether it is actually received or not. What matters is a legal right to claim the same. It is also well accepted principle that where income has been offered and assessed on the same basis as in the past, in order to be able to change the system, there has to be a valid reason, commercial, legal or otherwise for computation of income. While adjudicating which system of accounting will be suitable in the case of non-resident it is important to keep in mind the provisions of ss. 4, 5 and 9 of the IT Act. Sec. 4 requires that income is to be computed as per the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this connection, the learned counsel for the assessee has invited our attention to a decision of Special Bench of Tribunal, Delhi, in the case of IAC vs. Reinz Dichtungs GmbH (1989) 31 ITD 67(Del)(SB) where the Special Bench has upheld the practice of a non-resident company following the cash system of accounting for accounting the royalty income from an Indian company. He further submitted that the Hon'ble Bombay High Court in the case of Pfizer Corporation vs. CIT (2003) 180 CTR (Bom) 319: (2003) 259 ITR 391(Bom) has also held that there is no provision in the IT Act which debars non-resident assessee from following cash system of accounting and the non-resident assessee was entitled to follow either the cash system or mercantile system of accounting. He further submitted that the term "method of accounting" has not been defined in the Act and there is no stipulation as to how these details of receipts and expenditure on cash basis are to be kept. He further submitted that these details may be kept in excel sheets of computers, log book, etc. and thus, in the assessee's case, the assessee used to maintain details of all receipts received by it from Indian s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's contention that assessee has option to adopt either cash or mercantile system of accounting and, accordingly, the assessee has adopted cash system of accounting insofar as its income in India is concerned, the learned Departmental Representative has submitted that the assessee has not produced any books of accounts claimed to be maintained on cash basis in India to show that the assessee was maintaining cash system of accounting for its Indian operations. It was further contended by the learned Departmental Representative that the assessee has not been able to appreciate the distinction between the disclosing of income on cash basis in IT return and maintaining of books on accounting principles on cash basis. In other words, the learned Departmental Representative submitted that merely because the assessee disclosed income on cash basis in the return of income, in the absence of any books of account regularly maintained on accounting principles on cash basis, it cannot be said that the assessee has been adopting cash system on accounting for its Indian operations. He, therefore, submitted that the various decisions relied upon by the assessee are not applicable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gains of business or profession" or "Income from other sources" is, subject to the provisions of sub-s. (2), to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Therefore, what is relevant for the purpose of s. 145(1) is the system of accounting regularly employed by the assessee. In the present case, the assessee is a foreign company and not its PE in India. 31. We, therefore, have to see as to which system of accounting has been regularly employed by this foreign company, who is an assessee under the IT Act. It is not in dispute that annual income of the foreign company, which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India is chargeable to tax under the Act as would be clear from s. 5(2)(a) and 5(2)(b) of the Act. In order to determine whether any income from whatever source it is derived, has been received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to non-resident in India during any relevant year, one has to ascertain the system of accounting regularly employed by the non-reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has been maintaining its books of account on mercantile basis, the assessee has to determine its income taxable in India only on mercantile system of accounting, which has been consistently followed by the assessee in respect of all its transactions whether carried out in India or outside. In this view of the matter, we, therefore, uphold the order of learned CIT(A) in holding that the income of the assessee in India is to be computed on the basis of mercantile system of accounting. The alternative ground raised by the assessee has already been taken care of by the learned CIT(A), who has directed the AO to ensure that an income which has been assessed on accrual basis in one year should not be again assessed on receipt basis in the same or in other year. Therefore, the assessee should not have any grievances insofar as assessee's alternative contention is concerned. The ground raised by the assessee in this respect is rejected and the learned CIT(A)'s order is upheld. 32. In asst. yrs. 1998-99 to 2001-02, the assessee has taken one preliminary ground that the learned CIT(A) has erred in law and on facts in upholding the AO's action in initiating the proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable to tax has escaped assessment, namely : (a) Where no return of income has been furnished by the assessee although his total income or total income of any other person in respect of which he is assessable under this Act during the previous year exceeding the maximum amount which is not chargeable to income-tax : The assessee has been undertaking business activities in India for a very long period of time. The income of the assessee from India shall be more than ₹ 1 lakh, the limit specified in s. 149 of the IT Act. In view of the foregoing, I have reason to believe that income chargeable to tax exceeding ₹ 1,00,000 has escaped assessment within the meaning of s. 147 of the IT Act, 1961." 33. In asst. yr. 2001-02, it was noticed by the AO that the assessee had filed its return of income but the same was filed on cash basis. The AO applied Expln. 2(a) to s. 147 to initiate proceedings under s. 147 of the Act. The return so filed by the assessee was merely processed under s. 143(1) of the Act, and no regular assessment under s. 143(3) of the Act was made before issuing notice under s. 148 of the Act. 34. It was contended by the assessee that since asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t complying with the provisions of s. 139 of the Act. Therefore, the case of the appellant falls within the ambit of deemed escapement as provided in sub-cl. (a) of the Expln. 2 to s. 147 and that is why the AO issued notices under s. 148 of the Act for invoking the provisions of s. 147 of the Act. Further, there are judicial precedents to the effect that at the time of initiating the proceedings the AO is not expected to reach a final conclusion regarding the taxability of such income under the Act, only a prima facie belief regarding escapement of income would be sufficient for invoking the provision of s. 147 of the Act. A reference can be made to the following two decisions of the Supreme Court which make it clear that merely a prima facie belief with respect to escapement of income has to be found : (i) It has been laid down by the Supreme Court in the case of Raymond Woollen Mills Ltd. vs. ITO & Ors. (1999) 152 CTR (SC) 418: (1999) 236 ITR 34(SC) that where there is a prima facie material, the sufficiency and correctness of the belief cannot be questioned at this stage. At this stage, the final outcome of proceedings is not relevant. In other words, at the initiation stage, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieve that income for assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has cause or justification to know or suppose that income has escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. vs. ITO (1991) 98 CTR (SC) 161: (1991) 191 ITR 662(SC), for initiation of action under s. 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceedings is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not the established fact of escapement of income. At the stage of issue of notice, the only issue was whether there was relevant material on whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the aforesaid two criteria that income from sale of spares was not shown in the return of income and receipt from technical services was shown on cash basis as against accrual basis are sufficient to entertain a belief that income chargeable to tax in India has escaped assessment. The learned CIT(A) has rightly analyzed the facts of the case and has taken a view that AO has invoked the provisions of s. 147 of the Act validly. The order of learned CIT(A) on this issue is, thus, upheld. In other words, the grounds challenging the validity of AO's action in initiating proceedings under s. 147 of the Act raised by the assessee are rejected for the asst. yrs. 1998-99 to 2001-02. 38. Next dispute is with regard to the question whether the assessee company has any business connection or PE in India insofar as its business activity of supplying goods or spare parts to Indian customers is concerned. 39. The assessee is a company incorporated under the laws of Singapore and is one of the group companies of Rolls Royce Group. The principal activity of the assessee company is those relating to sale of spare parts for oil field equipments and the marketing and sale of engines and turbin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken a view that the assessee has a business connection or PE in India in the form of ANR. 41. The AO further stated that the income of the assessee from maintenance services accrues or arises in India by deploying engineers and personnel for undertaking maintenance of the equipment at the sites of the Indian clients located in India, and the maintenance activities cannot be isolated from the supply of spares. He further observed that supply of spares and services or maintenance of the equipments are inextricably linked to each other as the service engineers would certainly require spare parts to be replaced or overhauled. 42. The AO further stated that the assessee company has placed one Mr. Venketaramana as executive regional sales manager in India and, thus, income of the assessee from supply of spares accrues or arises in India from the activities of its sales manager as well. 43. The learned CIT(A) has agreed with the AO's view. In the light of the various points raised by the AO, the learned CIT(A) held that the assessee company has a PE in India on following counts : (i) that assessee has a source of income in India; (ii) that the assessee has established a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia because appellant has no PE in India under the provisions of India Singapore tax treaty read with s. 90 of the Act. (viii) An agent (i.e., a person acting on behalf of some other person) can be treated as a PE under the India Singapore tax treaty only if' (a) he has and habitually exercises in that State an authority to conclude on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. (ix) In case an agent has no authority to conclude contracts or does not maintain any stock of that person or does not secure order wholly or almost wholly for that other person or for the enterprise and other enterprises controlling, controlled by, or subject to the same common con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivil Appeal No. 5260 of 2008 (Supreme Court) has held that onus lies on the Tax Department to prove that there is a PE. The Tax Department must bring reliable evidence on record in this regard. The Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775(SC) has held that an assessment without reference to any material or evidence or on pure guesswork, is bad in law. (xiv) The AO had presumed that as ANR was paid a commission higher than the amount provided in the contract it must have rendered more services. However, the AO has failed to bring any document that establishes that ANR is paid a commission higher than the amount specified in the contract. It is also important to note that the AO has also failed to bring on record any evidence, documentary or otherwise, that establishes that ANR had rendered more services than specified in the contract. It is important to note that the entire premise of the AO seems to be on the ground that ANR was also paid a commission @ 5 per cent of the invoice value in earlier years when there was no agreement between the appellant and ANR, and after an agreement was executed, the amount of commission was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be established on the basis of documents that such offices were in fact used by the appellant in India (there is no material on this aspect on record). (xix) The learned Departmental Representative during the course of his arguments had repeatedly referred to the provisions of the cl. 8 of the agreement between ANR and the appellant. The said provision merely restricts ANR to market competitive products. The rationale behind is that of conflict of interest in case ANR also markets the competitive products. The said provision nowhere restricts right of ANR to deal in, do business in or to market other non-competitive products. It has also been alleged that ANR has no other clients. This conclusion of the learned AO and learned CIT(A) is against the reasonable interpretation of the agreement. This shows the completely biased attitude of the concerned authorities. (xx) Similarly other provisions of the said agreement have also been wrongly interpreted. Another instance is of cl. 19 of the said agreement. This clause merely specifies that this agreement supersedes all representations, agreements, statements and understandings made prior to the execution of this agreement and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (2007) 207 CTR (SC) 361: (2007) 288 ITR 408(SC) has held that income from offshore supplies is not taxable in India. This judgment has been followed by Delhi Tribunal in the case of LG Cable Ltd. vs. Dy. CIT MANU/ID/0079/2008-Tribunal-Delhi. In the present case, contracts for supply and services are different. The supplies have been made on FOB (Singapore) basis. (xxiv) The learned AO and the learned CIT(A) have not brought any material on record to hold that the assessee has a PE in India on account of ANR. 46. The learned Departmental Representative, on the other hand, reiterated the various reasons and observations made by the Revenue authorities below in support of the view that the assessee has a business connection or PE in India on various counts as so elaborately discussed by the learned CIT(A) in his order. The learned Departmental Representative has furnished a written note to support the orders of the authorities below. 47. We have considered the rival contentions of both the parties and have carefully perused the orders of the authorities below. We have perused the various papers placed in the paper book filed by the assessee. 48. Before we proceed to decide the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in reiterated in the case of CIT vs. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs (2004) 189 CTR (SC) 193: (2004) 267 ITR 654(SC) where the Hon'ble Supreme Court observed and held as under (pp. 659-660) : "Where liability to tax arises under the local enactment the provisions of ss. 4 and 5 of the Act provide for taxation of global income of an assessee chargeable to tax thereunder. It is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation as envisaged under s. 90 to the contrary, if any, and such an agreement will act as an exception or modification of ss. 4 and 5 of the IT Act. The provisions of such agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of s. 90(2) of the Act. Sec. 90(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty if an enterprise of the other Contracting State has no PE in India. Therefore, in the present case, we have to see as to whether the assessee non-resident company has a PE in India within the meaning of definition of PE as contained in art. 5 of DTAA so as to charge tax on so much of the profits of an enterprise as is attributable to the PE in India. 52. Article 5 of DTAA between India and Singapore defines the expression "PE" as under : "1. For the purposes of this agreement, the term 'PE' means a fixed place of business from which the business of the enterprise is wholly or partly carried on. 2. The term 'PE' includes especially : (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) premises used as a sales outlet or for soliciting and receiving orders; (j) an installation or structure used for the exploration or exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise. However, the provisions of sub-paras (a) to (e) shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State through which the business of the enterprise is wholly or partly carried on. 8. Notwithstanding the provisions of paras 1 and 2, where a person other than an agent of an independent status to whom para applies is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a PE in the first-mentioned State, if' (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first mentioned State a stock of goods of merchandise, from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce services in respect of the equipment supplied by other companies of the same group to the Indian customers and supply of spare parts is inherent in the arrangement of supply of the equipment made by the other companies of Rolls Royce Group. The AO had taken the view that the supplier of the equipment had the responsibility to supply the spares of the equipment, and no person other than the one authorized by the manufacturer/supplier of the equipment would be able to supply the spares and provide services in respect of such complicated equipment supplied by the supplier. Therefore, the source of income of the assessee in India is only the equipment that was supplied by its group companies as the assessee is only the concern, who can supply spares and services in respect of those equipments. In the light of this observation, the AO, therefore, had taken a view that the assessee company has a source of income in India and, thus, income from supply of spares is taxable in India. 56. On this aspect of the matter, the learned counsel for the assessee has submitted that each company belonging to Rolls Royce Group is separate legal entity and a separate tax assessee. He further submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anything more showing directly or indirectly any connection or relation between two distinct contracts, it cannot be regarded as a basis to hold that the assessee company has a source of income in India for the reason that the companies supplying equipment were belonging to Rolls Royce Group, and equipment so supplied was installed or fixed by Indian customers in India. The Department has not been able to point out any iota of evidence or material to show and establish that in the original contract of supplying equipment by some other company belonging to Rolls Royce Group, there exists any condition putting obligation upon the Indian buyer or upon the assessee company to purchase or supply spares necessary to the main equipment already supplied by some other company of Rolls Royce Group under a different contract. It is also noticed that for purchasing certain spares by Indian customer, the Indian customer invites a request for quotation by a notice from assessee company, and after finalizing the negotiations, the spares were supplied FOB Singapore to India. It is also not in dispute that the assessee company ships spares ex-works Singapore or FOB Singapore to India in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as services are concerned, they were rendered by the engineers, who travelled to India to the client's site to render these services after the orders are placed by the Indian client to the assessee company. After rendering the specific services required from the engineers, they go back to their base destination and they have nothing to do with the supplies which the assessee company may have made during the relevant period. It was also pointed out by the learned counsel for the assessee that these engineers coming to India to render the specific technical services did not have any authority to negotiate or conclude contracts on behalf of the assessee company. On this issue, the learned counsel for the assessee has submitted that the allegations made by the AO are based upon his assumptions only and the AO has failed to point out any material or circumstances by which it could be said that the activity of supply of spares and activity of providing services are inextricably linked to each other. He further submitted that the activity of supplying of main equipment by other group companies of Rolls Royce Group has nothing to do with the assessee's business of providing servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Fees for technical services", as shown by the assessee. The question that arises before us is as to whether the assessee has a PE with regard to its activity of supplying goods or spares to its clients in India ? In order to decide this issue, it is to be ascertained as to whether the activity of providing services and activity of supplying spares are inextricably linked to each other. The AO has held that the activity of providing services and activity of supplying spares are inextricably linked as, in his view, the maintenance activity cannot be isolated from supply of spares, and the service engineers certainly required the spares and parts to be replaced or overhauled. There is no dispute as to the fact that during the course of providing maintenance and service to any equipment, certain parts need to be replaced or overhauled. But, in the instant case, we are concerned with the question whether providing services by the assessee's engineers is dependent upon the fact that the spares and parts need to be replaced or overhauled are necessarily to be procured from the assessee company and the Indian client is bound to avail services of the assessee company only bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her activity has not been included, even indirectly. Therefore, though spare parts were necessary to be replaced in any equipment at the time of servicing or maintenance of the equipment, the supply of spares made by the assessee company to Indian clients is not an integral part of the contract of providing maintenance services. It is also not the case of the Department that the supplies of spares were not made at arm's length price, but its cost has been indirectly included in the service charges, or, on the other hand, it is not established by the Department that the cost for services charged by the assessee company was not at arm's length price but its cost has been included in the price of spares supplied by the assessee company. In absence of any material to show and indicate that supply activity and service activity are inextricably linked to each other or are integral part of each other, it is very difficult to hold that the assessee company has a PE in India insofar as its activity of supplying spares to Indian customers is concerned because of the reason that the assessee has been maintaining certain facilities for providing services to Indian customers at their si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ural resources in as much as the assessee company provides services to ONGC and GAIL and also supplying the spares to these entities is totally misconceived in as much as merely because the assessee is providing services or supplying spares to ONGC and GAIL, the assessee cannot be said to have a mine, oil or gas-well, a quarry or any place of extraction of natural resources as understood within the meaning of art. 5(2)(f) of the Act. It was further submitted by the learned counsel for the assessee that it is also not correct to allege that the assessee company provides services and facilities to the Indian clients or supplying spares to them for and on behalf of suppliers of the main equipment belonging to Rolls Royce Group, so as to say that the assessee has a PE in India in as much as there is no material on record to show that the assessee has rendered services in India or has supplied spares in India on behalf of the supplier of the main equipment. The activity of supplying equipment by other group companies is totally a distinct and a separate transaction having no relation or connection to the activities undertaken by the assessee of supplying spares to Indian clients or prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so been performed for their group companies belonging to Rolls Royce Group for a period aggregating to more than 30 days in any fiscal year. 66. The Revenue authorities have also alleged that the assessee has a PE in India within the meaning of art. 5(6) of DTAA between India and Singapore as the assessee has furnished services in India through its employees or other personnel for a period of more than 90 days in any fiscal year and activities of providing services are performed for a related enterprise for a period aggregating to more than 30 days in any fiscal year. 67. However, in the present case, no such material has been brought on record to prove and establish that the assessee company participates directly or indirectly in the management, control or capital of other group companies belonging to Rolls Royce Group and vice versa nor does any person of assessee company participates directly or indirectly in the management, control or capital of other group companies belonging to Rolls Royce Group and vice versa. The Revenue authorities have applied para 6 of art. 5 of DTAA merely because the assessee company belongs to same Rolls Royce Group and certain equipments have also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h are used for receiving and soliciting orders, and also in the form of ANR dependent agent. 71. In this regard, the AO has taken a view that the activities of ANR are much more than those provided for in the contract. The AO has alleged that the assessee company has paid the commission of 5 per cent of the contract value to ANR over and above the fees of US $ 40,000 payable under the written contract made with ANR. The AO has also observed that from the documents received from ONGC, it was seen that ANR acted as its agent even prior to the date of the agreement executed on 1st Jan., 2002 and on this basis, the AO has concluded that the activities of ANR are more than what is provided for in the agreement. 72. With regard to the allegation made by the AO that the activities of the agent of the assessee viz., ANR, are more than what has been specified under the contract, the AO has made the following observation : "As regards the agents in India, the assessee has submitted that it has appointed only M/s ANR Associates (P) Ltd., Calcutta (ANR) as its agent. It has also submitted a copy of agreement dt. 1st Jan., 2002. However, the documents received from ONGC show that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Jan., 2002, it would indicate that ANR was providing much more services to assessee company than mentioned in the written agreement. On this aspect of the matter whether activities of ANR are much more than what is provided for in the contract, the learned CIT(A) has observed and held as under : "The submissions of the appellant and finding of the facts of the AO have been considered. In normal course appellant while refuting the changes of the AO is duty-bound to furnish the correct statement of facts and nature of activities being carried out by the appellant. The fact that for asst. yr. 2003-04 a sum of US $ 40,000 has been paid as fixed commission, and not paid @ 5 per cent as payable in lieu of the agreement, very effectively supports the case of the AO. It indicates that there are certain other covenants between the appellant and ANR Associates which have not been mentioned in the agreement dt. 1st Jan., 2002. The only way to contest the claim of the AO would have been to produce details of payments made to the ANR Associates during the relevant years duly certified by the appellant and verified by ANR Associates. But that has not been done except making a repeated s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls of stay of the expatriates during the financial year. However, with respect to management services in relation to power generation project it has been mentioned by the appellant that these services rendered to related companies were performed in Singapore and, therefore, these incomes are not liable to tax in India without even indicating the actual details of services. The fact that there has been a retrospective amendment in the s. 9 by Finance Act, 2007 which makes it clear that such payments for such services have to be included in the total income for Indian IT Act in case of even the non-resident has not been taken into account while making this point. At the same time it has been indicated by the AO on page No. 7 of the assessment order for asst. yr. 2002-03, that services are received by the group companies in India. If the appellant was interested to deny these findings of facts, he should have indicated the exact details and nature of services and indicating as to which entity rendered the services and where these services have been performed. In view of these facts the AO has rightly relied on the ratio of AAR in the case of Steffen, Robertson & Kirsten Consulting Eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, the nature of services could only be inferred from surrounding circumstances and materials on record. But, the materials brought on record by the parties are not sufficient to draw an inference that ANR was providing much more services than what is mentioned in the written agreement dt. 1st Jan., 2002. 76. In the light of the discussions made above, we, therefore, hold that the observations or findings of the authorities below that activities of ANR were much more than what was specifically provided in the agreement dt. 1st Jan., 2002 are purely based on assumptions and presumptions without the same being supported by any reliable or adequate evidences. Therefore, the claim of the Revenue that activities of ANR are much more than what is provided for in the agreement is rejected. 77. Now, the question arises as to whether in the light of the nature of activities carried out by ANR and in the light of the terms of agreement entered into between the assessee company and ANR, the assessee can be said to have a PE in India in the form of ANR. 78. It has been alleged by the AO that ANR is engaged and its office is used for receiving and soliciting orders for the assessee company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. The arguments raised by the appellant have been considered. Prima facie it is not denied that ANR Associates did facilitate the business of the appellant which was carried out through them. The background of the relationship of the appellant and ANR Associates is an agreement between ANR Associates and the appellant dt. 1st Jan., 2002 for the duration of two years. There is no mention of any renewal of the same by the parties; at the same time there is no mention of the termination of contract either. At the same time para 19 of the agreement also refers to previous understanding i.e. prior to formalization of the agreement in writing prior to 1st Jan., 2002. A close scrutiny of this agreement reveals that the scope of work of ANR Associates included liaisoning with customer, maintaining relationship, making customer aware of suitable R.R. products, creating interest in appellant's products. Appellant is thus involved both of the liaisoning and activities of procuring of orders. The job assigned to ANR Associates by the appellant was to maintain relationships with the existing customers of the appellant by updating them about the products of the appellant and on the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity or operation of the non-resident with the Indian party and any stray or isolated production is not enough to constitute business connection. Further, the Hon'ble Supreme Court in CIT vs. R.D. Aggarwal & Co. & Anr. (1965) 56 ITR 20(SC) has observed that business connection means something more than mere business. It envisaged that a relation to be termed as a 'business connection', it must be real and intimate and through or from which income must accrue or arise whether directly to the non-resident. It pre-supposes an element of continuity between the business of the non-resident and his activity in the taxable territory, rather than a stray or isolated transaction. In the present case these conditions are clearly fulfilled. In the instant case the payments are made to ANR Associates by the appellant on a regular basis through deduction from payment to make to the appellant @ 5 per cent or lump sum payment in accordance with the contract which has been entered into for a period of two years. The claim of the appellant that remunerations are paid at arm's length is not supported by facts. Moreover, the fact that same are made on a arm's length will not alt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities and income of the appellant and accordingly there was no agent of the appellant in India. From the asst. yrs. 2000-01 and 2001-02, under an ad hoc arrangement, it had paid commission to ANR Associates @ 5 per cent of the sales and had not paid the fixed commission of US $ 40,000 as provided in the contract since the same was entered on 1st Jan., 2002. As stated during the aforesaid period prior to 1st Jan., 2002, the appellant has only ad hoc arrangement with ANR Associates and did not have any written contract. The contract was subsequently executed with ANR Associates on 1st Jan., 2002. At this point it is essential to keep in mind that the relationship between principal (appellant) and the agent (ANR Associates) has to be examined on the basis of actual conduct of business. Whether there is a written contract or not or whether it has been entered into on a subsequent date will be of no consequence if the agent has been performing these duties from an earlier date. Any finalization of a business arrangement in the form of written contract from a subsequent date cannot negate the services, activities and services of the agent rendered prior to such finalization and their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the appellant, the client issues a purchase order to the appellant for the supply of goods or rendition of services, as the case may be, (d) subsequently, the appellant supplies the goods on FOB basis or renders the services as per the purchase order made by the client, (e) since the appellant has no establishment or employee or agent to represent itself in India, all communications between the client and the appellant take place through the fax, electronic mail or through other modes of telecommunication. The appellant would be utilizing the services of the agent namely ANR Associates in all the above steps on a regular basis to carry out its business in India. The facts of the case as indicated above and its conduct of business through ANR Associates, clearly establish that the appellant has a business connection in India in terms of s. 9(1)(i) of the IT Act, in view of the ratio laid down by the Supreme Court in the case of CIT vs. R.D. Aggarwal (supra) as well as decision of Andhra Pradesh High Court in case of G.V.K. Industires vs. CIT (supra). Reference is also made to the decision of the Supreme Court in the case of Barendra Prosad Ray vs. ITO (1981) 22 CTR (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of supplying spares in India through any person and no person in India is authorized to act or function on behalf of the company or to conclude any contracts in India. 82. To decide this issue as to whether the assessee has a PE in India in the form of an agent ANR, it is necessary to examine and appreciate the terms of agreement of agency entered into between assessee and ANR vide agreement dt. 1st Jan., 2002. The purpose of the agreement as mentioned in cl. 2 of the agreement is that the assessee requires certain in-country support services in relation to promote and supporting the sale of products in India, and ANR Associates has the infrastructure in place to provide such services subject to and in accordance with the provisions of this agreement. The nature of services to be provided by ANR Associates to the assessee company are set out in cls. 3, 4 and 5 of the agreement, which are as under : "Services 3. Throughout the period of this agreement, ANR shall : 3.1 Liaison with the operators of equipment to support R-R products and keep R-R informed of their status. 3.2 Maintaining close relationship with customers and potential customers so that their equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uot;Representations and warranties of ANR 9. ANR represents and warrants that : 9.1 This agreement, the relationship created hereby and ANR's activities hereunder do not and will not violate any laws of, or applicable to, India, including but not limited to the OECD Convention on combating bribery of foreign officials in international business transactions and all related and implementing legislation including the United States Foreign Corrupt Practices Act, or put R-R in breach of any laws, and further warrants that, in connection with the provision of the services any of them, ANR will duly observe at all times throughout the period of the agreement all applicable laws and the terms of this agreement. 9.2 Neither ANR nor to ANR's knowledge, any other person has made, or will offer to make any loan, gift, donation or other payment or anything of value, directly or indirectly, whether in cash or in kind, to or for the benefit of any political candidate, political party, Government agency or individual elected or appointed as an employee or officer thereof, to secure or retain business or obtain any improper advantage. 9.3 It is a corporation duly under the laws of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xecution of this agreement and concerning services to be provided to the assessee company by ANR. 83.5 This agreement was made effective from 1st Jan., 2002 expiring on 31st Dec., 2003 unless both parties agreed to a renewal or extension on terms to be agreed upon and subject to the early terminations in the event mentioned in cls. 11.2, 11.3 and 11.4 of the agreement. It was also provided that the agreement would not be assigned in whole or in part nor may its performance be delegated by either party without the prior written consent of the other party. 83.6 Clause 15 of the agreement provides that the existence of this agreement is not to be published or disclosed by either party without prior written consent of the other party to the text, contents and timing of any such disclosure. 83.7 The products in respect of which the ANR has agreed to provide services vide cls. 3, 4 and 5 of the agreement, are mentioned in Sch. A containing two sections i.e., s. 1 and s. 2 to the agreement. Schedule A to this agreement reads as under : "Schedule A Sec. 1'New unit products'Oil and gas industry 1.1 Coberra 2,000 and 6,000 series turbine driven compression and power gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oing any activities other than what are directed by the assessee. The authorities below have also taken a view that, in the instant case, ANR, though an independent entity, rendered services to the assessee almost wholly and exclusively, and in that respect Revenue authorities have relied upon the various clauses of the agreement dt. 1st Jan., 2002 and also the role of ANR after 1st Jan., 2002, and also its role prior to 1st Jan., 2002 during which period, a commission @ 5 per cent of sales value was being paid to the ANR directly by ONGC after deducting the same from assessee's bill. The learned Departmental Representative has also laid a great emphasis upon the relationship between the assessee and ANR and the role of ANR in connection with the activity of supplying spares by the assessee to Indian clients as appearing from the agreement dt. 1st Jan., 2002 entered into between the assessee and ANR. 85. The learned counsel for the assessee, on the other hand, has submitted that ANR Associates is an independent agent, and the supply of spares has been made by the assessee company to Indian clients on FOB basis and no activities relating to the sale of spares to Indian customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he enterprise through a fixed place of business" shall usually mean that persons dependent on the enterprise conduct the business of the enterprise in the State in which the fixed place is situated. The business of the enterprise must, therefore, be carried wholly or partly only through fixed place of business by its personnel. The term "personnel" includes both employees and others, such as dependent agents, who receive instructions from the enterprise. There must be a connection between the business activity of the enterprise and the place of business. The place of business must be the base for the enterprise business activity in that State. The place of business does not have to generate profits directly, but the profits should arise wholly or partly through business activities carried on partly or wholly at the fixed place of businsess. The activities carried on wholly or partly at the fixed place of business need not be of a productive character. In other words, the PE within the meaning of art. 5(1) would not necessarily have to be an establishment that one would normally regard as being a business establishment. It is also not important whether the profits are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities of such agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprise controlling, controlled by, or subject to the same common control, as that enterprise, he will not be considered as an agent of an independent status. To be an independent agent within the meaning of para (9) of art. 5, the person must not be a dependent agent, i.e., he must be both legally and economically independent. An independent agent is generally responsible for the result of his work and not subject to close supervision. What is relevant is the freedom given to him to act on behalf of the principal. The provision of information to the principal by the agent is not so relevant, unless it is required to get approval for his actions. Extensive control and detailed instructions with limited discretionary powers to non-employees would suggest their lack of legal independence. Independence must be a matter of law and fact, and the degree of control exercised by the enterprise would be a critical factor. Further, an agent, who works wholly or almost wholly for one principal, is unlikely to be economically independent since he wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee to have certain in-country support services in relation to promote and supporting the sale of its products in India. Since it was understood between assessee company and ANR that ANR has the infrastructure in India to provide such services in relation to promote and support the sale of assessee's products in India, subject to the terms and conditions incorporated in the agreement, the assessee company had entered into an agreement with ANR for availing certain in-country support services in relation to promote and supporting the sale of products in India. The expression "products" in respect of which in-country support services were required to be rendered by ANR to assessee company has been detailed in Sch. A of the agreement. Sch. A of the agreement contains two sections i.e., s. 1 and s. 2. Sec. 1 is with regard to new unit products used by oil and gas industry. Sec. 2 is with regard to the customer service products under oil and gas industry. In this list of products mentioned in Sch. A, the items mentioned are the various equipments which were sold to customers in oil and gas industry. In the agreement, certain limitations and restrictions have als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent status within the meaning of para (9) of art. 5 of DTAA. 90. It is pertinent to note that cl. 5 of the agreement dt. 1st Jan., 2002 between the assessee and ANR provides that ANR shall report to, take instructions and advice from, and make the services available to the assessee through Mr. Sudhir Mayor for the products identified in s. 1 of Sch. A and Mr. Darve Klug for the products identified in s. 2 of Sch. A, or their nominees. Mr. Robert Turner will handle liaison on all administrative aspects of this agreement on behalf of company. The assessee may change the person or persons nominated under this clause at any time by notice in writing to ANR. Further cl. 8.2 of the said agreement provides that ANR shall act exclusively for the assessee in relation to the promotion of its products and shall not directly or indirectly assist any other person, firm or company competing with the assessee company or advise or represent or be concerned with or interested in the business of any such person, firm or company in India. This clause makes it clear that ANR is prohibited and restrained from handling identical products or goods for principal. As per the condition enumerated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as the amount of commission earned by ANR from them. Second limb of para (9) of art. 5 requires that the activities of an independent agent shall not be devoted wholly or almost wholly for the enterprise in order to consider him as an agent of independent status. The purpose of second limb in para (9) of art. 5 is to include agents, who though acting in the ordinary course of their business, are devoted entirely or almost entirely to the work of the enterprise. In the instant case, it is not in doubt that ANR is the sole agent of assessee company, but what is required to be seen is that whether assessee company is the sole client of ANR to bring it within the mischief of the second part of para (9). The terms of "wholly" and "almost wholly" are not technical terms or terms of artticle. They must receive their ordinary meaning as understood by English speaking people. The word "wholly" means entirely, completely, fully, totally; "almost wholly" would mean very near to wholly, a little less than a whole. In terms of percentage "almost wholly" would mean anything around 90 per cent. In the instant case, ANR has given a certifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spare parts to Indian clients. The amount of remuneration payable to the agent has not been determined with reference to the value of various products and spare parts sold in any relevant year. Prior to 1st Jan., 2002, a commission was being paid @ 5 per cent of invoice value, which has been now changed to lump sum amount of US $ 40,000 payable annually. This sort of fixation of remuneration is usually not done between two independent parties in any uncontrolled transaction. The fixation of remuneration payable to the agent as specified in the written agreement dt. 1st Jan., 2002 seems to be in the nature of a transaction controlled by the assessee company. Therefore, in this view of the matter, the transaction between assessee company and ANR cannot be considered to be made at arm's length. The assessee has not furnished any instance of transaction entered into between two independent parties in uncontrolled manner in support of the assessee's contention that payment of remuneration of lump sum amount of US $ 40,000 was determined at arm's length. On the other hand, the Revenue authorities below have been able to establish that the transaction between the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee (sic-ANR) has been rendering services almost wholly for the assessee, and (iv) the transaction between them is not at arm's length, we hold that ANR is not an independent agent within the meaning of para (9) of art. 5 of DTAA between India and Singapore. 96. As already observed above, carrying on of the business of any enterprise through a fixed place of business usually means that persons dependent on the enterprise conduct the business of the enterprise in the State in which the fixed place is situated. The term "person" includes both the employees and others, such as dependent agents, who receive instructions from the enterprise. In the present case, the ANR Associates has been rendering services as per the requirement of the assessee company. The assessee company required certain in-country support services in relation to promote and supporting the sale of its products in India and ANR Associates was appointed as an agent having such infrastructure in India to provide such services under the terms and conditions of the agreement entered into between assessee and ANR Associates. The ANR Associates was required to make liaison with the operators of equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting State shall be deemed to have a PE in the first-mentioned State, if any of the three cls. (a), (b) and (c) thereof applies. Clause (a) deals with a person who has and habitually exercises an authority to conclude contracts on behalf of the enterprise in the first-mentioned State unless his activities are limited to the purchase of goods or merchandise for the enterprise. Clause (b) deals with a person who acts without such authority but habitually maintains in the first-mentioned State a stock of good or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. Clause (c) says that the person habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 98. In the instant case, it is an admitted position that cls. (a) and (b) of para (8) of art. 5 do not apply in as much as there is no material or evidence brought on record to show and establish that the ANR habitually exercised an authority to conclude contracts on behalf of the assessee company in India or ANR habit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service agreement, the contention of the assessee, though seems to be attractive and plausible, that the assessee has no PE in India deserves to be rejected. We, therefore, hold that assessee has a PE in India in the form of ANR within the meaning of art. 5(1), 5(8) r/w art. 5(9) of the treaty. 100. Having held that assessee has PE in India, it is also imperative on our part to decide whether assessee has a business connection in India within the meaning of s. 9 of IT Act, 1961. In the light of the decision of Hon'ble Supreme Court in the case of CIT vs. R.D. Aggarwal & Co. & Anr. (1965) 56 ITR 20(SC) and in the case of Anglo French Textile Co. Ltd. vs. CIT (1953) 23 ITR 101 (SC) the essential features of "business connection" may be summed up as follows : (a) a real and intimate relation must exist between the trading activities carried on outside India by non-resident and the activities within India; (b) such relation shall contribute, directly or indirectly, to the earning of income by the non-resident in his business; (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04. The attribution of profit to PE in India has been worked out by the AO in different assessment years as under : (i) In asst. yr. 1998-99, the AO worked out the sum of ₹ 51,98,636 being received by the assessee from ONGC, out of which 10 per cent was attributed towards receipt from services, and balance 90 per cent was attributed towards receipts for supply of spares. The receipt from supply of services has been taxed under s. 115A @ 20 per cent of receipts. With regard to the profit from business of supply of spares, the AO has worked out the net profit @ 11 per cent of the turnover of the assessee on the basis of overall rate of profit disclosed by the group companies for the period from 1994 to 1998. The AO, therefore, determined 11 per cent of 90 per cent of total receipts of ₹ 51,98,636 at ₹ 5,14,665, which was assessed as business profit of the assessee taxable in India. (ii) In the asst. yr. 1999-2000, the AO had worked out the total turnover at ₹ 1,23,46,643 received from ONGC, 90 per cent thereof was allocated towards receipts from supply of spare parts and rest 10 per cent was allocated towards receipts from providing services. The AO then d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 105. On an appeal, the CIT(A) decided this issue regarding determination of profit attributable to PE in India and taxable in India by observing and holding as under : (i) With regard to the AO's action in assessing the income from services under art. 12 of the DTAA, the CIT(A) has upheld the AO's action by observing that the incomes from services taxable under art. 12 of the DTAA are independent of PE in India and as such, they are subjected to tax on gross basis as per tax rate provided in art. 12 of the DTAA. However, this issue is not before us for our consideration to decide in this appeal and the same has also been offered to tax by the assessee under art. 12 in asst. yrs. 2002-03, 2003-04 and 2004-05. (ii) The CIT(A) held that attribution of 25 per cent of the profit from supply of spares in asst. yrs. 2002-03, 2003-04 and 2004-05 to the PE in India would be adequate, and 10 per cent of the profit would be adequate in other assessment years. He directed the AO to compute the profit from business of supply of spares after applying global profit rate, and thereafter attribute the same to the extent of 25 per cent of the profit in the asst. yrs. 2002-03, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d negotiation thereof and promoting sales and doing marketing operations against which a commission has already been paid to agent. Similarly, in the case of Annamalais Timber Trust & Co. vs. CIT (1961) 41 ITR 781(Mad), it has been held that there was justification only of apportionment of 10 per cent of assessee's share of profit of the trading operations carried out in India when except entering into contract in taxable territory all other operations were carried out outside taxable territory. In the present case, while adopting the rate of 10 per cent of profit to be allocated towards operations carried out by PE in India, we have taken into account the fact that the assessee company has been paying a fixed remuneration of US $ 40,000 to the agent in India., which is otherwise taxable in the hands of the agent in India, and which would go to reduce the amount of profit attributable to PE in India. Therefore, having regard to the fact that commission was also being paid at fixed amount of US $ 40,000 to ANR w.e.f. 1st Jan., 2002, and having regard to the fact that PE in India was mainly engaged in soliciting orders and promoting sales and doing marketing activities, we are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we hold that only 10 per cent as against 25 per cent directed by the CIT(A) of the profit from sale of spares is to be attributed to the activities carried out by the PE in India and then to be taxed accordingly as per art. 7(1) of the DTAA. We hold accordingly. 110. Before the CIT(A), an alternative contention was raised by the assessee that even if for the sake of argument it is assumed that the assessee company has a business connection and/or PE in India, no further income can be taxed in the hands of the company as the assessee company remunerated the alleged business connection/PE in the form of agent viz., ANR Associates, at an arm's length. In this connection, the assessee had relied upon the decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. Director of IT (supra) as well as the decision of Hon'ble Bombay High Court in the case of Set Satellite (Singapore) Pte Ltd. vs. Dy. CIT (2008) 218 CTR (Bom) 452: (2008) 11 DTR 313 (Bom). It was also pointed out that in the decision of Bombay High Court in the case of Set Satellite (Singapore) Pte Ltd. vs. Dy. CIT (supra), a reliance was placed upon the decision of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X
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