9911796707
TMI Blog2008 (12) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, the assessee set up a project office in Mumbai and a site office in Haldia in June, 1998 after obtaining the approval from the RBI. The assessee in turn had awarded a sub-contract in favour of its subsidiary company, namely, Stork Comprimo (Malaysia) Sdn. Bhd. (hereinafter called as "Malaysian company"). Under the agreement the Malaysian company was required to supply the personnel to the assessee company for the purpose of execution of its project at Haldia. In the year under consideration the assessee made payment of Rs. 1,23,98,902 to the Malaysian company for supply of the personnel and claimed the same as deduction in computing its income. In the course of assessment proceedings, the assessee was required to show cause as to why the deduction should not be disallowed in view of the provisions of s. 40(a)(i) of the Act since no tax has been deducted at source against such payment. In reply, it was stated by the assessee that the personnel supplied by the Malaysian company to the assessee were working under the direction, supervision and control of the assessee and, therefore, it could not be said that any service had been rendered by the Malaysian company. It was further su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not justified in coming to the conclusion that Malaysian company had a PE in India; and (v) that the assessee as well as the Malaysian company are separate companies although under the same group and one is not the subsidiary of another and, therefore, the validity of the agreement could not be questioned without any basis. In view of the above submissions, it was pleaded that the Malaysian company had no income chargeable to tax, in India and therefore, no disallowance could be made under s. 40(a)(i) of the Act. Reliance was again placed on the decision of the Authority for Advance Ruling in the case of Tekniskil (Sendirian) Berhard. 5. After considering the submissions of the assessee and the material placed before him including India-Malaysia treaty, the CIT(A) held that the Malaysian company did tender services to the assessee. However, it was found by him that India-Malaysia treaty does not contain any specific article dealing with fees for technical services and, therefore, it was observed by him that the taxability of the payments received by the Malaysian company would be governed by art. 7 dealing with the business profits. It was also observed by him that art. 7 perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: "Article 5: Permanent establishment 4. An enterprise of one of the Contracting States shall be deemed to have a PE in the other Contracting State if: (a) It carries on supervisory activities in that other Contracting State for more than six months in connection with a construction, installation or assembly project which is being undertaken in that other Contracting State; (b) ..........." The only reason given by the AO is that the personnel sent by the Malaysian company did supervision work at Haldia project and, therefore, such project constituted PE in India. We have gone through the agreement between the assessee and the Malaysian company appearing in the paper book at pp. 1 to 5. The recitals of the agreement show that the Malaysian company is engaged in the business of hiring of skilled and unskilled personnel in the field of mechanical, electrical, civil and professional activities and to supply the same to any person, firm or company. It is further stated that in order to execute its project at Haldia, the assessee seeks to obtain the requisite personnel from Malaysian company. Clause 4 of the agreement provides that the role of the Malaysian company would e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art. I would specially include various places mentioned in sub-cls. (a) to (i). The combined reading of paras 1 and 2 show that the place of business mentioned in para 2 would be considered as PE of non-resident if such non-resident carries on its business in such places in other Contracting State. The CIT(A) has given a finding that the assessee does not have any place of business in India. This finding has not been controverted by the Revenue. Therefore, in our opinion, para 2 of art. 5 would have no application to the present case. 9. In view of the above discussion, it is held that there was no PE of the non-resident Malaysian company in India in terms of art. 5 of DTAA between India and Malaysia. Hence, the payment received by the non-resident Malaysian company was not taxable in India. Consequently, the provisions of s. 195 and s. 40(a)(i) of the Act could not be invoked by the AO. The order of the CIT(A) is, therefore, upheld on this issue. 10. The next issue relates to the disallowance of Rs. 42,09,874 representing the salary cost attributable to Indian project but debited in the books of head office. In the course of assessment proceedings it was noticed by the AO that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (1983) 6 ITD 373 (Bom); (iv) IAC vs. Godricke Group Ltd. (1985) 22 TTJ (Cal)(SB) 394 : (1985) 12 ITD 1 (Cal)(SB). 12. After going through the provisions of s. 44C of the Act, the Board circular as well as the decisions relied upon by the assessee, the CIT(A) observed that following principles emerge: - Expenses incurred by head office that are not in the nature of executive and general administrative expenses are not covered by s. 44C of the Act; and - Expenses specifically attributable to Indian operations are not hit by the provisions of s. 44C of the Act. On merits it was found that almost 90 per cent of the cost debited in the books of Indian project towards salary cost was in respect of technical/engineering staff and, therefore, the same could not be considered to be of general or administrative in nature. Merely because such expenses had been allocated to different projects cannot lead to a conclusion that they are in the nature of general and administrative expenditure. Accordingly, the contention of the assessee that the provisions of s. 44C does not apply to the facts of the case was accepted by the CIT(A). However, it was found by him that a sum of Rs. 4,18,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remises outside India used for the purposes of the business or profession; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India, (c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India, and (d) such other matters connected with executive and general administration as may be prescribed." At this stage, it would be appropriate to refer to the decision of the Hon'ble Bombay High Court in the case of Emirates Commercial Bank Ltd. wherein the scope of the above provisions was explained as under: "Sec. 44C is applicable only in the cases of those non-residents, who carry on business in India through their branches. The said section was introduced to get over difficulties in scrutinizing claims in respect of general administration expenses incurred by the foreign head office insofar as such expenses stand related to their business or profession in India having, regard to the fact that foreign companies operating through branches i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e visited India and the expenditure was incurred on travelling by such employees in India. The entire travelling was for Indian branch and therefore, no expenses could be attributed for any other work. It was not a case of allocation of expenses. Hence, the said decision cannot be applied on the facts of the present case since the employees of assessee in the head office not only worked for Indian project but also for other work of head office. 15. However, we are in agreement with the finding of the CIT(A) that expenses disallowed don't fall within the ambit of the expression "head office expenses" as defined in Expln. (iv) to s. 44C. According to this definition, head office expenses are restricted to executive and general administration expenses only. The s. 44C does not apply in respect of each and every expense incurred by the head office. The CIT(A) has given a finding that out of the expenditure of Rs. 42,12,180 only the sum of Rs. 4,12,220 represented head office expenses while the rest of the expenditure represented the salary paid for technical job done by the engineers for Indian project. Accordingly, it has been held by him that such expenditure could not be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany was chargeable to tax under the Act. Since no tax has been deducted at source, the above amount could not be allowed as deduction under s. 40(a)(i) of the Act. 18. On appeal, the CIT(A) was of the view that the facts of the case were covered by art. 5(2)(j) and not art. 5(2)(k). It was further observed by him that art. 5(2)(j) would apply only where such employees had worked for more than 6 months. Since such employees had worked only for 135 days, it could not be said that UK company had a PE in India. Consequently, the assessee was not liable to deduct the tax at source. Therefore, the disallowance was held to be unjustifiable. Reliance was placed by him in the case of Brown & Root Inc., In re (1999) 153 CTR (AAR) 18 : (1999) 237 ITR 156 (AAR), the decision of the Tribunal in the case of BKI/HAM V.O.F. C/o Arthur Anderson & Co. vs. Addl. CIT (2001) 70 TTJ (Del) 480 and the decision of the Authority for Advance Ruling, No. P-111 of 1995, XYZ, In re (1997) 141 CTR (AAR) 457 : (1997) 228 ITR 55 (AAR), in support of the proposition that a specific provision will override a general, provision. In view of the above discussion, he deleted the disallowance made by the AO. 19. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant. In order to appreciate the controversy, it would be appropriate to refer to the relevant clauses of art. 5. The same are being reproduced below: "Article 5: Permanent establishment 1. ............. 2. The term "PE" shall include especially: (a) to (i) ............. (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment; (k) the furnishing of services including managerial services, other than those taxable under art. 13 (royalties and fees for technical services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-month period; (ii) services are performed wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 being payment to Dumul Technology Services B.V. in connection with the engineering services for the project at Haldia. The AO was of the view that the engineering services amounted to technical services which were made available to the assessee company for completion of the project. Hence, the income of the resident company was taxable as per art. 12 of the India-Netherland treaty. Since no tax was deducted at source, the disallowance was made under s. 40(a)(i) of the Act. 22. On appeal, the CIT(A) found that engineering services were proved for inspection of the material required for execution of the Indian project. Though such services could be taken as technical in nature, it could not be said that any technical knowledge, experience, etc. had been made available to the assessee in view of the decisions of the Tribunal in the case C.E.S.C. Ltd. vs. Dy. CIT (2003) 80 TTJ (Kol)(TM) 806 and Raymond Ltd. vs. Dy. CIT (2003) 80 TTJ (Mumbai) 120 : (2003) 86 ITD 791 (Mumbai). Accordingly, it was held that art. 12 of the treaty could not be applied. According Lo the CIT(A), the payment was covered by art. 7 of the said treaty. Since, there was no PE in India, the said amount was not c ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
