EPCOS AG, Nashik V. The Deputy Director of Income-tax, Pune

ITA 1413/PUN/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49728 (ITAT-PUNE)
• Duration Of Justice: 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 01-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HARESHWAR SHARMA
• Assessee Lawyers: SUNIL M LALA
• Keywords: Business income; Double taxation relief; Deemed to accrue or arise in india; Permanent establishment; Wholly owned subsidiary; Set aside
• Section: 5(2); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ITA NO. 1413/PN/2010 (ASST. YEAR: 2006-07) EPCOS AG, C/O EPCOS IDIA P. LTD., E, 22-25, MIDC SATPUR, NASHIK .. APPELLANT PAN AAACE 9787H VS. DY. DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-I, PUNE .. RESPONDENT APPELLANT BY: SHRI SUNIL M LALA RESPONDE NT BY: SHRI HARESHWAR SHARMA ORDER PER D. KARUNAKARA RAO, A.M: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE DY. DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-I, PUN E DATED 27.10.2010 AND DISPUTE RESOLUTION PANEL, PUNE (DRP) DATED 30.7.201 0, PERTAINING TO THE ASSESSMENT YEAR 2006-07. 2. AT THE VERY OUTSET, THE LEARNED COUNSEL FOR THE ASS ESSEE MENTIONED THAT GROUND NOS. 3, 4 & 5 ARE NOT PRESSED, AS THEY ARE ACADE MIC IN NATURE. LOOKING AT THE GROUNDS AS WELL AS THE FACTS OF THE CASE, WE FIND THAT THE SAID GROUNDS HAVE TO BE DISMISSED. ACCORDINGLY, GROUND NOS 3, 4 & 5 ARE DISMISSED AS ACADEMIC. ITA NO 1413/PN/10 EPCOS AG 2 3. THAT LEAVES US WITH THE GROUND NOS 1 & 2 FOR ADJUD ICATION, WHICH READ AS UNDER: 1. NON-CONSTITUTION OF PERMANENT ESTABLISHMENT (PE) OF THE APPELLANT IN INDIA. 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DY. DIRECTOR OF INCOME- TAX (INTERNATIONAL TAXATION)-I, PUNE, (AO) ERRED IN PROPOSING AND THE DISPUTE RESOLUTION PANEL (DRP) FURTHER ERRED IN NOT INTERF ERING WITH THE CONCLUSION F THE AO THAT THE APPELLANTS TWO INDIAN SUBSIDIARIES CONSTIT UTE ITS BUSINESS CONNECTION IN INDIA UNDER SECTION 9(1)(I) OF THE I NCOME-TAX ACT, 1961 (THE ACT) OR A PERMANENT ESTABLISHMENT (PE) IN INDIA UNDER VARIOUS PROVISIONS OF ARTICLE 5 INCLUDING ARTICLES 5(1), 5(2), 5(5) AND 5(6) OF TH E INDIA-GERMANY TAX TREATY (TAX TREATY). 1.2 THE AO AND THE DRP FAILED TO APPRECIATE THAT THE AP PELLANT OPERATES ENTIRELY FROM OUTSIDE INDIA, HAS NO FIXED PLACE OF BUSINESS IN IN DIA AS ENVISAGED UNDER SECTION 9(1)(I) OF THE ACT OR ARTICLE 5(1) OR 5(2) O F THE TAX TREATY DIRECTLY OR IN THE FORM ITS TWO INDIAN SUBSIDIARIES AND FURTHER ARTIC LE 5(5) AND 5(6) OF THE TAX TREATY DO NOT APPLY TO ITS CASE AS THEY RELATE ONLY TO LOCAL INDIAN AGENTS ENGAGED IN BUYING AND SELLING GOODS IN INDIA ON BEHALF OF TH EIR OVERSEAS PRINCIPAL WHICH IS NOT THE FACT IN THE CASE OF THE APPELLANT AND THE AP PELLANT CLAIMS RELIEF ACCORDINGLY. GROUND NO. 2 NO ATTRIBUTION OF INCOME DEEMED TO A CCRUE/ARISE IN INDIA POSSIBLE TO THE ALLEGED PE OF THE APPELLANT IN INDIA 2.1 WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AO ERRED IN PROPOSING AND THE DRP FURTHER E RRED IN NOT INTERFERING WITH THE AOS CONCLUSION THAT THE APPELLANTS INDIA SOURCE I NCOME TAXABLE ON DEEMED ACCRUAL BASIS IS ATTRIBUTABLE TO THE ALLEGED PE IN IN DIA UNDER ARTICLE 7 OF THE TAX TREATY. 2.2 THE AO AND THE DRP FAILED TO APPRECIATED THAT SI NCE THE APPELLANT OPERATES ENTIRELY FROM OUTSIDE INDIA (GERMANY) AND CARRIES OUT NO OPERATIONS IN INDIA, NO INCOME CAN BE ATTRIBUTED TO THE ALLEGED PE IN INDIA UNDER ARTICLE 7 OF THE TAX TREATY, AND EVEN OTHERWISE PURSUANT TO ARTICLE 7(3) O F THE TAX TREATY, THE TAXATION ON GROSS BASIS AT HIGHER RATES OF 20% ON GROSS BA SIS UNDER SECTION 115A/44D OF THE ACT IS UNWARRANTED AND THE TAXATION OUGHT TO BE AT 10% ON GROSS BASIS UNDER ARTICLES 11 AND 12 OF THE TAX TREATY AS OFFERED IN THE RETURN OF INCOME AND THE AO BE DIRECTED ACCORDINGLY. 4. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESS EE FILED RETURN OF INCOME FOR ASSESSMENT YEAR 2006-07 DECLARING THE TOTAL INCOME OF RS 15.03 CRORES (ROUNDED OFF). THE ASSESSEE IS DIFFERENT VIS--VIS E PCOS WHICH HAS A GLOBAL PRESENCE. THE DRAFT ASSESSMENT ORDER WAS PASSED ON 30. 12.2009. THE ASSESSEE FILED OBJECTIONS AGAINST THE SAID DRAFT ASSESSMENT O RDER BEFORE THE DISPUTE RESOLUTION PANEL (DRP). AFTER CONSIDERING THE OBJECTI ONS OF THE ASSESSEE, DRP REJECTED THE SAID OBJECTIONS AND DIRECTED THE AO TO A SSESS THE INCOME AS PROPOSED IN THE DRAFT ORDER. ACCORDINGLY, THE AO TAXED THE INCOME OF RS 15.03 CRORES UNDER SECTION 115A READ WITH SECTION 44DA OF THE ACT WITHOUT ALLOWING ITA NO 1413/PN/10 EPCOS AG 3 ANY DEDUCTION IN RESPECT OF EXPENDITURE OR ALLOWANCE U NDER ANY OF THE SECTIONS FROM SECTIONS 28 TO 44C OF THE ACT. AGGRIEVED WITH TH E SAID ORDER OF THE AO, THE ASSESSEE FILED PRESENT APPEAL BEFORE US DIRECTLY. 5. DURING THE PROCEEDINGS BEFORE US, THE LEARNED COUNSE L FOR THE ASSESSEE FILED A BRIEF NOTE, WHICH IS REPRODUCED AS UNDER: 1. THE APPELLANT, A NON RESIDENT COMPANY INCORPORAT ED IN GERMANY, HAS A WHOLLY OWNED SUBSIDIARY IN INDIA NAMED EPCOS INDIA PVT. LTD. (EIPL). DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT COMPANY HAS RECEIV ED FOLLOWING INCOMES FROM ITS SUBSIDIARY I.E. EIPL: RS INCOME FROM ROYALTY : 1,10,10,0 00/- INCOME FOR PROVIDING IT SUPPORT, MARKETING 8,86,69,000/- SUPPORT & SALES SUPPORT (I.E. FEE FOR TECHNICAL SERVICES) INTEREST INCOME ON LOAN 5 ,06,43,000/- TOTAL 15,03,22,000/- 2. THE AFORESAID PAYMENTS WERE OFFERED TO TAX AT 10% ON GROSS BASIS UNDER ARTICLE 11 & 12 OF THE INDO-GERMAN TAX TREATY. 3. THE AO HELD THAT THE SUBSIDIARY OF THE APPELLANT COMPANY CONSTITUTES ITS PERMANENT ESTABLISHMENT UNDER ARTICLE 5 OF THE TREATY AND THAT THEREFORE, THE INCOME RECEIVED BY THE APPELLANT IS NOT TAXABLE UNDE R THE HEADS OF ROYALTY, FTS OR INTEREST INCOME BUT AS BUSINESS PROFITS ATTRIBUTABLE T O PE UNDER ARTICLE 7 OF THE TREATY. ACCORDINGLY, THE AO TAXED THE SAID INCOME U/ S 115A (IN CASE OF INTEREST) AND U/S 115A R.W.S. 44DA OF THE ACT (IN CASE OF ROYALT Y AND FTS) AT 20% WITHOUT ALLOWING AY DEDUCTION IN RESPECT OF ANY EXPENDITURE OR ALLOWANCE. 4. THE HONBLE ITAT IN THE APPELLANTS OWN CASE FOR A Y 2003-04 ON IDENTICAL FACTS ACCEPTED THE STAND OF THE APPELLANT OF OFFERING THE AFORESAID INCOMES FOR TAX @ 10% AND HELD THAT THE SUBSIDIARY OF THE APPELLANT CO MPANY CANNOT BE CONSIDERED AS A PERMANENT ESTABLISHMENT AND THAT NO REVENUES EARNE D BY THE APPELLANT COMPANY COULD BE SAID TO BE ATTRIBUTABLE TO THE PE. (SEE ACIT V EPCOS AG (2009) 120 TTJ 29 (PUNE) PARA 36 TO 51). 5. THOUGH, THE HONBLE DRP AND AO IN THE RELEVANT Y EAR (I.E. AY 2006-07) HAVE NOT DISPUTED THAT THE ABOVE ISSUE IS COVERED BY THE ORDER O F THE HONBLE TRIBUNAL IN AYU 2003-04 BUT THEY HAVE REFUSED TO FOLLOW THE SAME MERELY BECAUSE SAME HAS BEEN CHALLENGED BY THE DEPARTMENT BEFORE THE HONBL E HIGH COURT. (PLEASE SEE PARA 9, 7, PG 26 OF DRAFT ASSESSMENT ORDER AND PG 8 OF DRP ORDER). THE DEPARTMENT APPEAL IS STILL PENDING BEFORE THE HONBLE HIGH COURT. 6. IN VIEW OF THE ABOVE, THE APPELLANT MOST HUMBLY P RAYS TO YOUR HONOUR TO KINDLY FOLLOW THE ABOVE MENTIONED ORDER OF HONBLE TRIBUNA L FOR AY 2003-04 AND OBLIGE. 6. REFERRING TO THE ORDER OF THE TRIBUNAL FOR THE ASSESSM ENT YEAR 2003-04, THE COUNSEL NARRATED THAT THE ISSUE AT GROUND NO 1 RELA TES TO NON-CONSTITUTION OF PERMANENT ESTABLISHMENT (PE) OF THE APPELLANT IN I NDIA. IN THIS REGARD, THE COUNSEL MENTIONED THAT THE SAID ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2003-04 IN ITS FAVOUR. IN THIS REGARD, THE COUNSEL RELIED ON PARAGRAPH 40 TO 41.1 AND STATED THAT THE ASSESSEE COMPANY DID NOT HAVE ANY PE IN INDIA MUCH LESS A PE TO WHICH SUBJECT ROYALTY ITA NO 1413/PN/10 EPCOS AG 4 AND FEE FOR TECHNICAL SERVICES (FTS) CAN BE ATTRIBUTED . FURTHER HE MENTIONED THAT THE AO AS SEEN FROM PARA 9.7 OF THE ORDER DID NOT FOLLO W THE SAID DECISION OF THE TRIBUNAL MERELY STATING THAT THE DEPARTMENT DID NOT AC CEPT THE SAID DECISION AND THE CASE WAS PENDING BEFORE THE HONBLE HIGH COURT. F URTHER ALSO, REFERRING TO PARA 5.3 OF THE ORDER OF THE DRP, THE COUNSEL MENTIONE D EVEN THE DRP REPEATED SIMILAR ASSERTION STATING THAT THE MATTER IS PENDING B EFORE THE BOMBAY HIGH COURT AND THEREFORE PROCEEDED TO REJECT THE STATEMENT/O BJECTION OF THE ASSESSEE. 7. PER CONTRA, THE LEARNED DR FOR THE REVENUE MENTIONED THAT THE SAID DECISION OF THE TRIBUNAL SHOULD NOT BE FOLLOWED FOR T HIS YEAR AS EVERY ASSESSMENT FOR EVERY YEAR IS DIFFERENT AND SPECIFIC TO THE FACTS OF THE SAID ASSESSMENT YEAR. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AS WELL AS THE DECISION RELIED UPON BY THE LEARNED COUNS EL. IT IS A FACT THAT THERE IS A DECISION BY THIS TRIBUNAL IN THE CASE OF THE ASSESSE E FOR THE ASSESSMENT YEAR 2003-04 IN THE BACKGROUND OF THE FACT THAT ORDER OF TH E CIT (A) WAS NOT ACCEPTED BY THE REVENUE. THERE IS NO DRP FOR THE PERIOD RELEVAN T TO THE ASSESSMENT YEAR 2003-04. THEREFORE, THE ORDER THEN CHALLENGED WAS PASSE D BY THE CIT (A) AND THE SAID ORDER WAS CONFIRMED BY THE TRIBUNAL UPHOLDING THE NON-EXISTENCE OF PE. IN THIS REGARD, WE FIND IT RELEVANT TO REPRODUCE PARAS 39 TO 41.1 OF THE TRIBUNALS ORDER AS UNDER: IS IT NECESSARY THAT THE PE CAN ONLY BE SAID TO EXIST, UNDER THE BASIC RULE, WHEN CORE BUSINESS ACTIVITY IS CARRIED OUT BY THE PE? 39. WE QUITE AGREE WITH THE STAND OF THE REVENUE AUT HORITIES TO THE EXTENT THAT AS LONG AS AN ECONOMIC ACTIVITY IS CARRIED OUT IN THE FIXED PLACE OF BUSINESS AVAILABLE TO FOREIGN ENTERPRISE, WHETHER SUCH AN ACTI VITY IS A CORE ACTIVITY OR A PERIPHERAL ACTIVITY, IT HAS TO BE CONCLUDED THAT THE FOREIGN ENTERPRISE HAS A PE IN THE SOURCE JURISDICTION. MODEL CONVENTION COMMENTARY STATES THAT THE ACTIVITY CARRIED OUT BY THE PE MAY NOT BE A PRODUCTIVE CHARA CTER, THOUGH THE COMMENTARY DOES RECOGNIZE THAT IT COULD PERHAPS BE A RGUED THAT IN THE GENERAL DEFINITION, SOME MENTION SHOULD ALSO BE MADE TO THE O THER CHARACTERISTIC OF THE PE, NAMELY THAT THE ESTABLISHMENT MUST HAVE A PRODUCTI VE CHARACTER I.E. CONTRIBUTE TO THE PROFITS OF THE ENTERPRISE. HOWEVER, IN THE PRESENT DEFINITION, THIS COURSE HAS NOT BEEN TAKEN, LATE PROF. VOGEL ALSO CONCU RRED WITH THIS SCHOOL OF THOUGHT AND OBSERVED THAT THE PE NEED NOT BE A BR ANCH IN THE NATURE OF FACILITY ENGAGED IN ACTIVITIES OF THE SAME TYPE AS TH OSE OF THE HEAD OFFICE ORGANIZATION, NOR NEED THE PLACE OF BUSINESS DIRECTLY CONTRIBUTE TO ENTERPRISES PROFITS AND ALL THAT ITS BUSINESS MUST DO IS TO SERVE T HE ENTERPRISES OVERALL ITA NO 1413/PN/10 EPCOS AG 5 PURPOSE, BUT IT MUST BE AN ACTIVITY. THE QUESTION, HO WEVER, IS THAT THE ACTIVITY MUST BE OF THE BUSINESS OF THE TAX PAYER COMPANY, AND NOT OF THE INDEPENDENT SUBSIDIARIES OF SUCH A TAXPAYER COMPANY. ON THE FACTS O F THE CASE BEFORE US, NO PART OF THE WORK OF EPCOS AG WAS CARRIED OUT IN INDIA . THE E-MAILS AND LETTERS WERE SENT FROM OUTSIDE INDIA, AND AT BEST INDIAN SUBSID IARIES ACTED UPON THE ADVICES SO GIVEN IN THE E-MAILS AND LETTERS IN INDIA. THAT ACTION OF THE SUBSIDIARIES CANNOT ALTER THE SITUS OF THE ACTIVITIES OF THE EPCOS AG. DOES MERE EXISTENCE OF PE LEADS TO TAXABILITY OF INCOM E IN SOURCE COUNTRY? 40. IT IS ALSO IMPORTANT TO BEAR IN MIND THAT A NON- RESIDENT COMPANY HAVING A PE IN INDIA, BY ITSELF, DOES NOT LEAD TO TAXABILITY IN I NDIA; THERE MUST BE SOME PROFIT ATTRIBUTABLE TO SUCH A PE WHICH ALONE COULD BE TAXED IN INDIA BECAUSE OF THE EXISTENCE OF THE PE. WHEN THE PE CARRIES ON AN ACTIV ITY WHICH DOES NOT SERVE OVERALL PURPOSE OF THE FOREIGN ENTERPRISE, OR WHICH D OES NOT CONTRIBUTE TO PROFITS OF THE ENTERPRISE, THE EXISTENCE OF SUCH A PE IS WHOLLY ACADEMIC AND DOES NOT HAVE ANY TAX IMPLICATIONS IN THE SOURCE JURISDICTION. TO THAT LIMITED EXTENT, THERE IS AN INHERENT CONTRADICTION IN THE OECD APPROACH IN ASMUCH AS ON ONE HAND PE PROVIDES THRESHOLD LIMITS FOR TRIGGERING TAXATION IN THE SOURCE COUNTRY, ON THE OTHER HAND, THE EXISTENCE OF THE PE IS DECIDED DE HOR S THE ACTIVITY IN THE ABSENCE OF WHICH TAXABILITY OF PROFITS IN THE SOURCE COUNTRY CANNOT BE TRIGGERED AT ALL. ON THE FACE OF IT, WHEN A PE IS NOT ENGAGED IN A CRITI CAL ACTIVITY HAVING SOME CONTRIBUTION TO OVERALL PROFITS OF THE ENTERPRISE OR A REVENUE GENERATING ACTIVITY, THE EXERCISE TO ASCERTAIN WHETHER OR NOT A PE IS IN EX ISTENCE IS A MEANINGLESS RITUAL AND AN EMPTY FORMALITY. VIEWED IN THIS PERSPEC TIVE, AND BEARING IN MIND THE FACT THAT BY NO STRETCH OF LOGIC IT COULD BE HEL D THAT ANY SIGNIFICANT OR CRITICAL BUSINESS ACTIVITY BY THE EPCOS AG WAS CARRIED OUT IN IN DIA, EVEN IF THERE IS A PE IN INDIA, THAT WILL BE WHOLLY ACADEMIC AND WILL NOT LEAD TO ANY TAXABILITY OF INCOME. NOT ONLY THE WORK DONE IN INDIA, IF AT ALL, DID NOT CONSTITUTE SIGNIFICANT OR CRITICAL BUSINESS ACTIVITY, THE ASSESSEE COMPANY DID NOT E ARN ANY REVENUES AS A RESULT OF THE ACTIVITIES SO CARRIED OUT BY THE EMPLOYE ES OF INDIAN SUBSIDIARIES AND, THEREFORE, NO PART OF THE REVENUES ACTUALLY GENERATE D BY THE ASSESSEE COMPANY COULD BE SAID TO BE ATTRIBUTABLE TO THE PE. THE QUEST ION OF EXISTENCE OF PE OF THE ASSESSEE COMPANY, IN THESE CIRCUMSTANCES, HAS NO IMPACT OF TAXABILITY OF THE ASSESSEE COMPANY. 41. THE REQUIREMENTS OF EXCLUSION CLAUSE UNDER ART. 15 (5) ALSO HIGHLIGHT THIS ASPECT OF PROFIT ATTRIBUTION. WHILE WE WERE EXAMININ G INTERPLAY BETWEEN ART. 12 AND ART. 7, WE HAD NOTICED THAT THIS EXCLUSION CLAUSE HAS TWIN REQUIREMENTS OF (A) EXISTENCE OF THE PE THROUGH WHICH BUSINESS IS CARRIED OU T; AND OF (B) EXISTENCE OF EFFECTIVE CONNECTION BETWEEN SUCH A PE AND THE RIGHT S, PROPERTIES AND CONTRACTS IN RESPECT OF WHICH ROYALTIES AND FEES FOR TECHNICA L SERVICES ARE PAID. THAT WOULD MEAN THAT ONLY SUCH ROYALTIES AND FEES FOR TE CHNICAL SERVICES ARE EXCLUDED FROM THE SCOPE OF ART. 12(1) AND (2) AS ARE ATTRIBUTABLE TO THE PE THROUGH WHICH BUSINESS IS CARRIED ON BY THE ENTERPRISE . IN OTHER WORDS, THE TAXABILITY UNDER ART. 12 SHIFTS TO TAXABILITY UNDER ART. 7 ONLY IN RESPECT OF ROYALTIES AND FEES FOR TECHNICAL SERVICES WHICH ARE ATTRIBUTABLE TO THE PE IN QUESTION. IN CASE AN ASSESSEE RECEIVES ROYALTIES AND FE ES FOR TECHNICAL SERVICES BUT THESE RECEIPTS DO NOT HAVE AN EFFECTIVE NEXUS WITH THE PE, AND ARE NOT, THEREFORE, ATTRIBUTABLE TO THE PE, THE EXCLUSION CLA USE UNDER ART. 15(5) AS ALSO TAXABILITY UNDER ART. 7(1) AND (2), IS NOT TRIGGERED . 41.1IN THE LIGHT OF THESE DISCUSSIONS, IN OUR CONSIDERED VIEW, THE ASSESSEE COMPANY DID NOT HAVE ANY PE IN INDIA, MUCH LESS A PE TO WHICH SUBJECT ROYALTIES AND FEES FOR TECHNICAL SERVICES CAN BE ATTRIBUTED. IN TERMS OF THE INDIA- GERMANY DTAA, INDIA DOES NOT HAVE RIGHT TO TAX THESE RECEIPTS AS BUSINESS PROFITS UNDER ART.7. OF COURSE, IN THE LIGHT OF OUR F INDING THAT NO REVENUES EARNED BY THE ASSESSEE COMPANY COULD BE SAID TO BE ATTRIBUTABLE TO THE PE, EVEN IF ONE WAS TO COME TO THE CONCLUSION THAT A PE EXISTED, NO TA XABILITY COULD ARISE UNDER ART. 7. THE ASSESSEE HAS OFFERED THE ROYALTIES AND FEES F OR TECHNICAL SERVICES FOR TAXABILITY IN INDIA UNDER ART. 12, AND, TO THAT EXT ENT, ADMITTED TAX LIABILITY EXISTS. THE OVERZEALOUS APPROACH OF THE AO HAS BEEN RIGHTLY R EJECTED BY THE CIT (A). WE APPROVE AND CONFIRM THE STAND OF THE CIT(A), AND DECLINE TO INTERFERE IN THE MATTER. 9. CONSIDERING THE ABOVE, WE HAVE ALSO EXAMINED THE COMPARABILITY OF THE FACTS OF THE CASE FOR THIS YEAR VIS--VIS THE ASSESSM ENT YEAR 2003-04. IT IS A FACT ITA NO 1413/PN/10 EPCOS AG 6 THAT NEITHER THE AO, NOR THE DRP, NOR THE PRESENT CIT-D R WERE ABLE TO DEMONSTRATE AS TO WHETHER THE FACTS OF THE CURRENT YEAR ARE DIFFERENT IN ANY FORM WITH THAT OF ASSESSMENT YEAR 2003-04. MERELY, THE DR MENTIONED THAT NOBODY HAS GONE INTO THAT ISSUE, THEREFORE, THE MATTER SHOULD BE SET ASIDE. WE ARE UNABLE TO APPRECIATE THIS LINE OF ARGUMENT OF THE CIT -DR FOR THE SIMPLE REASON THAT IT IS THE RESPONSIBILITY OF THE AO FIRST OF ALL TO FOLLOW THE JURISDICTIONAL DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 200 3-04. THE SAME WAS NOT FOLLOWED AND SURPRISINGLY, THEY HAVE NOT EVEN DISTING UISHED. THEY SIMPLY IGNORED STATING THAT THE SAID ORDER IS NOT ACCEPTED BY THE RE VENUE AND THE MATTER IS PENDING BEFORE THE HONBLE HIGH COURT OF BOMBAY. CONS IDERING THE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO CASE FO R SENDING THE FILES TO THE REVENUE. IN FACT IT IS THE CASE OF THE ASSESSEE THA T THE FACTS ARE IDENTICAL VIS-- VIS THE FACTS OF THE ASSESSMENT YEAR 2003-04. IN THE SE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE DECISION COMPRISED IN PARA 41.2 IS EQUALLY RELEVANT FOR THE YEAR UNDER CONSIDERATION IN RESPECT OF GROUND NO. 1. ACC ORDINGLY, GROUND NO. 1 RAISED BY THE ASSESSEE IS ALLOWED . 10. THE ISSUE RAISED IN GROUND NO. 2 RELATES TO NON-AT TRIBUTION OF INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. CONCLUSION ON THE SECOND ISSUE I.E. TAXABILITY @ 20 PE R CENT IN TERMS S. 44DS R/W S.115A IN CASE PE IS FOUND TO BE IN EXISTENCE: 47. IN OUR CONSIDERED VIEW, IN TERMS OF INDO GERMAN T AX TREATY PROVISIONS, IT WILL HAVE TO BE DEMONSTRATED THAT SUCH ROYALTIES AND FEES F OR TECHNICAL SERVICES HA E A LIVE ECONOMIC NEXUS WITH THE PE AND ONLY THEN EXCLUSION CL AUSE UNDER ART. 12(5) AS ALSO TAXABILITY UNDER ARTS. 7(1) AND 7(2), WILL COME INTO PLAY. IT IS ONLY AFTER THESE ROYALTIES AND FEES FOR TECHNICAL SERVICES ARE SO INCLUDED IN THE BUSINESS PROFITS ATTRIBUTABLE TO THE PE THAT THE PROVISIONS OF SS. 44D AND 115A CAN BE INVO KED. THEREFORE, EVEN IF WE ARE TO HOLD THAT THE TAXPAYER HAD A PE IN INDIA, UNLESS THER E IS A CATEGORICAL FINDING THAT ENTIRE RECEIPTS WERE ATTRIBUTABLE TO THAT PE, ENTIRE BUSINESS RECEIPTS OF THE TAXPAYER SOURCED FROM INDIA WOULD NOT HAVE BEEN TAXABLE IN INDIA UND ER ART. 7. THE PROVISIONS OF S. 44D AND S.115A DO NOT, THEREFORE, COME INTO PLAY ONLY BE CAUSE THERE IS A PE IN INDIA. TAXABILITY UNDER THE DOMESTIC LAW: 48. THE NEXT THING TO BE EXAMINED IS TAXABILITY OF ROYALTIES AND FEES FOR TECHNICAL SERVICES EARNED BY THE ASSESSEE COMPANY IN TERMS OF THE P ROVISIONS OF THE INDIAN IT ACT, 1961. 49. THERE IS NO DISPUTE ON THE BASIC FACTS. THE AMOUNT S RECEIVED BY THE ASSESSEE COMPANY ON THIS ACCOUNT MEET THE DEFINITION OF ROYA LTIES AND OF FEES FOR TECHNICAL SERVICES UNDER S.44D WHICH, IN TURN, REFERS TO EXPLN. 2 TO S. 9(1)(VI) RESPECTIVELY. ACCORDINGLY, THE LIMITATION ON DEDUCTIONS, AS SET OUT IN S.44D, DOES APPLY ON THE FACTS OF ITA NO 1413/PN/10 EPCOS AG 7 THE CASE, AND ENTIRE AMOUNT IS TO BE TAXABLE ON GROSS BASIS. HOWEVER, IN VIEW OF THE PROVISIONS OF S.115A, THE RATE OF TAX ON SUCH INCOME W ILL INDEED BE 20 PER CENT. 50. IN VIEW OF THE ABOVE DISCUSSIONS, THE TAXABILITY OF AMOUNTS RECEIVED BY THE ASSESSEE COMPANY ON ACCOUNT OF ROYALTIES AND FEES FOR TECHNICAL SERVICES, ON THE FACTS OF THIS CASE AND UNDER THE INDIAN IT ACT, WILL BE @ 2 0 PERCENT ON GROSS BASIS, THAT ASPECT OF THE MATTER IS, HOWEVER, ACADEMIC SINCE WE HA VE ALREADY HELD THAT, ON THE FACTS OF THIS CASE, SOURCE COUNTRY DOES NOT HAVE THE RIGHT TO TAX INCOME IN QUESTION, EXCEPT UNDER ART. 12(2) OF THE TAX TREATY AND AT A RATE NO T EXCEEDING 10 PER CENT. THE ASSESSEE HAS ALREADY ACCEPTED TAX LIABILITY TO THAT EXTENT, A ND THERE IS NO DISPUTE SO FAR AS TAXABILITY UNDER ART. 12(2) IS CONCERNED. 11. CONSIDERING THE ABOVE, THE ISSUE RAISED BY THE AS SESSEE IN GROUND NO 2 IS COVERED IN FAVOUR OF THE ASSESSEE AND THE TAXATION ON GROSS BASIS AT HIGHER RATE OF 20% UNDER SECTION 115A READ WITH 44D OF THE ACT ARE UNWARRANTED AND TAXATION IS OUGHT TO BE AT 10% ON GROSS BASIS UNDER A RTICLE 12(2) OF THE TAX TREATY AS OFFERED IN THE RETURN OF INCOME. ACCORDINGLY, GROUND NO. 2 IS ALLOWED . 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF APRIL, 2011. SD/- SD/- (I.C. SUDHIR) (D. KARUNAKA RA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED:6 TH APRIL, 2011 B COPY TO:- 1) ASSESSEE 2) DY. DIRECTOR OF IT (INTERNATIONAL TAXATION)-1, PUNE 3) THE ITO (TECH-I) SECRETARIAT, DRP, IT DEPT. PUNE 4) THE DR, A BENCH, ITAT., PUNE. BY ORDER TRUE COPY ASST. REGISTRAR, I.T.A.T., PUNE