M/S. VAN OORD DREDGING AND MARINE CONTRACTORS BV, MUMBAI V. THE ADIT (IT)2(2), MUMBAI

ITA 1536/MUM/2007

• Counselvise Citation: 153619914 RSA 2007
• Duration Of Justice: 4 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Assessment Year: 1998-1999
• Appeal Filed On: 15-02-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Double taxation relief; Permanent establishment; Question of law; Validity of assessment

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L : MUMBAI BEFORE SHRI N.V. VASUDEVAN, (JM) AND SHRI RAJENDRA SINGH ,(AM) ITA NO.1536/MUM/2007 ASSESSMENT YEAR : 1998-99 VAN OORD DREDGING AND MARINE CONTRACTORS BV (FORMERLY KNOWN AS BALLAST HAM DREDGING BV) C/O. S.R. BATLIBOI & CO. 14 TH FLOOR, THE RUBY 29 SENAPATI BAPAT MARG DADAR (W) MUMBAI-400 028. ..( APPELLANT ) P.A. NO. (AAACH 3500 M) VS. ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 2(2) SCINDIA HOUSE, BALLARD PIER MUMBAI-400 038. ..( RESPONDENT ) APPELLANT BY : SHRI PORUS KAKA RESPONDENT BY : SHRI J ITENDRA YADAV O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 13.11.2006 OF CIT(A) FOR THE ASSESSMENT YEAR 1998-9 9. THE ASSESSEE IN THIS APPEAL HAS RAISED DISPUTE ON THREE DIFFERENT GROUND S. 2. WE FIRST TAKE UP DISPUTE RELATING TO DISALLOWAN CE OF DEPRECIATION OF RS.73,21,164/- ON RE-EXPORT OF ASSETS. THE ASSESSE E IS A COMPANY REGISTERED IN NETHERLANDS AND A TAX RESIDENT OF NET HERLANDS. THE ASSESSEE IS IN THE BUSINESS OF DREDGING AND HAD DURING THE RELE VANT YEAR DONE DREDGING WORK AT THE INDIAN PORTS. THERE IS NO DISPUTE THAT THE ASSESSEE COMPANY HAD PERMANENT ESTABLISHMENT (PE) IN INDIA AND THAT INCO ME ATTRIBUTABLE TO THE PE HAS TO BE ASSESSED IN THE NAME OF THE ASSESSEE. W HILE COMPUTING THE ITA NO.1536/M/07 A.Y:98-99 2 INCOME FROM PE, ASSESSEE HAD CLAIMED DEPRECIATION O N INDIA DREDGING VEHICLE HAM 924 AND PLANT AND MACHINERY. THE ASSE SSING OFFICER NOTED THAT THESE ASSETS WHICH HAD BEEN ENTERED BY THE ASS ESSEE IN THE BLOCK OF ASSETS HAD BEEN TRANSFERRED OUT DURING THE YEAR FRO M INDIA. THE ASSESSING OFFICER OBSERVED THAT FOR THE PURPOSE OF TAXATION, THE HEAD QUARTERS OF THE ASSESSEE AND THE PE WERE SEPARATE ENTITIES. THE AS SESSEE HAD INCLUDED THE ASSETS IN THE BLOCK OF ASSET OF THE PE WHEN THE ASS ETS WERE TRANSFERRED FROM THE HEAD QUARTERS TO THE PE AND THEREFORE, SIMILAR TREATMENT, HAS TO BE GIVEN TO THE ASSET WHEN IT WAS TRANSFERRED OUT OF THE PE ACCOUNT. THE ASSET HAD TO BE EXCLUDED FROM THE BLOCK OF ASSETS WHEN IT WAS TR ANSFERRED OUT. THOUGH THERE WAS NO SALE OF ASSET BY THE PE, THE ASSET NO LONGER EXISTED IN THE BLOCK OF ASSETS OF THE PE AND THEREFORE, IT HAD TO BE TRE ATED AS DEMOLISHED OR DESTROYED. THE ASSESSEE WAS THREFORE NOT ENTITLED TO DEPRECIATION ON THE ASSET. THE ASSESSING OFFICER ALSO OBSERVED THAT DE PRECIATION MUST HAVE BEEN CLAIMED BY THE ASSESSEE IN RESPECT OF ASSET TRANSFE RRED. HE REFERRED TO THE JUDGMENT OF HONBLE HIGH COURT OF CALCUTTA REPORTED I N 64 TAXMAN 508 FOR THE PROPOSITION THAT DOUBLE DEPRECIATION WAS NOT AL LOWABLE. THE ASSESSING OFFICER ALSO REFERRED TO CIRCULAR NO.740 DATED 17.4 .1996 OF CBDT AS PER WHICH A FOREIGN BRANCH OF FOREIGN COMPANY IN INDIA HAD TO BE TREATED AS SEPARATE ENTITY FOR THE PURPOSE OF TAXATION. HE, TH EREFORE, DISALLOWED CLAIM OF DEPRECIATION. 2.1. IN APPEAL, CIT(A) OBSERVED THAT INCOME OF PE H AD TO BE COMPUTED UNDER THE PROVISIONS OF ARTICLE-7 OF DTAA BETWEEN I NDIA AND NETHERLANDS. UNDER PARA-1 OF ARTICLE-7 ONLY THE INCOME ATTRIBUTA BLE TO PE COULD BE TAXED IN INDIA AND UNDER PARA-2 OF ARTICLE-7, THE PE HAS TO BE TREATED AS DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES OR UNDER SIMILAR CONDITIONS AND DEALING WHOLLY INDEPENDENTLY WITH TH E ENTERPRISE OF WHICH IT IS A PE, WHILE COMPUTING INCOME FROM THE PE. FURTHER, PARA-3 OF ARTICLE-7 ALLOWED DEDUCTION ON ACCOUNT OF EXPENSES WHICH INCU RRED FOR THE PURPOSE OF PE INCLUDING THE EXECUTIVE AND GENERAL ADMINISTRATI ON, IN DETERMINING THE PROFIT OF THE PE. THE CIT(A) FURTHER OBSERVED THAT SINCE DTAA DID NOT PROVIDE ITA NO.1536/M/07 A.Y:98-99 3 FOR MANNER AND METHOD OF COMPUTATION AS WELL AS ALL OWANCE OF DEPRECIATION, THE DEPRECIATION HAD TO BE ALLOWED IN ACCORDANCE WI TH THE PROVISIONS OF INCOME TAX ACT IN VIEW OF THE PROVISIONS CONTAINED IN PARA-2 OF ARTICLE-3 OF DTAA. THE CIT(A) REFERRED TO THE PROVISIONS UNDER SECTION 43(6) OF THE I.T. ACT WHICH DEFINES WRITTEN DOWN VALUE OF AN ASSET AN D CLAUSE (C) OF SECTION 43(6) PROVIDES FOR INCREASE IN THE BLOCK OF ASSETS WHEN AN ASSET WAS ACQUIRED DURING THE YEAR AND SIMILARLY THERE IS PROVISION FO R REDUCTION FOR BLOCK OF ASSETS BY THE MONIES PAYABLE IN RESPECT OF PLANT & MACHINERY WHICH IS SOLD OR DISCARDED, DEMOLISHED OR DESTROYED DURING THE PREVI OUS YEAR. THE CIT(A) HELD THAT FOR THE PURPOSE OF COMPUTATION OF WDV UND ER SECTION 43(6)(C), TRANSFER OF ASSET BY THE PE TO THE HEAD QUARTER OUT SIDE INDIA HAD TO BE TREATED AS DEEMED SALE. HE THEREFORE DIRECTED THE A SSESSING OFFICER TO COMPUTE THE DEPRECIATION TREATING THE ASSET TRANSFE RRED AS SOLD. AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFO RE THE TRIBUNAL. 2.2. BEFORE US THE LD. AR ARGUED THAT THE PROFIT AT TRIBUTABLE TO PE HAD TO BE COMPUTED TREATING THE PE AS AN INDEPENDENT ENTITY. THEREFORE, IF ANY ASSET HAS BEEN USED IN THE WORKING OF THE PE, DEPRECIATIO N HAS TO BE ALLOWED WHICH IS THE MAIN ITEM OF EXPENDITURE IN CASE OF THE ASSE SSEE. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD CLAIMED DEPRECIATIO N ONLY DURING THE YEAR THE VESSEL HAD BEEN USED. IT WAS POINTED OUT THAT THE ASSESSEE HAD BEEN USING THE VESSEL AT DIFFERENT LOCATIONS WORLD-WIDE AND TRANSFER OF THE VESSEL TO SOME OTHER LOCATION DID NOT MEAN THAT THE VESSEL HAD BEEN SOLD OR DISCARDED, DEMOLISHED OR DESTROYED. HE REFERRED TO THE JUDGMENT OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. BENGAL A SSAM STEAMSHIP (161 ITR 576) IN WHICH IT WAS HELD THAT EXPRESSIONS DEMOLI SHED OR DESTROYED MEANT PHYSICAL DEMOLITION OR DESTRUCTION. IT WAS F URTHER SUBMITTED THAT EVEN COMPULSORY ACQUISITION OF THE ASSET DID NOT AMOUNT TO SALE AS HELD BY HONBLE SUPREME COURT IN CIT VS. BOMBAY BURMAH TRAINING COR PORATION (161 ITR 386). IN ANY CASE, IT WAS FURTHER ARGUED THAT SAME ISSUE HAS ALREADY BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A SSESSMENT YEAR 1997-98 IN ITA NO.3474/M/00 IN WHICH THE TRIBUNAL VIDE ORDE R DATED 30.6.2000 ITA NO.1536/M/07 A.Y:98-99 4 ALLOWED THE CLAIM OF DEPRECIATION IN IDENTICAL SITU ATION. THE TRIBUNAL ALSO ALLOWED THE CLAIM IN ASSESSMENT YEAR 2000-01 IN ITA NO.7559/MUM/2004. THE REVENUE HAD RAISED A SPECIFIC QUESTION OF LAW W HETHER RE-EXPORTING ASSET OUTSIDE INDIA FOR USE OUTSIDE INDIA AMOUNTED TO DIS CARDING THE ASSET FOR THE PURPOSE OF BUSINESS IN INDIA BUT THE HONBLE HIGH CO URT OF BOMBAY IN THE ORDER DATED 7.8.2008 IN INCOME TAX APPEAL NO.283/20 08 UPHELD THE ORDER OF THE TRIBUNAL. SIMILARLY THE CLAIM HAS ALSO BEEN AL LOWED BY THE TRIBUNAL IN ASSESSMENT YEAR 1999-2000 IN ITA NO.3855/M/07. IT WAS ACCORDINGLY URGED THAT THE ORDER OF THE CIT(A) SHOULD BE SET ASIDE. THE LD. DR ON THE OTHER HAD PLACED RELIANCE ON THE ORDER OF AUTHORITIES BELOW. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED RIVA L CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY O F DEPRECATION IN RESPECT OF INDIAN DREDGER VEHICLE-HAM 924 AND PLANT AND MACHINE RY WHILE COMPUTING INCOME FROM PE OF THE ASSESSEE COMPANY IN INDIA. T HERE IS NO DISPUTE THAT THE ASSESSEE HAS A PE IN INDIA AND THE INCOME ATTRI BUTABLE TO PE IS TAXABLE. THE ONLY DISPUTE IS REGARDING THE ALLOWABILITY OF D EPRECIATION IN RESPECT OF ASSETS MENTIONED ABOVE. THE ASSESSEE DURING THE YE AR HAD TRANSFERRED THESE ASSETS FROM INDIA. THE ASSESSING OFFICER, TH EREFORE TOOK THE VIEW THAT THE ASSETS NO LONGER EXISTED IN THE BLOCK OF ASSETS OF THE PE AND HAVE THEREFORE TO BE TREATED AS DEMOLISHED OR DESTROYED. IN APPEAL CIT(A) HELD THAT THE ASSETS HAVE TO BE TREATED AS SOLD DURING T HE YEAR AND DEPRECIATION HAS TO BE CALCULATED AS PER RULES ACCORDINGLY. THE CASE OF THE ASSESSEE IS THAT IT HAS DIFFERENT OPERATIONS AT DIFFERENT SITES IN THE WORLD AND THE TRANSFER OF THESE ASSETS TO SOME OTHER SITE CANNOT BE TREATE D AS DEMOLITION/DESTRUCTION OF THE ASSETS. THE ASSETS C AN ALSO NOT BE TREATED AS SOLD AS ASSESSEE CONTINUED TO BE THE OWNER OF THE A SSETS. THERE IS NO DISPUTE THAT THE ASSETS HAD BEEN USED DURING THE YE AR IN THE BUSINESS OF THE PE. IN OUR VIEW DEPRECIATION HAS TO BE ALLOWED IN CASE OF THE ASSETS HAVE BEEN USED DURING THE YEAR WHILE COMPUTING THE INCOM E OF THE PE. THE TRANSFER OF THE ASSETS TO SOME OTHER SITE DOES NOT MEAN DEMOLITION/DESTRUCTION OR DISCARDING OF THE ASSETS. WE AGREE WITH THE LD. ITA NO.1536/M/07 A.Y:98-99 5 AUTHORISED REPRESENTATIVE FOR THE ASSESSEE THAT THE EXPRESSION DEMOLISHED, DESTROYED MEANS PHYSICAL DEMOLITION OR DESTRUCTIO N AS HELD BY HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. BENGAL A SSAM STEAMSHIP (SUPRA). IT CAN ALSO NOT BE TREATED AS SALE AS THE ASSESSEE CONTINUED TO BE THE OWNER OF THE ASSET. IN ANY CASE WE FIND THAT THE SAME ISS UE HAS ALREADY BEEN EXAMINED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1997-98 IN WHICH THE TRIBUNAL VIDE ORDER DATED 30.6 .2000 IN ITA NO.3474/M/00 ALLOWED DEPRECIATION IN IDENTICAL SITU ATION. THE SAID ORDER WAS FOLLOWED IN ASSESSMENT YEAR 2000-01 IN ITA NO.7559/ M/04. AGAINST THE ORDER OF THE TRIBUNAL IN ASSESSMENT YEAR 2000-01, R EVENUE FILED AN APPEAL BEFORE THE HONBLE BOMBAY HIGH COURT IN WHICH SPECIFI C QUESTION OF LAW WAS RAISED AS TO WHETHER RE-EXPORTING ASSET OUTSIDE IND IA FOR USE OUTSIDE INDIA AMOUNTED TO DISCARDING THE ASSET OF THE PE FOR THE PURPOSE OF BUSINESS IN INDIA. THE HONBLE CALCUTTA HIGH COURT DID NOT ACCEP T THE PLEA OF THE REVENUE AND UPHELD THE ORDER OF THE TRIBUNAL. THEREFORE, I N OUR VIEW THE ISSUE RAISED IS COVERED BY THE DECISION OF THE TRIBUNAL IN ASSES SEE'S OWN CASE IN ASSESSMENT YEAR 1997-98 (SUPRA) AND ASSESSMENT YEAR 2000-01 (SUPRA). RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL (SUPRA) WE SET ASIDE THE ORDER OF THE CIT(A) AND ALLOW THE CLAIM OF THE ASSE SSEE . 3. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF CHARTER HIRE RENTALS FOR THE STAND BY PERIOD AMOUNTING TO RS.22,42,485/ -. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE DURING THE YEAR HAD PAID CH ARTER HIRE CHARGES IN RESPECT OF DREDGER SAGAR MANTHAN @ NLG 16,950 P ER DAY FOR MOBILIZATION, WORKING AND STANDBY PERIOD FROM 27.8.1997 TO 28.12. 1997. THE DREDGER WAS ON A STANDBY FOR A PERIOD OF 7 DAYS FROM 3.11.1997 TO 9.11.1997. THE ASSESSING OFFICER NOTICED FROM THE COPY OF AGREEMEN T THAT NO HIRE CHARGES WERE PAYABLE DURING IDLE TIME. THE ASSESSEE HAD MA DE PAYMENT FOR THE STANDBY PERIOD ALSO. THE ASSESSEE ARGUED THAT THE DREDGER HAD TO BE KEPT IN STANDBY POSITION FOR CLEANING, DRY DOCKING ETC. AND THEREFORE, HIRE CHARGES HAD TO BE PAID FOR THIS PERIOD ALSO. THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION RAISED AND DISALLOWED THE HIRE CHARGES F OR STANDBY PERIOD WHICH ITA NO.1536/M/07 A.Y:98-99 6 AMOUNTED TO RS.22,42,485/-. THE ASSESSEE DISPUTED THE DECISION OF THE ASSESSING OFFICER AND SUBMITTED BEFORE THE CIT(A) T HAT THE HIRE CHARGES PAID FOR STANDBY PERIOD HAD TO BE ALLOWED. THE CIT(A) O BSERVED THAT THE HIRE CHARGES WERE PAYABLE ONLY WHEN THE DREDGER WAS USED AND THERE WERE NO CHARGES DURING IDLE TIME. HE THEREFORE, CONFIRMED T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER AGGRIEVED BY WHICH THE ASSE SSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3.1. BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITTE D THAT AS PER AGREEMENT THERE WERE NO CHARGES FOR IDLE TIME BUT THE STAND B Y PERIOD WAS DIFFERENT THAN THE IDLE TIME. IT WAS ARGUED THAT DEPRECIATIO N WAS ALLOWABLE WHEN THE ASSET WAS READY FOR USE. HE REFERRED TO THE JUDGMEN T OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SOUTHERN PETROCHEMICAL INDUSTRIES CORPORATION LTD. (301 ITR 255) IN WHICH IT HAS BEEN HELD THAT A SSET KEPT AS STANDBY WAS ENTITLED TO DEPRECIATION. THEREFORE IT WAS CLEAR T HAT STANDBY PERIOD HAD TO BE TREATED AS USER OF THE ASSET. THE LD. AR ALSO POIN TED OUT THAT HIRE CHARGES PAID BY THE ASSESSEE HAD BEEN ASSESSED IN CASE OF T HE RECIPIENT AND THEREFORE, DISALLOWANCE COULD NOT BE MADE IN CASE O F THE ASSESSEE. IT WAS ACCORDINGLY URGED THAT THE ADDITION MADE SHOULD BE DELETED. THE LD. DR PLACED RELIANCE ON THE AUTHORITIES BELOW. 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE O F CHARTER HIRE RENTAL AMOUNTING TO RS.22,42,485/- FOR THE STANDBY PERIOD. THE ASSESSING OFFICER NOTED THAT THE DREDGER WAS ON STANDBY FOR A PERIOD OF SEVEN DAYS FROM 3.11.1997 TO 9.11.1997. HE THEREFORE, TREATED THE P ERIOD OF STANDBY AS PERIOD OF NO USE. SINCE THE AGREEMENT PROVIDED FOR NO HIRE RENTALS DURING IDLE TIME, THE ASSESSING OFFICER HELD THAT NO HIRE RENTALS WERE PAYABLE FOR THE STANDBY PERIOD. THE CASE OF THE ASSESSEE IS THAT D URING PERIOD OF USE, THE DREDGER HAS TO BE KEPT ON STANDBY FOR CLEANING, DRY -DOCKING ETC., AND THEREFORE, STANDBY PERIOD CAN NOT BEEN TREATED AS I DLE PERIOD. THE CLAIM OF THE ASSESSEE IS SUPPORTED BY THE JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SOUTHERN PETROCHEMICAL INDUSTRI ES CORPORATION ITA NO.1536/M/07 A.Y:98-99 7 LTD.(SUPRA) IN WHICH IT HAS BEEN HELD THAT DEPRECIA TION IS ALLOWABLE FOR STANDBY PERIOD WHICH MEANS THAT STANDBY PERIOD HAS TO BE TREATED AS PERIOD OF USE. THERE IS NO DISPUTE THAT THE DREDGER WAS O N STANDBY AS THE ASSESSING OFFICER HIMSELF HAD NOTED THAT THE DREDGE R WAS ON STANDBY FOR A PERIOD OF SEVEN DAYS. THE LD. AR HAS ALSO POINTED OUT THAT THE RENTALS OF THE STANDBY PERIOD PAID BY THE ASSESSEE HAS ALREADY BEE N SHOWN AND ASSESSED AS INCOME IN CASE OF THE RECIPIENT. IN FACTS AND I N THE CIRCUMSTANCES OF THE CASE AND CONSIDERING LEGAL POSITION MENTIONED ABOVE , WE AGREE THAT THE DEDUCTION HAS TO BE ALLOWED IN CASE OF HIRE CHARGE S FOR THE STANDBY PERIOD ALSO. WE, THEREFORE, SET ASIDE THE ORDER OF THE CI T(A) AND ALLOW THE CLAIM OF THE ASSESSEE. 4. THE THIRD DISPUTE IS REGARDING LEGAL VALIDITY OF RE-OPENING OF ASSESSMENT. SINCE WE HAVE ALREADY DELETED THE ADDI TION MADE ON MERIT WE DO NOT CONSIDER IT NECESSARY TO GO INTO THE ISSUE O F LEGAL VALIDITY OF ASSESSMENT WHICH HAS ALSO NOT BEEN ARGUED BY THE PA RTIES. 5. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 8.6.2011. SD/- SD/- ( N.V. VASUDEVAN ) (RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 8.6.2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.