M/s. NAGASE & COMPANY LTD., MUMBAI V. ADIT (I.T) - Rg.-3(2), MUMBAI

ITA 1800/MUM/2007

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8933 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 24-10-2016
• Assessment Year: 1998-1999
• Appeal Filed On: 01-03-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CO MUMBAI
• Assessee Lawyers: MANOJ ANCHALIA SHRI DIP
• Keywords: Business income; Loose papers; Double taxation relief; Additional evidence; Permanent establishment
• Section: 133A; 234B; 148

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -LBENCH MUMBAI , . . , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND C. N. PRASAD,JUDICIAL MEMBER ./ITA/1800/MUM/2007, /AY.S: 1998-99 ./ITA/115/MUM/2006, /AY.S: 1998-99 NAGASE & COMPANY LIMITED C/O., S.R. BATLIBOI & CO.14 TH FLOOR, THE RUBY, 29, SENAPATI BAPAT MARG, DADAR (W),MUMBAI-400 028. PAN:AABCN 2879 G VS. ADIT-(INTL. TAXN.)-RANGE-3(2) SCINDIA HOUSE, BALLARD PIER MUMBAI-400 038. ( /APPELLANT ) ( / RESPONDENT) ./ITA/369/MUM/2006, /AY.S: 1998-99 ADIT-(INTL. TAXN.)-RANGE-3(2) MUMBAI-400 038. VS. NAGASE & COMPANY LIMITED C/O., S.R. BATLIBOI & CO.MUMBAI-28. ( /APPELLANT ) ( / RESPONDENT) ASSESSEE BY:S/ SHRI NITESH JOSHI & MANOJ ANCHALIA REVENUE BY: SHRI DIPAK RIPOTE-SR.DR / DATE OF HEARING: 24.10.2016 / DATE OF PRONOUNCEMENT: 12.01.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 31.10.2005 OF THE CIT(A )-XXXIII, MUMBAI THE ASSESSEE AND THE ASSESSING OFFICER(A.O.) HAVE FILED THE CROSS APPEAL S FOR THE ABOVE MENTIONED AY .THE ASSESSEE HAS ALSO FILED AN APPEAL AGAINST THE ORDER PASSED U/S.143(C) R.W.S 250-ORDER GIVING EFFECT TO THE CIT(A)S ORDER DT.27.2.2006.THE ASSES SEE- COMPANY IS ENGAGED IN IMPORT/EXPORT AS WELL AS DOMESTIC SALES OF DYESTUFF, CHEMICALS,PL ASTICS, MACHINERY,HEALTH FOOD AND MEDICAL EQUIPMENTS.IT HAS A LIAISON OFFICE(LO) IN MUMBAI,ES TABLISHED WITH THE SPECIFIC PRIOR APPROVAL OF THE RESERVE BANK OF INDIA (RBI).IT FILE D ITS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION,DECLARING INCOME AT RS. NIL. BRIEF FACTS: 2. A SURVEY UNDER SECTION 133A OF THE ACT WAS CONDUCTE D AT THE OFFICE PREMISES OF THE ASSESSEE ON 06/02/2003.DURING THE COURSE OF SURVEY, CERTAIN BOOKS OF ACCOUNTS/DOCUMENTS WERE IMPOUNDED.THE AO ISSUED NOTICE UNDER SECTION 1 48 OF THE ACT,ON 25/03/2003. IN RESPONSE TO THE NOTICE,THE ASSESSEE FILED ITS RETUR N OF INCOME ON 28/03/2003 DECLARING NIL INCOME.THE ASSESSEE CONTENDED THAT ITS LO WAS NOT A PERMANENT ESTABLISHMENT(PE) IN INDIA, AS PER THE PROVISIONS OF INDIA-JAPAN TAX TREATY (TR EATY). WHILE COMPUTING THE TAXABLE INCOME OF THE ASSESSEE, THE AO INVOKED THE PROVISIONS OF RULE 10 OF THE INCOME TAX RULES,1962 (RULES)AND ESTIMATE D THE PROFIT AT 10% OF THE TOTAL TURNOVER 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 2 FROM INDIA.FOR COMPUTING THE TOTAL TURNOVER,HE ADOP TED THE FIGURES MENTIONED IN THE PERFORM -ANCE REVIEW REPORTS OF ONE EMPLOYEE NAMELY GEORGE SUNDER(GS)AS THE SALES FIGURE FOR THE AY. UNDER CONSIDERATION. DURING THE RE-ASSESSMENT PROCEEDINGS, THE AO HELD T HAT PERUSAL OF THE DOCUMENTS IMPOUNDED FROM THE BUSINESS PREMISE OF THE ASSESSEE PROVED TH AT ITS ACTIVITIES WERE NOT CONFINED TO LIAISON WORK(LW)ONLY, THAT IT WAS HAVING A PE IN IN DIA, THAT IT HAD NOT RESTRICTED ITS ACTIVITIES TO LO, THAT IT WAS INDULGED IN OTHER ACTIVITIES THA T PROVED THAT IT WAS INVOLVED INTO DAY-TO-DAY BUSINESS OF (NAGASE & COMPANY, JAPAN) NCJ. HE OBSER VED THAT THERE WERE TOTAL 10 VOLUME/ FILES CONTAINING LOOSE PAPERS AND A DIARY,THAT VOLU ME ONE OF THE IMPOUNDED DOCUMENTS CONTA -INED PERFORMANCE REVIEW REPORTS (PRR.S) OF THE STA FF, THAT THE REPORTS INCLUDED VARIOUS PARTICULARS LIKE NAME OF THE EMPLOYEES, JOB PERIOD, APPRAISAL OF THE WORK, CONTRIBUTION OF THE EMPLOYEES/AGENTS FOR THE SUBSEQUENT YEARS AND THE O VERALL ASSESSMENT BY THE HIGHER AUTHORI - TIES,THAT IN THE APPRAISAL COLUMN OF THE PRR SALES FIGURES WERE REPORTED AND THE COLUMN WAS REQUIRED TO BE MAINTAINED BY THE SALES STAFF ONLY, THAT ASSESSEE LO HAD SEPARATE SALES STAFF OTHER THAN THE REGULAR STAFF.REFERRING TO COLUMN NU MBER THREE OF THE REPORT OF GS FOR THE YEAR UNDER CONSIDERATION,HE MENTIONED THAT SALES TARGET WERE FIXED FOR HIM AT US$42,85,197 AGAINST WHICH HE HAD SHOWN THE ACHIEVEMENT OF US $ 41,71,915,THAT THE TARGET FOR THE TEAM OF GS FOR THE YEAR UNDER CONSIDERATION WAS FIXED AT US $2,53,57,913 AS AGAINST WHICH THE TEAM ACHIEVED TARGET OF US $ 2,52,94,676,THAT GS HAD GIV EN HIS COMMENTS IN SHORTFALL IN ACHIEVING THE TARGET FIGURES OF SALES,THAT REPORT WAS EVALUAT ED BY THE APPRAISER, THAT AS PER THE REPORT GS DEVELOPED CONTACTS WITH MITSU/RPG FOR REVIVAL OF TH E BUSINESS OF THE NICOTINE SULPHATE, THAT AS PER THE COLUMN 4 OF THE REPORT GS INCREASED THE EXPORT BUSINESS BY US$ 1.5 MILLION (29%) FOR THE YEAR UNDER CONSIDERATION AS COMPARED TO LAS T YEARS. AS PER THE AO,SIMILAR SALES TARGETS WERE ASSIGNED TO TWO MORE EMPLOYEES NAMELY WE VINOD BLAGI & KISHORE L RAJANI.HE HELD THAT THE SALES STAFF WAS DIRECTLY INVOLVED INTO BUS INESS ACTIVITIES, THAT THEY WERE RESPONSIBLE FOR ACHIEVING THE TARGET FIXED AND ALSO EXPANSION A ND DEVELOPMENT OF THE FUTURE BUSINESS OF NCJ. HE REFERRED TO PAGES 34, 115 156, 157 OF THE V OLUME ONE.WITH REGARD TO THE DIARIES IMPOUNDED,HE STATED THAT SAME RECORDS SHOWED DOUBLE THE FIGURES OF QUANTITY,RATE,TOTAL VARIOUS ITEMS AND DETAILS OF SHIPMENTS.HE DIRECTED THE ASSESSEE TO FILE EXPLANATION IN THAT REGARD AND TO FURNISH THE TURNOVER FIGURES OF THE I NDIAN ENTITY AS WELL AS THE TOTAL TURNOVER.HE HELD THAT ASSESSEE HAD A PE IN INDIA, THAT IT WAS C ALLING THE PE IS LO, THAT THE PERMISSION FROM THE RBI TO OPEN ONLY LO WOULD NOT CHANGE THE CHARAC TER OF THE OFFICE,THAT THE LO WAS INDULGING IN FULL-FLEDGED SALES ACTIVITY,THAT FOR T HE CONTRAVENTION OF THE PERMISSION OF THE RBI HE WOULD BE INFORMING THE BANK SEPARATELY,THAT THE PAPERS FOUND DURING THE SURVEY PROCEED - 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 3 INGS INDICATED THAT LO WAS BEING USED TO CARRY OUT SALES AND MARKETING ACTIVITIES IN A BIG WAY, THAT THE EMPLOYEES WERE CONTACTING POTENTIAL CUSTOM ERS AND WERE GIVING QUOTATIONS ABOUT THE RATES,THAT THEY WERE PASSING ON THE REQUIREMENTS OF THOSE CUSTOMERS TO THE HO JAPAN,THAT THEY WERE FORWARDING THE QUARRIES OF THE CUSTOMERS TO JA PAN,THAT THEY WERE PURSUING SHIPMENT OF THE GOODS TO BE DELIVERED TO INDIAN CUSTOMERS AND W ERE FOLLOWING THE PAYMENTS,THAT THE HO WAS ONLY DESPATCHING THE GOODS ONCE THE ORDER WAS R AISED BY THE ASSESSEE,THAT IN CASE OF A LO THE EMPLOYEES WOULD JUST FORWARD AND RECEIVE THE QU ERIES AND WOULD NOT GO ALL OUT IN THE FIELD FULFILLING THE SALES TARGETS,THAT THE IMPOUND ED MATERIAL SHOWED THAT EMPLOYEES OF THE LO WERE GIVEN SPECIFIC SALES TARGET BOTH AS INDIVIDUAL AND AS A GROUP,THAT THE TARGETS WERE CONSTANTLY REVIEWED BY THE APPRAISERS,THAT THEY WER E SUPPOSED TO INCREASE/EXPAND BUSINESS AND TO DEVELOP NEW CONTACTS,THAT THE RAISING OF FIN AL BILLS BY THE HO WOULD NOT MEAN THAT ASSESSEE COULD CLAIM THAT NO PROFITS WERE ATTRIBUTA BLE TO IT,THAT THE ENTIRE ACTIVITY OF THE BUSINESS EXCEPT FOR THE FILE OF DISPATCH AND RAISIN G THE BILLS WERE CARRIED OUT BY THE ASSESSEE IN INDIA,THAT THE ASSESSEE HAD ARRANGED ITS WORK IN SU CH A FASHION THAT FINAL INVOICES WERE RAISED OUTSIDE AND THE GOODS WERE DIRECTLY SENT TO THE IND IAN CLIENTS,THAT IT ALSO MADE ARRANGEMENTS SO THAT THE INDIAN PARTIES MADE PAYMENT TO THE NCJ. HE REFERRED TO THE TREATY (POINT NUMBER 6) AND HELD THAT PROFIT ACCRUING ON THE SALES BEING MADE FROM THE ASSESSES OPERATIONS IN INDIA WERE TO BE TAXED UNDER THE HEAD BUSINESS INCOME FOR THE YEAR UNDER CONSIDERATION. 2.1. AS PER THE AO,THE ASSESSEE DID NOT SUBMIT THE SALES TURNOVER MADE BY IT DURING LAST SIX YEARS, INCLUDING THE YEAR UNDER APPEAL.HE DIRECTED IT TO SUBMIT A COPY OF ITS GLOBAL ACCOUNTS TO ASSESS THE PROFITABILITY AT THE GLOBAL LEVEL AND TO DETERMINE THE PROFIT OF THE INDIAN BRANCH.AS PER THE AO THE ASSESSEE DID NOT FURNISH ANY DOCUMEN TS/DETAILS IN THAT REGARD.INVOKING THE PROVISIONS OF RULE 10 OF THE RULES,HE ESTIMATED THE INCOME AT THE RATE OF 10% OF THE TOTAL TURNOVER FROM INDIA. HE HELD THAT ASSESSEE WAS MAIN LY SUPPLYING CHEMICALS THAT WERE IN GREAT DEMAND AND SOME OF THE ITEMS WERE NEAR MONOPOLY ITE MS,THAT THE ESTIMATE WAS QUITE REASONABLE CONSIDERING THE NATURE OF THE BUSINESS O F THE ASSESSEE. ANALYSING THE AVAILABLE DATA, THE AO HELD THAT ON A N AVERAGE THE ANNUAL TURNOVER RAISED FROM RS.100 CRORES(APPROXIMATELY)IN THE AY. 1999-2000 TO RS.250 CRORES (APPX.) IN THE AY. 2002-03,THAT SALES HAD INCREASED BY ALMOST 20% EVER Y YEAR, THAT THE TURNOVER FIGURES WERE NOT AVAILABLE FOR THE REMAINING YEARS, THAT SAME HAD TO BE ESTIMATED AT 20% MORE OR LESS THAN THE SUCCEEDING/PRECEDING YEAR.FOR THE AY.1998-99 HE EST IMATED AT 20% LESS THAN THE SALES FOR THE SUBSEQUENT AY. AND SO ON.AS STATED EARLIER,HE D ETERMINED THE INCOME OF THE ASSESSEE AT RS.7,97,69,800/- 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 4 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).IT WAS ARGUED THAT REASON ABLE OPPORTUNITY WAS NOT GIVEN BY THE AO TO PRODUCE THE EVIDENCE.THE ASSESSEE FURNISHED C ERTAIN DOCUMENTS BEFORE THE FAA FOR THE FIRST TIME.HE CALLED FOR A REMAND REPORT FROM THE A O WITH REGARD TO THE ADDITIONAL EVIDENCES PRODUCED BEFORE. BEFORE THE FAA,THE ASSESSEE CONTENDED THAT IT WAS A TAX RESIDENT OF JAPAN, THAT THE PROVISIONS OF INDO JAPAN TREATY WOULD BE APPLICABLE, THAT AS P ER ARTICLE 7 OF THE TREATY THE PROFITS WOULD BE TAXABLE IN INDIA ONLY IF IT HAD A PE,THAT IT WAS CARRYING OUT PREPARATORY AND AUXILIARY ACTIVITIES THROUGH ITS LO,THAT THE SAID LO WOULD NO T CONSTITUTE A PE OF THE ASSESSEE IN INDIA [ARTICLE 5(6)OF THE TREATY], THAT SALES WOULD TAKE PLACE DIRECTLY FROM JAPAN AND THE HO WOULD DELIVER THE GOODS DIRECTLY TO THE CUSTOMERS, THE CU STOMER WOULD OPEN A LETTER OF CREDIT IN FAVOUR OF THE HO FOR MAKING THE PAYMENT, THAT SALES WERE CARRIED OUT THROUGH THE INDEPENDENT AGENTS,THAT APPROXIMATELY 80 TO 85% OF THE ASSESSEE S EXPORT OF GOODS TO INDIAN CUSTOMER WAS CONDUCTED THROUGH THE INDEPENDENT AGENTS, THAT THE AGENTS WERE UNRELATED TO THE ASSESSEE AND WOULD PROVIDE SIMILAR SERVICES TO OTHER PARTIES ,THAT THE AGENTS WERE PAID COMMISSION FOR THEIR SERVICES,THAT AS PER THE PERMISSION OF THE RB I THE ASSESSEE HAD SET UP A LO IN INDIA TO REPRESENT THE PARENT COMPANY TO PROMOTE EXPORT FROM AND IMPORT INTO INDIA TO ACT AS A COMMU -NICATION LINK BETWEEN THE ASSESSEE AND ITS CUSTOM ERS IN INDIA, THAT THE LO WAS SPECIFICALLY PROHIBITED FROM CARRYING OUT ANY COMMERCIAL/INCOME GENERATING ACTIVITIES IN INDIA, THAT THE LO DID NOT CARRY OUT ANY ACTIVITY WHICH WAS PROHIBI TED BY THE RBI,THAT LO WAS INVOLVED ONLY IN LIAISONING WORK, THAT IT CARRIED OUT SUPPORT ACT IVITIES AND NOT NON-CORE ACTIVITIES FOR THE ASSESSEE, THAT THE EMPLOYEES OF THE LO WOULD CARRY OUT SUPPORT FUNCTIONS TO ENABLE THE HO TO CARRY OUT THE SALES IN AS WELL AS PURCHASES FROM IN DIA,THAT THE EMPLOYEES OF LO WERE NOT AUTHORISED TO NEGOTIATE THE PRICING FOR THE CONTRAC TUAL TERMS WITH THE POTENTIAL CUSTOMERS /SUPPLIERS, THAT THEY WOULD ACT TO FACILITATE THE S ALE BY THE HO, THAT THE PERFORMANCE REVIEW REPORTS WERE PRIMARILY GROUPED INTO VARIOUS SUBDIVI SIONS AT THE HO LEVEL, THAT THOSE DIVISIONS INCLUDED DYESTUFF, COLOUR AND ADDITIVES,MINERALS ET C.,THAT THE HO AT ITS LEVEL HAD CLASSIFIED THE EMPLOYEES AS PART OF ONE OF THOSE DIVISIONS,THAT TH E HO HAD A POLICY TO REVIEW THE PERFORMAN -CE OF THE EMPLOYEES BASED ON THE TARGETS ACHIEVED BY A DIVISION/GROUP TO WHICH THE RESPECTIVE EMPLOYEE BELONGED,THAT THE PERFORMANCE O F THE EMPLOYEE WAS MEASURED ACCORDING TO THE ASSISTANCE PROVIDED BY HIM THROUGH THE SUPPO RT FUNCTIONS RENDERED, THAT PROMPT COMMU -NICATION BOTH WAYS WOULD HELP THE HO IN ENSURING S ATISFIED AND LOYAL CUSTOMERS AND MAXIMISE SALES,THAT THE HO SALES AND PURCHASES TARG ETS WERE RELEVANT FOR MEASURING PERFORMA -NCE OR FOR EVALUATING THE EFFICIENCY/PERFORMANCE O F THE LO STAFF, THAT THE AO HAD PLACED 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 5 RELIANCE ON INCORRECT DOCUMENTS,THAT THE TURNOVER C OMPUTED BY THE AO INCLUDED THE SALES MADE BY THE ASSESSEE THROUGH ITS INDEPENDENT AGENTS ,THAT THE AGENTS WOULD COLLECT AND PROVIDE INFORMATION ABOUT THE INDIAN MARKET TO THE HO,THAT THEY WOULD IDENTIFY AND MEET NEW CUSTOMERS AND WOULD PROVIDE INFORMATION ABOUT P RICE TO THEM, THAT AS PER THE PROVISIONS OF ARTICLE 5 (8) OF THE TREATY AND INDEPENDENT STAT US OF THE AGENTS,ACTING IN ORDINARY COURSE OF ITS BUSINESS,WOULD NOT CONSTITUTE A PE OF THE PRINC IPAL IN INDIA,THAT NO EMPLOYEE OF THE ASSESSEE HELD THE POSITION OF MANAGEMENT,THAT NEITH ER THE AGENTS NOT THE ASSESSEE HAD ANY SHAREHOLDING IN EACH OTHERS BUSINESS,THAT THE DECI SION-MAKING POWER IN RESPECT TO ACTIVITIES OF THE AGENTS DID NOT REST WITH THE ASSESSEE,THAT T HEY WERE PAID A COMMISSION @ 2 TO 5%(APPR- OXIMATELY)OF THE SALES AMOUNT,THAT ALL THE COSTS RE LATING TO CONDUCTING THEIR AGENCY BUSINESS WAS BORN BY THE AGENTS,THAT THE AGENTS WOULD INDEPE NDENTLY FRAME THEIR BUSINESS POLICIES, THAT THE ONLY INSTRUCTION THE AGENTS WOULD RECEIVE FROM THE ASSESSEE WAS REGARDING THE OVERALL TERM OF IDENTIFYING THE NEW CUSTOMER AND THE PRICE TO BE CHARGED TO THEM,THAT SUCH INSTRUCT - TIONS WERE NORMAL IN ANY AGENCY RELATIONSHIP,THAT T HE AGENTS WOULD CARRY OUT SIMILAR ACTIVITIES FOR A NUMBER OF PRINCIPLES,THAT EACH OF THE AGENTS WOULD CONDUCT ITS BUSINESS AS INDEPENDENT ENTREPRENEUR ACCORDING TO HIS OWN VIEWS EXPERTIES A ND METHODS,THAT THE AGENTS WERE NOT DEPENDENT UPON THE ASSESSEE FOR THEIR ECONOMIC VIAB ILITY,THAT THE AGENTS WERE UNRELATED ENTITIES AND THE REMUNERATION PAID TO THEM WAS AT A RMS LENGTH BASIS.THE ASSESSEE FILED DOCUMENTS WITH REGARD TO ITS KEY AGENTS.THE DOCUMEN TS INCLUDED THE DATA AVAILABLE ON THE WEBSITE OF MUSK AND FRAGRANCE (M&F) AND ON THE WEBS ITE OF ASSOCIATED AGENCIES,LIST OF CUSTOMERS AGENTS WISE AND PRODUCT WISE.IT WAS FURTH ER ARGUED THAT DIRECT SALES/SALES THROUGH INDEPENDENT AGENTS WERE NOT TAXABLE IN INDIA, THAT THE BUSINESS OF THE ASSESSEE WAS STRUCTURED IN SUCH A MANNER THAT A MAJOR PART OF ITS SALES IN INDIA WAS AFFECTED THROUGH ITS INDEPENDENT AGENTS THAT THE AGENTS HAD CONSIDERABLE KNOWLEDGE A ND EXPERIENCE OF THE MARKET, THAT THE AO HIMSELF HAD ACKNOWLEDGED THE FACT, THAT MAJORITY (A PPROXIMATELY 85%) OF THE BUSINESS OF THE ASSESSEE WAS CARRIED ON THROUGH THE INDEPENDENT AGE NTS, THAT THERE WAS A CLEAR DEMARCATION OF PRODUCTS WHICH WERE SUPPLIED THROUGH DIRECT SALES A ND AGENTS SALES, THAT AGENTS SALES WERE BASED ON CERTIFIED EXHIBITS, THAT THE AO WAS NOT JU STIFIED IN STATING THAT THE ASSESSEE HAD ATTEMPTED TO RECLASSIFY TRANSACTION IN THE NATURE O F DIRECT SALES,THAT THE AO HAD ERRED IN STATING THAT ROLE OF THE INDEPENDENT AGENTS WAS NOT DIFFERE NT FROM THE CUSTOMERS OF THE ASSESSEE TO WHOM DIRECT SALES WERE MADE,THAT THE ASSESSEE HAD S UBMITTED SEVERAL SAMPLE DOCUMENTS EVIDENCING THE FACT THAT AGENTS WERE INDEPENDENT AN D WOULD DIRECTLY DEAL WITH THE HO, THAT THE DOCUMENTS ALSO PROVED THAT THE ASSESSEE HAD MAD E DIRECT REMITTANCES OF THE COMMISSION AMOUNT TO THE BANK ACCOUNTS OF THE AGENTS, THAT THE LO HAD ONLY PROVIDED A SUPPORT SERVICE TO 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 6 THE HO, THAT THE AO HAD HIMSELF ACKNOWLEDGED THE FA CT THAT AGENTS WERE WORKING FOR THE OTHERS ALSO,THAT THE ASSESSEE HAD FILED A COPY OF I TS CONSOLIDATED PROFIT AND LOSS ACCOUNTS REFLECTING FINANCIAL RESULTS OF NCJ AS WELL AS ITS SUBSIDIARIES ON A CONSOLIDATED BASIS, THAT A CERTIFIED STATEMENT REFLECTING THE SUMMARY OF FINAN CIAL DATA IN RESPECT OF THE YEARS ENDED MARCH 1996 TO MARCH 2002 WAS ALSO FURNISHED, THAT I T SUBMITTED THE STATEMENTS REFLECTING THE BREAKUP OF COST OF SALES AND SELLING EXPENSES,THAT IT HAD ALSO SUBMITTED A REVISED STATEMENT EXPLAINING THE REASON FOR REVISING THE SAME,THAT IT HAD FURNISHED SPECIFIC RECONSILIATION STATEMENT IN RESPONSE TO THE ISSUE RAISED BY THE AO WITH REGARD TO DISCREPANCY IN THE AMOUNT OF SALES MADE BY M&F,AS INDEPENDENT AGENTS FOR THE AY.1998-99, THAT THE AO HAD NOT COMMENTED ON PARA 5A AND 5B OF THE FIRST REMAND REP ORT AS WELL AS THE SUBMISSIONS MADE BY THE ASSESSEE ON 30/06/2005 IN HIS SECOND REMAND REP ORT.THE ASSESSEE FURTHER ARGUED THAT TURNOVER COMPUTED BY THE AO WAS ERRONEOUS,THAT THE FIGURES REFLECTED IN THE ACHIEVEMENT COLUMN OF THE PRR OF THE EMPLOYEES INCLUDED THE SAL ES MADE BY THE ASSESSEE THROUGH ITS INDEPENDENT AGENTS,THAT THE FIGURES ALSO INCLUDED T HE AMOUNT OF PURCHASES, THAT THE LO ESSENTIALLY ACTED AS, NEGATION CHANNEL BETWEEN THE HO AND THE INDIAN PARTIES AND ONLY PLAYED A SUPPORTIVE ROLE IN RESPECT OF ASSESSEES IMPORT B USINESS, THAT THE LO IS NOT ENGAGED IN MAKING PURCHASES FOR THE ASSESSEE IN INDIA, THAT AS PER THE PROVISIONS OF ARTICLE 7 (5) OF THE TREATY NO PROFIT WOULD BE ATTRIBUTABLE TO THE PE ON ACCOUNT OF PURCHASES MADE BY SUCH PE IN INDIA, THAT PURCHASES MADE BY THE ASSESSEE FROM IND IA SHOULD BE EXCLUDED WHILE COMPUTING ITS TOTAL TAXABLE INCOME,THAT THE AO HAD ASSUMED TH AT THERE WAS A 20% INCREASE IN THE SALES IN THE SUBSEQUENT YEARS,THAT THE INCREASE/DECREASE OF 20% IN THE SALES FIGURE FOR THE SUBSEQUENT/ PRIOR YEARS COULD NOT BE TAKEN ON AN AD HOC BASIS, THAT THE AO HAD ATTRIBUTED THE ENTIRE 10% PROFITS TO THE LO IN INDIA,THAT EVEN IF THE LO WAS CONSIDERED AS A PE OF THE ASSESSEE THE ENTIRE PROFIT ON SALES COULD NOT BE ATTRIBUTED TO LO IN IN DIA ,THAT THE AMOUNT OF PURCHASES AND SALES MADE THROUGH THE AGENT SHOULD BE REDUCED FROM THE F IGURES REFLECTED IN THE ACHIEVEMENT COLUMNS OF THE PERFORMANCE REVIEW REPORTS.IT RELIED UPON THE CASE OF ANNAMALAIS TIMBER TRUST AND COMPANY (41 ITR 781)AND ARGUED THAT EVEN IF THE LO WAS REGARDED AS A PE THE SCOPE OF ACTIVITIES OF THE LO COULD NOT IN ANY EVEN T BE HIGHER THAN THAT OF AN INDEPENDENT AGENT,THAT THE AVERAGE RATE OF COMMISSION PAID TO T HE AGENT SHOULD THEREFORE BE CONSIDERED FOR COMPUTING REVENUE ATTRIBUTABLE TO THE LO OPERATIONS IN RESPECT OF DIRECT SALES,THAT FROM SUCH REVENUES THE EXPENSES PERTAINING TO THE LO SHOULD B E DIRECTED TO ARRIVE AT THE NET PROFITS,THAT BASED ON THE ABOVE THE INCOME ATTRIBUTABLE TO THE P E SHOULD BE COMPUTED AS PER THE AVERAGE RATE OF COMMISSION ON BY THE INDEPENDENT AGENTS,THA T THE AGENTS ACTED IN THE ORDINARY COURSE OF THEIR BUSINESS AND HAD LEGAL AND ECONOMIC INDEPE NDENCE,THAT EVEN IF ANY OF ITS AGENTS WAS 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 7 HELD TO BE A PE OF THE ASSESSEE THAT TAXABLE INCOME SHOULD BE CALCULATED AS PER ARTICLE 7 OF THE TREATY.THE ASSESSEE ALSO REFER TO THE CIRCULAR NUMBER 23, DATED 23/07/1969 AND ARTICLE 7 OF THE TREATY AND STATED THAT NO INCOME WOULD ARISE IN THE HANDS OF THE ASSESSEE, THAT THERE WAS NO REQUIREMENT TO PLACE RELIANCE ON THE GLOBAL PROFITABILITY FIGURES THAT, PROVISIONS OF ARTICLE 5(8)WOULD BE APPLICABLE IN THE CASE UNDER C ONSIDERATION.THE ASSESSEE ALSO FILED DETAILS OF THE DISCREPANCY POINTED OUT BY THE AO IN THE FIR ST REMAND REPORT AND THE SUBMISSIONS MADE BY IT BEFORE THE AO. 3.1. THE FAA, AFTER CONSIDERING THE SUBMISSIONS OF THE A SSESSEE AND THE REMAND REPORTS,HELD THAT THE AO HAD PROVIDED A TABLE LISTING OUT OF 21 INSTANCES OF DOCUMENTATION (FORMING PART OF THE IMPOUNDED DOCUMENTS)TO SUPPORT THE ARGUMENT THA T ITS LO WAS ENGAGED IN FULL-FLEDGED BUSINESS ACTIVITIES,THAT THE DOCUMENTS INDICATED ST RONG EVIDENCE TO THE POINT THAT LO HAD UNDERTAKEN MARKETING ACTIVITIES, INCLUDING NEGOTIAT IONS AND HAD BEEN DEALING WITH CUSTOMERS, THAT THE DOCUMENTS INDICATED THAT THE ROLE OF THE L O IN INDIAN WAS CRITICAL TO THE MAIN TRADING BUSINESS OF THE ASSESSEE IN INDIA,THAT THE ACTIVITI ES COULD NOT BE CATEGORISED AS PREPARATORY AND AUXILIARY ACTIVITIES,THAT THEY DID NOT QUALIFY FOR EXCLUSION FROM THE DEFINITION OF THE TERM PE UNDER ARTICLE 5 OF THE TREATY,THAT THE LO CONSTITUT ED A PE OF THE ASSESSEE IN INDIA, THAT THE ASSESSEE HAD CLAIMED THAT APPROXIMATELY 80-85% OF T HE EXPORT BUSINESS OF THE ASSESSEE HAD BEEN CONDUCTED THROUGH INDEPENDENT AGENTS AND THAT THEY WERE UNRELATED TO IT, THAT ALTHOUGH ALL THE CUSTOMERS WHETHER ATTENDED DIRECTLY OR THRO UGH AGENTS MADE PAYMENTS TO THE HO AT JAPAN BUT THE BUSINESS NEGOTIATIONS WERE CARRIED OU T WITH THEM BY THE LO, THAT THERE WAS NO BASIC DIFFERENCE IN THE DEALING BY THE ASSESSEE WIT H THE CUSTOMERS DIRECTLY OR THROUGH AGENTS, THAT THE ROLE OF THE INDEPENDENT AGENTS WAS NOT DIF FERENT FROM THE CUSTOMERS WHO NEGOTIATED DIRECTLY,THAT DURING THE SURVEY OPERATIONS DETAILS REGARDING THE SALES CLAIMED TO HAVE BEEN MADE BY SO-CALLED INDEPENDENT AGENTS WERE FOUND TO BE REFLECTED IN THE TOTAL SALES FIGURE OF MUMBAI OFFICE FOR THE AY. 1999-2000 AND 2000-2001,T HAT THE LO HAD PLAYED A ROLE IN SALES MADE BY THE AGENTS,THAT LO WAS INVOLVED IN THE AGEN TS SALES TRANSACTION, THAT THE FIGURES OF THE PRR,IMPOUNDED DURING THE SURVEY OPERATION,SHOUL D BE CONSIDERED TO BE THE TURNOVER FOR THOSE YEARS, THAT THE RECONCILIATION SUBMITTED BY T HE ASSESSEE WITH REGARD TO THE FIGURE AS PER THE EXHIBITS VIS A VIS THE PRR DID NOT SUBSTANTIATE THE CLAIM THAT IT ALSO INCLUDED PURCHASES, THAT NOWHERE IT HAD BEEN CERTIFIED BY THE ASSESSEE THAT REPORTS ALSO INCLUDED AGENTS SALES,THAT IT HAD NOT FILED DETAILS OF PURCHASES,THAT IN RESPE CT OF REMAINING AY.S THE FIGURES AS PER THE CERTIFIED EXHIBITS SHOULD BE CONSIDERED AS THERE WA S NO JUSTIFICATION FOR 20% AD HOC INCREASE/ DECREASE TO THE SALES FIGURE OF THE THOSE AY.S,THAT SALES FIGURE HAD BEEN TAKEN ON THE ESTIMATE 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 8 BASIS FOR THE AY.S 1996-97 TO 1998-99 AND AY.2001-0 2 FOR WHICH NO REFERENCE TO IMPOUNDED DOCUMENTS HAD BEEN MADE BY THE AO,THAT EVEN THE SAL ES FIGURES FOR THE AY.2002-03 HAD BEEN ESTIMATED ON THE BASIS OF THE SALES FIGURES FOR THE EARLIER AY.FOR WHICH NO IMPOUNDED DOCUMENTS HAD BEEN REFERRED TO,THAT THE AO HAD DETE RMINED THE SALES FOR THE AY.S.1996-97 AND 1997-98 BY ADOPTING RATE OF 20% DECREASE,THAT T HE SALES SHOWN BY THE ASSESSEE FOR THE THOSE AY.S WERE MORE THAN THE SALES FIGURES ADAPTED ON ESTIMATE BASIS BY THE AO.HE DIRECTED THE AO TO ADOPT THE SALES FIGURE FOR ALL THE ABOVE AY.S (EXCEPT AY. 1999-00 AND 2000-01) AS PER THE CERTIFIED EXHIBITS SUBMITTED BY THE ASSESSE E.THE FAA FURTHER HELD THAT THE PE IN INDIA WAS AN EXTENSION OF THE ASSESSEE,THAT FROM THE VERI FICATION OF THE ACCOUNTS,SUBMMITTED IT BY THE ASSESSEE,IT WAS NOT POSSIBLE TO DRAW ANY REASON ABLE CONCLUSION,THAT IN THE ABSENCE OF VARIOUS DETAILS LIKE ITEMISED DETAILS OF SALES/ PUR CHASES AND EXPENSES CLAIM OF THE ASSESSEE REMAINED UNSUBSTANTIATED,THAT THE ACCOUNTS FILED BY THE ASSESSEE WERE MERELY EXTRACTS OF ITS ANNUAL ACCOUNTS,THAT THE CERTIFIED STATEMENTS REFLE CTING THE SUMMARY OF THE FINANCIAL DATA DID NOT GIVE A COMPLETE STATE OF AFFAIRS, THAT THE AO D ID NOT HAVE ANY OPTION BUT HAD TO ESTIMATE THE PROFITS ATTRIBUTABLE TO PE UNDER RULE 10 OF THE RULES,THAT THE ASSESSEE HAD SUBMITTED THAT GP FROM ITS GLOBAL OPERATION WAS APPROXIMATELY 7%,T HAT ITS ACTIVITIES INVOLVED TRADING/ MARKETING WHICH WOULD YIELD HIGH PROFITS.FINALLY,HE APPLIED THE GP RATE OF 8%,AS AGAINST 10% APPLIED BY THE AO. 4. BEFORE US, THE AUTHORISED REPRESENTATIVE (AR) ARGUE D THAT FACTS AVAILABLE FOR LATER YEAR I.E. AY.1999-00 COULD NOT FORM BASIS FOR ASSUMING FACTS FOR THE YEARS PRIOR TO SUCH YEAR,THAT INCOME FOR EARLIER YEARS HAD TO BE ASSESSED ON THE BASIS OF MATERIAL SUBSISTING FOR THOSE YEARS, THAT THE AO HAD MAJORLY RELIED ON THE DOCUMENTS IMP OUNDED DURING THE SURVEY PROCEEDINGS FOR THE PERIOD 1995 TO 2003 TO HOLD THAT LO OF THE ASSESSEE CONSTITUTED A PE IN INDIA FOR THE YEAR UNDER CONSIDERATION,THAT ONLY DOCUMENTS FROM 1 995 TILL MARCH 1998 COULD BE CONSIDERED FOR UNDERSTANDING THE STATE OF AFFAIRS FOR THE IMPU GNED YEAR UNDER APPEAL, THAT THE AO/FAA HAD BASED THEIR CONCLUSIONS ON THE PRR.S OF THE STA FF OF THE LO,THAT THE PRR.S.WERE NOT FOR THE YEAR UNDER APPEAL,THAT THE MEMBERS OF THE STAFF WERE BEING EVALUATED ON THE BASIS OF THEIR SUPPORT ROLE GIVEN TO THE ACTUAL/CUSTOMERS AND HENC E THE FIGURES MENTIONED WERE IN RESPECT OF SUPPORT GIVEN BY THE STAFF AND DID NOT RELATE TO SA LES ACHIEVED BY SUCH EMPLOYEES IN INDIA, THAT THE PRR.S WERE RELEVANT FOR THE SUBSEQUENT AY. S.,THAT NO ADVERSE CONCLUSION SHOULD BE DRAWN FROM SUCH DOCUMENTS NOT PERTAINING TO THE YEA R TO HOLD THAT ASSESSEE HAD A LO IN INDIA, THAT LO CARRIED OUT THE RBI PERMITTED ACTIVITIES ON LY AND ACTED AS A COMMUNICATION CHANNEL GATHERING MARKET INFORMATION,THAT THE ANALYSIS OF T HE DOCUMENTS FOR THE YEAR UNDER APPEAL 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 9 PROVED THAT LO WAS ENGAGED IN ACTIVITIES WITHIN THE RBI PERMITTED GUIDELINES I.E. PREPARATORY AND AUXILIARY SERVICES, THAT ARTICLE 5 OF THE DTAA DEFINED THE CONCEPT OF PE, THAT AS PER THE DTAA PREPARATORY AND AUXILIARY SERVICES WOULD NOT C ONSTITUTE PE, THAT NO DECISION-MAKING WAS DONE AT THE LO BUT WAS DONE AT HO OF THE ASSESS EE I.E.AT JAPAN,THAT THE AGENTS WERE POINTED BY THE HO AND THE LO ONLY ACTED AS AN INFOR MATION/COMMUTATION CHANNEL,THAT THE LOS ROLE ASSUMED SIGNIFICANCE ON ACCOUNT OF THE LA NGUAGE BARRIER BETWEEN THE COUNTRIES, THAT THE STAFF OF THE LO WAS RESPONSIBLE FOR COLLECTING THE MARKET INFORMATION AND RELAYING THE SAME TO THE HO,THAT THE DOCUMENTS IMPOUNDED BY THE DEPARTMENT CLEARLY INDICATED THAT ACTIVITIES CARRIED OUT BY THE STAFF OF THE LO WERE MERELY THAT OF COMMUNICATION CHANNEL, THAT THE AO HAD MENTIONED THAT RBI WAS BEING SEPARATELY INFORMED ABOUT THE VIOLATION BY THE LO OF CARRYING OUT ACTIVITY BEYOND WHAT WAS PERMITTED, THAT THE RBI HAD NOT TAKEN ANY ACTION AGAINST THE LO TILL DATE IN SPITE OF THE ENTIRE OPE RATION OF THE LO BEING DISCLOSED TO THE REGULATOR ON AN ANNUAL BASIS, THAT ACTIVITIES CARRI ED OUT THROUGH INDEPENDENT AGENTS COULD NOT BE SAID TO BE CONSTITUTING A PE OF THE ASSESSEE IN INDIA,THAT THE ASSESSEE WOULD SELL ITS COMMO -DITIES TO INDIAN CUSTOMERS DIRECTLY AS WELL AS THR OUGH INDEPENDENT AGENTS IN INDIA, THAT THE FULL DETAILS OF THE SALES MADE BY THE ASSESSEE TO C LIENTS IN INDIA THROUGH AGENTS/DIRECTLY WERE SUBMITTED TO THE AO, THAT WHILE DETERMINING THE ISS UE OF PE IN INDIA HE DID NOT CONSIDER THE MATERIAL FILED BEFORE HIM AND HELD THAT ENTIRE SALE S OF THE ASSESSEE IN INDIA WERE ATTRIBUTABLE TO PE OF THE ASSESSEE IN INDIA,THAT THE AGENTS WERE IN DEPENDENT AGENTS AND WERE CARRYING OUT THE ACTIVITIES IN THE NORMAL AND ORDINARY COURSE OF BUS INESS, THAT AS PER ARTICLE 5 (7) AND 5 (8) OF THE TREATY ACTIVITIES CARRIED OUT BY AN INDEPENDENT AGENT IN HIS ORDINARY COURSE OF BUSINESS WOULD NOT CONSTITUTE A PE,THAT THE AGENTS WERE NOT LEGALLY OR ECONOMICALLY DEPENDENT ON THE ASSESSEE,THAT THEY WOULD DEAL WITH VARIOUS OTHER CU STOMERS/PRINCIPLES THAT NONE OF THE DOCUMENTS IMPOUNDED FOR THE YEAR ESTABLISH THAT AGE NTS WERE CUSTOMERS OF THE LO,THAT THE DOCUMENT AT PAGE 567 OF THE PAPER BOOK DID NOT INDI CATE THAT AGENTS WERE CUSTOMERS OF LO, THAT THE SAID PAPER SUPPORTED THE VIEW THAT THE AGE NTS WERE INDEPENDENT AND THE LO WAS ONLY ACTING AS FACILITATOR, THAT PAGE 559 OF PAPER BOOK INDICATED AND SUPPORTED THE VIEW THAT AGENTS WERE ACTUALLY INVOLVED IN DEVELOPING MARKET AND NOT THE LO-EMPLOYEES, THAT THE LO- EMPLOYEES HAD PASSED INFORMATION TO HO,THAT SUCH PA SSING OF INFORMATION COULD NOT BE THE BASIS TO ASSUME THAT AGENTS WERE WORKING AT THE BEH EST OF THE LO, THAT AGENTS WOULD COORDINATE WITH THE LOCAL OFFICE,THAT DECLARATION F ROM THE MAJOR AGENTS OF THE ASSESSEE TO THE EFFECT THAT THEY WERE INDEPENDENT AGENTS WAS FILED, THAT THE SIMPLE PRINT OF THE WEBSITES OF THE AGENTS CLEARLY SHOWED THAT THEY WERE DEALING WITH T HE OTHERS BESIDE THE ASSESSEE,THAT THE SALES MADE THROUGH THE AGENTS IN INDIA SHOULD BE EXCLUDED FROM THE PROFITS ATTRIBUTABLE TO THE PE OF 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 10 THE ASSESSEE IN INDIA. HE MADE A REFERENCE TO PAGES 75 -78 AND 81-85 OF THE PB.IT WAS FURTHER ARGUED THAT THE PROFITS ATTRIBUTABLE IN RESPECT OF THE DIRECT SALES OF THE ASSESSEE IN INDIA SHOULD BE COMPUTED ON THE AVERAGE RATE OF COMMISSION OF TH E INDEPENDENT AGENTS THAT EVEN IF THE LO WAS CONSIDERED AS A PE OF THE ASSESSEE IN INDIA THE SCOPE OF ACTIVITIES COULD NOT BE IN ANY EVENT BE WIDER THAN THE ACTIVITIES OF INDEPENDENT A GENTS,THAT PROFITS ATTRIBUTABLE TO THE PE OF THE ASSESSEE IN INDIA IN RELATION TO THE DIRECT SAL ES IN INDIA SHOULD BE COMPUTED ON THE BASIS OF THE AVERAGE RATE OF COMMISSION PAID BY THE ASSESSEE TO SUCH AGENTS.ALTERNATIVELY,IT WAS ARGUED THAT THE PROFITS ATTRIBUTABLE TO THE PE OF T HE ASSESSEE IN INDIA IN RELATION TO THE DIRECT SALES IN INDIA SHOULD BE COMPUTED ON THE BASIS OF T HE ALLOCATING THE GROSS MARGIN/NET MARGINS OF THE GLOBAL OPERATIONS OF THE ASSESSEE TO THE ACT IVITIES CARRIED OUT BY THE PE IN INDIA, THAT IN CASE THE GROSS MARGINS WERE APPORTIONED TO THE PE T HE EXPENDITURE INCURRED BY THE LO SHOULD BE ALLOWED AS A DEDUCTION WHILE COMPUTING THE PROFI T ATTRIBUTABLE TO A PE OF THE ASSESSEE IN INDIA,THAT THE AO HAD ARBITRARILY ESTIMATED THE PRO FIT AT THE RATE OF 10% ON AD HOC BASIS WHICH WAS REDUCED TO 8% BY THE FAA, THAT THE ASSESSEE IS A TRADING COMPANY AND WAS OPERATING ON EXTREMELY THIN MARGINS.HE RELIED UPON THE CASES OF MITSUI AND COMPANY LTD.(39ITD59) AND TOKYO MARINE AND FIRE INSURANCE COMPANY LIMITED (IT A/4696/DEL/2005). 4.1. THE DEPARTMENTAL REPRESENTATIVE (DR)CONTENDED THAT TWO OF THE EMPLOYEES OF THE LO WORKING WITH THE ASSESSEE DURING THE YEAR UNDER CON SIDERATION,THAT THE DETAILS OF TRAVELLING EXPENSES AND THE ESTABLISHMENT EXPENSES FOR THE ASS ESSMENT YEAR 1998-99 PROVED THAT GS AND BALGI WERE ON THE PAYROLL OF THE ASSESSEE,THAT THEY WERE ENGAGED IN THE SALES AND BUSINESS PROMOTION OF THE ASSESSEE FOR THE YEAR UNDER APPEAL , THAT THE ASSESSEE HAD A PE IN INDIA, THAT THE IMPOUNDED MATERIAL SHOWED THAT THE ASSESSEE HAD NOT RESTRICTED ITS ACTIVITIES TO LIASONING ONLY,THAT IT INDULGED INTO OTHER ACTIVITIES,THAT TH E LO WAS INVOLVED IN DAY-TO-DAY BUSINESS AND AGGRESSIVE SALES ACTIVITIES WITH THE HELP OF THE EM PLOYEES, THAT PERFORMANCE OF THE EMPLOYEES WAS ANALYSED ON THE BASIS OF SALES TARGET,THAT THE EMPLOYEES WERE INVOLVED IN EXPANSION OF THE BUSINESS AND DEVELOPMENT OF FUTURE BUSINESS,THA T THE LO HAD UNDERTAKEN MARKETING ACTIVITIES INCLUDING NEGOTIATIONS AND IT WAS DEALIN G WITH CUSTOMERS,THAT THE ROLE OF LO IN INDIA WAS CRITICAL TO THE MAIN TRADING BUSINESS OF THE ASSESSEE, THAT THE ACTIVITIES COULD NOT BE CATEGORISED AS PREPARATORY OR AUXILIARY ACTIVITIES, THAT THE ACTIVITIES CARRIED OUT BY THE LO DID NOT QUALIFY FOR THE EXCLUSION FROM THE DEFINITION O F THE TERM PE UNDER ARTICLE 5 OF THE TREATY, THAT AO HAD NOTICED THAT ALL CUSTOMERS MADE PAYMENT S TO THE HO AT JAPAN AND THAT ASSESSEE WOULD RAISE INVOICES IN THE NAME OF EACH SERVES CUS TOMERS, THAT THERE WAS NO BASIC DIFFERENCE IN ASSESSEES DEALING WITH CUSTOMER EITHER DIRECTLY OR THROUGH AGENTS,THAT THE ROLE OF INDEPEN - 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 11 DENT AGENTS WAS NOT DIFFERENT FROM THE CUSTOMERS WH O WERE NEGOTIATED DIRECTLY,THAT SALES CLAIM TO HAVE BEEN MADE BY INDEPENDENT AGENTS WERE FOUND TO BE REFLECTED IN THE TOTAL SALES FIGURE OF MUMBAI OFFICE, THAT LO WAS DIRECTLY INVOL VED IN ALL THE SALES TRANSACTION PERTAINING TO INDIAN OPERATIONS,THAT THE ESTIMATION OF PROFIT THE RATE OF 10% ON AD HOC BASIS WAS IN ACCORDANCE TO RULE 10 OF THE RULES,THAT THE AO HAD ASKED THE ASSESSEE TO SUBMIT DETAILS OF ITS GLOBAL ACCOUNTS FOR LAST SIX YEARS,THAT THE ASSESSE E HAD NOT PRODUCED ANY DOCUMENTS/DETAILS, THAT THE AO WAS LEFT WITH NO OTHER OPTION BUT TO ES TIMATE THE PROFIT, THAT THE ASSESSEE CHANGED STANDS CONSTANTLY BY FILING THE REVISED CERTIFIED C OPIES OF THE ACCOUNTS AND DOCUMENTS EVERY NOW AND THEN. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE IMPOUNDED DOCUMENTS AND THE REMAND REPORTS FILE D BY THE AO.WE FIND THAT AN ACTION U/S. 133A OF THE ACT WAS CARRIED OUT AT THE BUSINESS PRE MISES OF THE ASSESSEE,THAT CERTAIN DOCUMEN -TS WERE IMPOUNDED DURING THE SURVEY PROCEEDINGS,TH AT THE AO HELD THAT THE LO OF THE ASSESSEE WAS CARRYING OUT BUSINESS ACTIVITIES AND T HUS WAS ITS PE IN INDIA,THAT THE BUSINESS THROUGH THE AGENTS WAS PROCURED THROUGH THE LO,THAT THAT THE LO HAD PLAYED A ROLE IN THE SALES MADE BY THE AGENTS,THAT THE FIGURES OF THE PR R SHOULD CONSTITUTE THE PART OF THE TURNOVER FOR THOSE YEARS.THE AO ESTIMATED SALES ADOPTING A P ARTICULAR FORMULA( I.E.20% INCREASE OR DECREASE IN THE SALES FIGURES FOR THE SUBSEQUENT OR EARLIER YEARS),THE FAA HELD THAT THE LO WAS THE PE OF THE ASSESSEE IN INDIA,THAT THE AO WAS NOT JUSTIFIED IN ESTIMATING THE SALES,THAT HE SHOULD ACCEPT THE SALES FIGURES SUBMITTED BY THE ASSESSEE EXCEPT FOR TWO AY.S,THAT THE AO HAD RIGHTLY INVOKED THE PROVISIONS OF RULE 10 OF TH E RULES.HE DIRECTED THE AO TO ADOPT GP RATE OF 8% AS AGAINST THE 10%,AS ADOPTED BY THE AO. 5.1. IT IS SAID THAT FOR INCOME TAX PROCEEDINGS,EACH AY. IS A SEPARATE ASSESSMENT UNIT AND LIABILITY TO PAY TAX DEPENDS UPON THE FACT AS TO WH ETHER ANY INCOME HAD ARISEN OR ACCRUED TO AN ASSESSEE IN THAT PARTICULAR YEAR OR NOT.EVENTS O F EARLIER OR SUBSEQUENT YEARS CAN BE USEFUL IN THAT REGARD,BUT SAME SHOULD LEAD TO ESTABLISH THE B ASIC FACT IN A PARTICULAR YEAR THE ASSESSEE HAD RECEIVED CERTAIN INCOME OR INCOME HAD ACCRUED T O IT.IN THE CASE UNDER CONSIDERATION,THE AO/FAA REFERRED TO CERTAIN IMPOUNDED DOCUMENTS TO E STABLISH THAT THE LO WAS,IN FACT, FUNCTIONING AS PE OF THE ASSESSEE FOR THE YEAR UNDE R APPEAL AND HENCE ITS INCOME SHOULD BE TAXED IN INDIA.THEREFORE,WE ARE OF THE OPINION THAT ISSUE OF EXISTENCE OF PE SHOULD BE DECIDED FIRST. FOR THAT PURPOSE IT WOULD BE ESSENTIAL TO REFER TO THE IMPOUNDED MATERIAL.ONE OF THE DOCUMENT -TS RELIED UPON BY THE AO IS PRR OF ONE OF THE EMPL OYEES.WE FIND THAT IT TALKS OF THE PERFORM 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 12 -ANCE OF ONE OF THE EMPLOYEES FOR THE FY.1998-99 I. E.FOR THE AY.1999-2000.IN OUR OPINION, THE REPORT HAS NO RELEVANCE FOR DECIDING ANYTHING F OR THE YEAR UNDER CONSIDERATION. NOW,WE WOULD LIKE TO ANALYSE THE OTHER DOCUMENTS THAT ARE RELEVANT FOR THE INSTANT AY.AGREEMENT DTD.13.09.1996,ENTERED IN TO BETWEEN LG CHEMICALS L TD. KOREA AND NAGASE & CO.(PG.517- 22)TAKE OF GRANTING NON TRANSFERABLE RIGHTS TO DIST RIBUTE CERTAIN CHEMICALS.THE AGREEMENT WAS VALID UP TO DECEMBER,1996.NO OTHER DOCUMENT WAS REF ERRED TO BY THE AO/FAA TO PROVE THAT THE AGREEMENT WAS RENEWED WAS ACTED UPON DURING THE YEAR UNDER APPEAL.PG. 523 OF THE PB IS A LETTER FROM ONE OF THE EMPLOYEES OF THE ASSESSEE TO ITS SHANGHAI OFFICE.IN THAT LETTER THE EMPLOYEE HAS ADVISED THE SHANGHAI OFFICE AS TO HOW TO DEAL WITH INDIAN CUSTOMERS.BUT,IT DOES NOT PROVE THAT THE ASSESSEE WAS INDULGING IN SALES ACTIVITIES.A FAX MESSAGE FROM GS ON 15.07.2000 TO THE HO(PG.537-39)CLEARLY SHOW THAT TI LL JULY,2000 LO WAS SUPPOSED TO FIND OUT THE BUSINESS POSSIBILITIES IN THE VARIOUS PAR TS OF INDIA.IT ALSO TALKS THAT INTENTION OF THE BOMBAY OFFICE WAS NOT TO DO INDEPENDENT BUSINESS. LETTER FROM ONE OF THE EMPLOYEES TO HO (PG.546)PERTAINS TO SOME INFORMATION ABOUT PURCHASE S TO BE MADE AS PER THE COMMENTS/ ORDER OF THE HO.PG.559OF THE PB IS A LETTER FROM M USK AND FRAGRANCE (M&F) TO LO.WE HAVE NOT COME ACROSS ANY EVIDENCE THAT CAN PROVE TH AT LO HAD DIRECTLY DEALT WITH THE AGENT. THE ASSESSEE HAD CLAIMED THAT INFORMATION RECEIVED FROM M&F HAD BEEN FORWARDED TO HO. THE AO HAD NOT COMMENTED UPON THE ASSERTION MADE BY THE ASSESSEE.THE NEXT DOCUMENT (PG.567) TALKS ABOUT MEETING OF MEMBERS OF THE LO W ITH AGENT AND ONE OF THE MANUFACTURER.IT DOES NOT PROVE THAT THE LO WAS CARRYING OUT BUSINES S ACTIVITIES. 5.2. THERE IS A VERY THIN LINE BETWEEN LIASONING/PROVIDI NG AUXILIARY SERVICES AND DOING BUSINESS. IN THE FIRST INSTANCE SUPPORT IS GIVEN BY LO TO ITS HO WHO LOOKS AFTER THE BUSINESS. BUT,IF THE LO STARTS TAKING INDEPENDENT BUSINESS DE CISIONS,INCLUDING DEALING WITH THE CUSTOMERS,SAME COULD NOT BE TREATED PREPARATORY/AUX ILIARY SERVICES.PROVIDING/COLLECTING INFORMATION AND ACTING AS PER THE INSTRUCTIONS OF T HE HO WILL NOT DEFINITELY FALL IN THE CATEGORY OF DOING BUSINESS INDEPENDENTLY.SO,UNTIL AND UNLESS SOME RELIABLE EVIDENCE IS NOT BROUGHT ON RECORD IT CANNOT BE HELD THAT AN ASSESSEE WAS NOT L IASONING OR WAS DOING BUSINESS.WHAT HAS TO BE SEEN IS THAT WITH WHOM THE DECISION MAKING POWER LIES.IF THE LO HAS TO FOLLOW THE DIRECTIONS/COMMAND OF THE HO THEN THE REINS OF THE BUSINESS WOULD NOT BE IN ITS HANDS AND IT CANNOT BE TREATED AN INDEPENDENT ENTITY.BUT,IF IT I NFORMS THE HO,AFTER ENTERING IN TO BUSINESS TRANSACTION ON ITS OWN,ABOUT THE RESULTS OF ITS BUS INESS ACTIVITIES THEN THE HO CANNOT CLAIM THAT THE HO WAS ASSISTING IT.IN THE MATTER OF UAE E XCHANGE CENTRE (313 ITR 94),THE HONBLE DELHI HIGH COURT HAS HELD AS UNDER: 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 13 THE PLAIN MEANING OF THE WORD ' AUXILIARY' IS FOUN D IN THE BLACK' S LAW DICTIONARY 7TH EDITION AT PAGE 130 WHICH READS AS ' AIDING OR SUPP ORTING, SUBSIDIARY' ..ONCE AN ACTIVITY IS CONSTRUED AS BEING SUBSIDIARY OR IN AID OR SUPPORT OF THE MAIN ACTIVITY IT WOULD, ACCORDING TO US, FALL WITHIN THE EXCLUSIONARY CLAUSE. TO SAY THA T A PARTICULAR ACTIVITY WAS NECESSARY FOR COMPLETION OF THE CONTRACT IS, IN A SENSE SAYING TH E OBVIOUS AS EVERY OTHER ACTIVITY WHICH AN ENTERPRISE UNDERTAKES IN EARNING PROFITS IS WITH TH E ULTIMATE VIEW OF GIVING EFFECT TO THE OBLIGATIONS UNDERTAKEN BY AN ENTERPRISE VIS-A-VIS I TS CUSTOMER. IF LOOKED AT FROM THAT POINT OF VIEW, THEN, NO ACTIVITY COULD BE CONSTRUED AS PREPA RATORY OR OF AN ' AUXILIARY' CHARACTER. FROM THE ABOVE DISCUSSION IT IS CLEAR THAT ANY ACTI VITY BEING SUBSIDIARY OR IN AID OR SUPPORT OF MAIN ACTIVITY HAS TO BE TREATED AUXILIARY OR PREPAR ATORY ACTIVITY.PERUSAL OF THE IMPOUNDED DOCUMENTS,RELEVANT FOR THE YEAR UNDER APPEAL,HAVE N OT LED US TO THE CONCLUSION THAT THE LO WAS OFFERING SERVICES THAT WERE NOT AUXILIARY. 5.3. WE HAVE NOT COME ACROSS ANY STATEMENT OF ANY OF THE EMPLOYEES OR THE OFFICIALS / EXECUTIVES OF THE LO,RECORDED DURING THE SURVEY PRO CEEDINGS OR AFTER THE ACTION U/S. 133A OF THE ACT WAS OVER.GENERALLY,DURING THE SUCH OPERATIO NS STATEMENTS ARE RECORDED AND QUESTIONS ARE ASKED ABOUT RELEVANT AND IMPORTANT IMPOUNDED DO CUMENTS.THERE IS NO DOUBT THAT TWO OF THE EMPLOYEES GS AND VINOD BALGI WERE EMPLOYER OF T HE LO FOR THE YEAR UNDER CONSIDERA - TION.BUT, THAT DOES NOT LEAD TO ANY FINAL CONCLUSIO N.NO QUESTION WAS EVER ASKED TO THEM ABOUT THE DUTIES ASSIGNED TO THEM OR ABOUT THE RESPONSIBI LITIES SHARED BY THEM.THERE APPOINTMENT LETTERS WOULD HAVE GIVEN SOME CLUES ABOUT THEIR JOB PROFILE.NOTHING IS ON RECORD THAT CAN PROVE THAT THE LO WAS FUNCTIONING AS AN INDEPENDENT PROFIT CENTER FOR THE YEAR UNDER CONSIDERATION. WE WANT TO MAKE IT CLEAR THAT OUR OB SERVATION ARE FOR THE AY.1998-99 AND THEY ARE IN NO WAY BINDING FOR ANY OTHER AY.WE HAVE ANAL YSED THE PAPERS THAT ARE RELEVANT FOR THE YEAR UNDER CONSIDERATION ONLY AND OUR DECISION IS A LSO BASED SOLELY ON THOSE DOCUMENTS. 5.4. HERE,WE WANT TO MENTION THAT WE HAVE TAKEN NOTE OF A PORTION OF ORDER OF THE AO,WHEREIN HE HAS MENTIONED THAT HE WOULD INFORM THE RBI ABOUT THE VIOLATIONS MADE BY THE LO IN CONDUCTING ITS ACTIVITIES.WE ARE NOT AWARE AS TO WH AT WAS THE OUTCOME OF THAT EXERCISE. THE FAA OR THE DR HAS NOT MENTIONED ANYTHING ABOUT THE CORRESPONDENCE ENTERED INTO WITH THE RBI.WE ARE AWARE THAT DECISION OF RBI MAY NOT BE VE RY RELEVANT FOR DETERMINING THE TAX LIABILITY OF AN ASSESSEE.BUT,IF THE RBI HAS,AFTER R ECEIVING A COMMUNICATION FROM THE AO,NOT INITIATED ANY PROCEEDINGS AGAINST THE ASSESSEE FOR VIOLATING THE TERMS AND CONDITIONS OF THE PERMISSION LETTER ISSUED TO IT BY THE BANK FOR OPER ATING THE LO,THEN IT WILL STRENGTHEN THE CASE OF THE ASSESSEE.BY NOT TAKING ANY ACTION AGAINST TH E ASSESSEE,THE RBI HAS ACCEPTED THE PLEA THAT THE LO WAS PERFORMING THE ACTIVITIES THAT WERE ALLOWED BY THE BANK. 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 14 CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT TH ERE IS NO EVIDENCE THAT THE LO WAS FUNCTIONING AS PE OF THE ASSESSEE IN INDIA FOR THE YEAR UNDER APPEAL.FIRST EFFECTIVE GROUND IS DECIDED IN FAVOUR OF THE ASSESSEE. AS ALL THE OTHER GROUNDS,RAISED BY THE ASSESSEE,ARE ALTERNATIVE GROUNDS,SO,WE ALLOW THEM FOR STATISTICAL PURPOSES. ITA/1800/MUM/2007-AY.1998-99(APPEAL BY THE ASSESSEE ): 6. WHILE GIVING EFFECT TO THE ORDER OF THE FAA, THE AO DISALLOWED EXPENSES UNDER THE HEADS AGENTS COMMISSION (RS.1,56,26,851/-)AND EXPENDITUR E INCURRED TOWARDS PACKING AND TRANS - PORTATION OF PERSONAL AND HOUSEHOLD EFFECTS AND AIR TRAVELS OF THE EMPLOYEES (RS.2,98,750/-). THE ASSESSEE CHALLENGED THE ORDER OF THE AO BEFORE THE FAA,WHO DISMISSED THE APPEAL FILED BY IT. 7. BEFORE US,THE AR ARGUED THAT THE ISSUE WILL HAVE TO BE DECIDED ONLY IF IT WAS HELD THAT ASSESSEE HAD PE IN INDIA, THAT ASSESSEE WOULD BE PA YING COMMISSION TO INDEPENDENT AGENTS, THAT AFTER REJECTING THE FINANCIALS OF THE ASSESSEE FOR CONSIDERING THE TURNOVER THE AO WAS NOT JUSTIFIED IN IRAN UPON THE SAME STATEMENT FOR HOLDI NG THAT GP RATE OF 8% WAS INCLUSIVE OF COMMISSION PAID TO THE AGENTS, THAT ALL EXPENSES IN CONNECTION WITH THE DETERMINATION OF CORRECT PE PROFITS SHOULD BE CONSIDERED FOR COMPUTI NG THE TAXABLE INCOME, THAT THE ASSESSEE WAS REQUIRED TO INCUR EXPENDITURE FOR RELOCATION OF PERSONAL AND HOUSEHOLD EFFECTS OF THE EMPLOYEES,THAT THE EXPENDITURE WAS INCURRED IN CONN ECTION WITH THE RELOCATION OF THE EMPLOYEES IN THE NORMAL COURSE OF BUSINESS, THAT TH E EXPENDITURE WAS AN ALLOWABLE DEDUCTION. THE DR SUPPORTED THE ORDER OF THE AO AND THE FAA. 8. WHILE DECIDING THE EARLIER APPEAL,WE HAVE HELD THAT ASSESSEE WAS NOT HAVING PE IN INDIA. THE ISSUES RAISED BY THE ASSESSEE ARE ACADEMIC IN N ATURE IN THE BACKGROUND OF OUR ORDER. SO, WE ALLOW THE APPEAL FILED BY THE ASSESSEE FOR STATI STICAL PURPOSES. ITA/369/MUM/2006-AY. 1998-99(APPEAL BY THE AO): 9. FIRST GROUND OF APPEAL IS ABOUT ESTIMATION OF SALE FIGURES.DURING THE ASSESSMENT PROCEED INGS,THE AO FOUND THAT THERE WAS AN ERROR IN THE ST ATEMENT FILED BY THE ASSESSEE WITH REGARD TO TURNOVER FIGURES.THE ASSESSEE,VIDE ITS LETTER DATED 13/05/2005 (PAGE 257 OF THE PB) FILED EXPLANATION IN THAT REGARD.LATER ON, IT ALSO PRODUC ED REVISE CERTIFIED STATEMENT ALONG WITH APPENDED VERIFICATION BY THE CERTIFIED PUBLIC ACCOU NTANT ACCEPTING THE MISTAKE ALONG WITH THE RECONCILIATION OF THE AMOUNTS. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION FILED 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 15 BY THE ASSESSEE.HE STATED THAT THERE WERE MISTAKES IN THE AVERAGE COMMISSION PAID TO THE AGENTS,THAT THE ACCOUNTS OF THE ASSESSEE WERE NOT R ELIABLE. HE ESTIMATED THE TURNOVER FIGURE ON THE BASIS OF THE PRR OF THE EMPLOYEES APPLYING PLUS /MINUS TO THE FIGURES APPEARING IN THE REPORTS. HE ALSO ESTIMATED THE GROSS PROFIT FOR THE YEAR UNDER CONSIDERATION AT THE RATE OF 10%, AS STATED IN THE EARLIER PART OF OUR ORDER. 9.1. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FAA AND MADE ELABORATE SUBMISSIONS. HE CALLED FOR REMAND RE PORTS FROM THE AO. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE REPORTS HE HELD THAT TURNOVER FIGURES HAD TO BE CONSIDERED AS PER THE CERTIFIED STATEMENTS FILED ON RECORD, TH AT IN A PARTICULAR YEAR THE ESTIMATED TURNOVER WAS LESS THAN THE CERTIFIED TURNOVER, THAT THERE WA S NO JUSTIFICATION FOR REJECTING THE CERTIFIED STATEMENTS. 9.2. DURING THE COURSE OF HEARING BEFORE US, THE DR STAT ED THAT THE ASSESSEE ITSELF HAD ADMITTED THAT THERE WERE MISTAKES IN THE STATEMENT FILED WIT H REGARD TO AVERAGE COMMISSION PAID TO THE AGENTS,THAT THE ASSESSEE FILED THE REVISED STATEMEN TS ONLY AFTER DETECTION BY THE AO, THAT AO WAS LEFT WITH NO OPTION BUT TO ESTIMATE THE TURNOVE R. THE AR SUPPORTED THE ORDER OF THE FAA. 9.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE AO HAD NOTED THAT THERE WAS DISCREPANCY IN THE CERT IFICATE DEALING WITH AVERAGE COMMISSION PAID TO THE AGENTS, THAT THE ASSESSEE PRODUCED REVI SE CERTIFICATE ALONG WITH THE RECONCILIATION BEFORE THE AO,THAT THE REVISED CERTIFICATE WAS CERT IFIED BY AUTHORISED PERSON, THAT OUT OF THE VARIOUS CERTIFIED STATEMENTS FILED BY THE ASSESSEE THE DISCREPANCY WAS ONLY IN CASE OF ONE CERTIFICATE.WE FIND THAT WHILE SENDING THE REMAND R EPORTS THE AO DID NOT COMMENT UPON THE RECONCILIATION FILED BY THE ASSESSEE WITH REGARD TO COMMISSION PAID TO THE AGENTS.PG.309-316, 327-340 AND 427 OF THE PB ARE ABOUT THE RECONCILIAT ION OF THE FIGURES. AFTER GOING THROUGH THESE DOCUMENTS WE ARE OF THE OPINION THAT THE FAA WERE JUSTIFIED IN REJECTING THE METHOD ADOPTED BY THE AO I.E. ESTIMATING THE TURNOVER INST EAD OF ACCEPTING THE TURNOVER IS CERTIFIED BY THE PROFESSIONALS.WE HAVE TAKEN NOTE OF THE FACT THAT ASSESSEE IS A PUBLIC COMPANY IN JAPAN AND THE STATEMENTS DRAWN WERE FROM ITS PUBLIC ACCOUNTS.BECAUSE OF A GENUINE MISTAKE IN ONE OF THE CERTIFICATES (NOT ALL THE CERTIFIED D OCUMENTS),THE AO SHOULD NOT HAVE ESTIMATED THE TURNOVER.IN OUR OPINION, BEFORE TAKING SUCH A D RASTIC STEP IN CASE OF A PUBLIC LIMITED COMPANY HE SHOULD HAVE COMMENTED UPON THE RECONCILI ATION STATEMENT FILED BY THE ASSESSEE. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT TH E ORDER OF THE FAA DOES NOT NEED ANY 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 16 INTERFERENCE FROM OUR SIDE.SO, CONFIRMING HIS ORDER , WE DECIDE THE FIRST GROUND OF APPEAL AGAINST THE AO. 10. NEXT GROUND OF APPEAL IS ABOUT REDUCING THE GP TO 8 % BY THE FAA,AS AGAINST 10% ESTIMATED BY THE AO. FOLLOWING OUR ORDER FOR THE FI RST GROUND OF APPEAL, WE DISMISS SECOND GROUND. 11. LAST GROUND OF APPEAL IS ABOUT LEVY OF INTEREST UND ER SECTION 234B OF THE ACT.WHILE COMPLETING THE ASSESSMENT,THE AO HAD LEVIED INTERES T UNDER THE SAID SECTION.DURING THE APPELLATE PROCEEDINGS,THE FAA DELETED THE INTEREST. 11.1. WE FIND THAT THE ISSUE IS DECIDED AGAINST THE AO AN D IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE HONBLE JURISDICTIONAL HIGH COURT DELI VERED IN THE CASE OF NGC NETWORK ASIA LLC (313 ITR 187).WE WOULD LIKE TO REPRODUCE THE RE LEVANT PORTION OF THE JUDGMENT OF THE HONBLE COURT AND IT READS AS UNDER- UNDER THE PROVISIONS OF THE PRESENT ACT, THE ISSUE HAD COME FOR CONSIDERATION IN THE CASE OF CIT V. SEDCO FOREX INTERNATIONAL DRILLING CO. LTD. REPORTED IN [2003] 264 ITR 320 (UTTARANCHAL). ONE OF THE QUESTIONS WAS, AS TO WHET HER INTEREST COULD BE LEVIED ON THE ASSESSEE UNDER SECTION 234B OF THE ACT IN RESPECT OF TAX WHI CH WAS NOT LIABLE TO BE DEDUCTED AT SOURCE. A LEARNED BENCH OF THE UTTARANCHAL HIGH COURT, AFTE R CONSIDERING THE PROVISIONS, HELD AS UNDER (PAGE 328) : 'SECONDLY, ALTHOUGH SECTION 191 OF THE ACT IS NOT O VERRIDDEN BY SECTIONS 192, 208 AND 209(1)(A)(D) OF THE ACT, THE SCHEME OF SECTIONS 208 AND 209 OF THE ACT INDICATES THAT IN ORDER TO COMPUTE ADVANCE TAX THE ASSESSEE HAS TO, I NTER ALIA, ESTIMATE HIS CURRENT INCOME AND CAL CULATE THE TAX ON SUCH INCOME BY APPLYING T HE RATES IN FORCE. THAT UNDER SECTION 209(1)(D) THE INCOME-TAX CALCULATED IS TO BE REDUCE D BY THE AMOUNT OF TAX WHICH WOULD BE DEDUCTIBLE AT SOURCE OR COLLECTIBLE AT SOURCE, WHIC H IN THIS CASE HAS NOT BEEN DONE BY THE EMPLOYER COM PANY ACCORDING TO THE LAW PREVAILING F OR WHICH THE ASSESSEE CANNOT BE FAULTED.' 6. RELYING ON THE JUDGMENT IN SEDCO FOREX INTERNATI ONAL DRILLING CO. LTD. [2003] 264 ITR 320 (UTTARANCHAL), A LEARNED BENCH OF THIS COURT WAS PL EASED TO PASS AN ORDER DATED JULY 16, 2008 IN INCOME-TAX APPEAL (L) NO. 1796 OF 2007 IN THE CA SE OF THE DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) V. MORGAN CORPORATION GUAR ANTEE INTERNATIONAL FINANCE CORPORATION, BY APPLYING THE RATIO OF THAT JUDGMENT . 7. OUR ATTENTION IS ALSO INVITED TO THE JUDGMENT OF THE MADRAS HIGH COURT, IN THE CASE OF CIT V. MADRAS FERTILISERS LTD. REPORTED IN [1984] 149 I TR 703, WHERE THE MADRAS HIGH COURT TOOK THE VIEW THAT THE AMOUNT OF TAX DEDUCTIBLE AT SOURC E IS TO BE TAKEN INTO CONSIDERATION TO DETERMINE THE LIABILITY TO PAY THE INTEREST UNDER S ECTION 215. IN THAT CASE, THE ASSESSEE HAD NOT PAID ADVANCE TAX ON THE INTEREST INCOME. THE PAYER OF INTEREST HAD NOT DEDUCTED THE TAX. THE LEARNED BENCH OF THE MADRAS HIGH COURT WAS OF THE V IEW THAT LEVY OF INTEREST UNDER SECTION 215 ON THE ASSESSEE WAS NOT JUSTIFIED. 8. WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEW TAK EN IN THE CASE OF CIT V. SEDCO FOREX INTERNATIONAL DRILLING CO. LTD. [2003] 264 ITR 320, BY THE UTTARANCHAL HIGH COURT. WE ARE CLEARLY OF THE OPINION THAT WHEN A DUTY IS CAST ON THE PAYER TO PAY THE TAX AT SOURCE, ON FAILURE, NO INTEREST CAN BE IMPOSED ON THE PAYEE-ASSESSEE. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT,WE DECIDE THE THIRD GROUND AGAINST THE AO. 1800/M/07&115/M/06369/M/06, M/S. NAGASE & CO.LTD. 17 AS A RESULT,ITA/115/MUM/2006/FILED BY THE ASSESSEE IS ALLOWED, ITA/1800/MUM/2007/OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AND TH E APPEAL FILED BY THE AO STANDS DISMISSED. 115/MUM/2006/ ,ITA/1800/MUM/ 2007 ORDER PRONOUNCED IN T HE OPEN COURT ON 12 TH JANUARY,2017. 12 ,2017 SD/- SD/- ( . . / C.N. PRASAD ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 12.01.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR L BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.