Pioneer Overseas Corporation, V. ADIT, Circle-2(1),

ITA 1869/DEL/2005

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2403 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-12-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 1999-2000
• Appeal Filed On: 19-04-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P C YADAV ADVO; N P SAHNI SPECIAL
• Assessee Lawyers: S D KAPILA SHRI AJAY SOOD; R M MOURIC
• Keywords: Capital asset; Business income; Transfer pricing; Double taxation relief; Rule of consistency; Deemed to accrue or arise in india; Retrospective amendment; Permanent establishment; Advance ruling; Difference of opinion; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 5(2); 143(1); 250; 191; 64; 147; 148; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F: NEW DELHI BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER & SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NOS. 1868, 1869, 1870 & 1871/DEL/2005 ASSESSMENT YEARS: 1997-98, 1999-2000, 2000-01 & 2001-02 PIONEER OVERSEAS CORPORATION B-4. GREATER KAILASH ENCLAVE, PART II, NEW DELHI VS. DY./ASST. DIRECTOR OF INCOME TAX, CIRCLE 2(1), INTERNATIONAL TAXATION, NEW DELHI. PAN: AAACP 6547 N ITA NOS. 2289, 2290, 2291 & 2292/DEL/2005 ASSESSMENT YEARS: 1997-98, 1999-2000, 2000-01 & 200 1-02 ASSTT. DIRECTOR OF INCOME TAX, CIRCLE 2(1), INTERNATIONAL TAXATION, NEW DELHI. VS. PIONEER OVERSEAS CORPORATION B-4. GREATER KAILASH ENCLAVE, PART II, NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI S.D. KAPILA ADVOCATE SHRI AJAY SOOD, CA AND R. M. MOURIC, ADVOCATE. DEPARTMENT BY: SHRI N.P. SAHNI, SPECIAL COUNSEL AN D SHRI P.C. YADAV, ADVOCATE O R D E R PER: C.L. SETHI, J.M. ALL THESE APPEALS, FILED BY THE ASSESSEE AND THE R EVENUE, ARE DIRECTED AGAINST THE COMMON ORDER DATED 04.02.2005 PASSED BY THE LD. CIT(A), PERTAINING TO THE ASSESSMENT YEARS 1997-98, 1999-2000, 2000-01 AND 2001-02. 2. THESE APPEALS WERE HEARD ALONGWITH ITA NO. 4925/ DEL/2004 FILED BY THE ASSESSEE FOR THE A.Y. 1998-99 IN RESPECT OF WHICH A SEPARATE ORDER HAS ALREADY BEEN PASSED. 2 3. IN CONNECTION WITH THE AFORESAID APPEALS FILED B Y THE REVENUE, THE ASSESSEE HAD ALSO FILED CROSS OBJECTIONS NUMBERED A S C.O. NOS. 345 TO 348/DEL/2007, WHICH HAVE ALREADY BEEN DISPOSED OF B Y A SEPARATE ORDER PASSED BY US BY STATING THAT THE ISSUE RAISED IN TH E CROSS OBJECTIONS BEING SAME AND IDENTICAL TO THE ISSUES RAISED BY THE ASSE SSEE IN THE ABOVE REFERRED APPEALS FILED BY THE ASSESSEE, RENDERING T HE CROSS-OBJECTIONS AS REDUNDANT. ITA NO. 1868/DEL/2005 & 2289/DEL/2005, A.Y. 1997-98 4. WE SHALL FIRST TAKE THE APPEALS PERTAINING TO TH E A.Y. 1997-98. 5. IN APPEAL FILED BY THE ASSESSEE , GROUND NO 1(A) , 2, 3, 4 AND 5 ARE DIRECTED AGAINST THE LD. CIT(A)S ORDER IN HOLDING THAT THE AO HAS CORRECTLY AND RIGHTLY INITIATED PROCEEDINGS U/S. 14 7 OF THE INCOME TAX ACT, 1961 (THE ACT) 6. IN THIS YEAR, THE ASSESSEE FILED ITS RETURN OF I NCOME ON 05.12.1997 DECLARING TOTAL INCOME AT RS. NIL. THE RETURN OF I NCOME WAS PROCESSED U/S. 143(1) OF THE ACT. THEREAFTER, THE AO ISSUED NOTICE ON 11.01.2002 U/S. 148 OF THE ACT BY INITIATING PROCEEDINGS U/S. 147 OF THE ACT. IN RESPONSE TO NOTICE ISSUED U/S. 148 OF THE ACT, MR. AJAY KUMAR SOOD AND MR. K.K. SINGH, AUTHORIZED REPRESENTATIVE OF THE AS SESSEE ATTENDED AND APPEARED BEFORE THE AO AND SUBMITTED VARIOUS DETAIL S. AFTER HEARING AND CONSIDERING ALL MATERIALS ON RECORD, THE AO COMPLET ED THE ASSESSMENT ON 3 28.03.2003 DETERMINING THE TOTAL INCOME OF THE ASSE SSEE AT RS . 9,26,70,000/- U/S. 147/143(3) OF THE ACT. 7. BEING AGGRIEVED WITH THE AOS ORDER, THE ASSESSE E PREFERRED AN APPEAL BEFORE THE LEARNED CIT(A). 8. BEFORE THE LD. CIT(A), THE ASSESSEE HAD TAKEN A GROUND THAT THE INITIATION OF REASSESSMENT PROCEEDINGS U/S. 147 OF THE ACT AND ISSUE OF NOTICE U/S. 148 OF THE ACT WAS BAD IN LAW AND WITHO UT ANY JURISDICTION AS THE ASSESSMENT HAS BEEN RE-OPENED WITHOUT ANY FRESH MATERIAL OR INFORMATION HAVING COME TO LIGHT AND SPECIALLY WHEN THE ASSESSEE HAD DISCLOSED FULLY AND TRULY ALL MATERIAL FACTS NECESS ARY FOR THE ASSESSMENT. THE ASSESSEE SUBMITTED BEFORE THE LD. CIT(A) THAT R ESORTING TO THE PROVISIONS OF THE SECTION 147/148 BY THE AO WAS BAD IN LAW AND UNWARRANTED. THE ASSESSEE FURTHER CONTENDED BEFORE THE LD. CIT(A) THAT THE ASSESSEE SPECIFICALLY REQUESTED THE AO TO SUPPL Y THE REASONS RECORDED BY HIM FOR ENTERTAINING A BELIEF THAT INCOME HAD ES CAPED ASSESSMENT, IN ORDER TO ENABLE THE ASSESSEE TO FILE OBJECTIONS THE RE AGAINST, BUT SUCH REASONS WERE NEVER PROVIDED TO THE ASSESSEE DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. THE ASSESSEE, THEREFORE, C ONTENDED THAT NON- FURNISHING OF THE REASONS BY THE AO TO THE ASSESSEE MAKES IT CLEAR THAT NO REASONS WERE ACTUALLY RECORDED, AND NO REASONS WERE EXISTED AT THAT MATERIAL POINT OF TIME. THE ASSESSEE, THEREFORE, C ONTENDED THAT THE ASSESSEE HAS BEEN DENIED THE OPPORTUNITY TO FILE OB JECTIONS AGAINST THE 4 REASONS RECORDED BY THE AO. IN THIS RESPECT, THE ASSESSEE RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F GKN DRIVESHAFTS (INDIA) LTD. VS. ITO (2003) 259 ITR 19 (SC). 9. BEFORE THE LD. CIT(A), THE ASSESSEE ALSO SUBMITT ED THAT IN THE FIRST YEAR OF ASSESSMENT OF THE ASSESSEE I.E. THE A.Y. 19 93-94, THE ASSESSEE CASE WAS SELECTED FOR DETAILED SCRUTINY AND ASSESSEES S TAND THAT THE INCOME FROM CULTIVATING SEEDS WAS AGRICULTURAL INCOME, WAS ACCEPTED BY THE AO AND THIS POSITION CONTINUED TO REMAIN IN SUBSEQUENT ASSESSMENT YEARS UNTIL PRIOR THE ASSESSMENT YEAR 1998-99, WHEN THE A O HAD TAKEN A DIFFERENT VIEW THAN THE VIEW TAKEN IN THE ASSESSMEN T YEAR 1993-94. IT WAS, THEREFORE, SUBMITTED THAT THE REASSESSMENT PRO CEEDINGS INITIATED BY THE AO IN THE PRESENT ASSESSMENT YEAR 1997-98 IN T HE LIGHT OF HIS VIEW TAKEN IN A.Y. 1998-99, IS AGAINST THE RULE OF CONSI STENCY. HE, THEREFORE, SUBMITTED THAT THE REASSESSMENT MADE BY THE AO IS T O BE CANCELLED. 10. THE LD. CIT(A) IN PARA 2.3 OF HIS ORDER HAS STA TED THAT ON THE SPECIFIC REQUEST OF THE ASSESSEE, HE PERUSED THE AS SESSMENT RECORDS AND THE AO WAS ASKED TO SUBMIT THE COPY OF THE REASONS RECORDED U/S. 148 OF THE ACT. FROM PERUSAL OF THE RECORD, IT WAS FOUND BY THE LD. CIT(A) THAT THE AO HAS RECORDED THE PROPER REASONS BEFORE ISSUI NG THE NOTICE U/S. 148 OF THE ACT AND THE COPY OF THE REASONS WHICH WERE R ECORDED BY THE AO WAS DULY SUPPLIED TO THE ASSESSEE BY THE LD. CIT(A) . THE LD. CIT(A), 5 THEREFORE, STATED THAT REASONS WERE ACTUALLY AND DU LY RECORDED BY THE AO, WHICH WERE SUPPLIED TO THE ASSESSEE BY HIM. 11. HAVING RECEIVED THE COPY OF THE REASONS RECORDE D BY THE AO, THE ASSESSEE SUBMITTED A DETAILED REPLY STATING THAT BE SIDES THE ARGUMENTS ALREADY MADE, THE REASONS RECORDED BY THE AO WOULD INDICATE THAT THERE WAS NO FORMATION OF BELIEF THAT THE INCOME HAS ESCA PED ASSESSMENT AS THE REOPENING WAS MADE WITH A VIEW TO EXAMINE THE ISSUE AS CLEAR FROM THE REASONS GIVEN BY THE AO WHERE THE AO HAS MENTIONED THAT THE SAME ISSUE NEEDS TO BE EXAMINED THIS YEAR. 12. THE ASSESSEE ALSO SUBMITTED BEFORE THE LD. CIT( A) THAT THE REASONS RECORDED HAS CLEARLY ESTABLISHED THAT NO NEW FACTS CAME TO THE POSSESSION OF THE AO, AND THE AO HAD PROCEEDED SUMMARILY AND ARBITRARILY TO ISSUE NOTICE U/S. 148 MERELY BECAUSE HER PREDECESSOR FOR ANOTHER ASSESSMENT YEAR ASSESS THE INCOME OF THE ASSESSEE FROM PRODUCI NG THE SEEDS AS BUSINESS INCOME AS AGAINST AGRICULTURAL INCOME CLAI MED BY THE ASSESSEE. HE FURTHER ARGUED BEFORE THE LD. CIT(A) THAT THERE IS NO FINDING OF THE AO IN THE REASONS THAT INCOME OF THE ASSESSEE IS BUSIN ESS INCOME AND NOT AGRICULTURAL INCOME. HE FURTHER SUBMITTED BEFORE T HE LD. CIT(A) THAT JUST BECAUSE THE AO HAD HELD THAT IN A.Y. 1998-99 THAT I NCOME OF THE ASSESSEE IS BUSINESS INCOME AND NOT AGRICULTURAL INCOME, THA T BY ITSELF CANNOT BE A SUFFICIENT AND VALID REASON TO BELIEVE THAT INCOME HAD ESCAPED ASSESSMENT UNLESS THE REASONS CLEARLY STATES THAT FACTS DURING THIS YEAR WERE IDENTICAL 6 TO THAT OF A.Y. 1998-99 AND THE AO WAS ALSO OF THE VIEW ON THE FACTS OF THE CASE THAT THE IMPUGNED INCOME WAS NOT AGRICULTU RAL IN NATURE. IT WAS FURTHER SUBMITTED BEFORE THE LD. CIT(A) THAT MECHAN ICALLY ISSUING OF NOTICE U/S. 148 OF THE ACT BY THE AO FOR EXAMINING THE ISSUE AND MAKING ENQUIRY IS INDICATION OF BIAS, PREJUDICE AND COMPLE TE NON-APPLICATION OF MINE OF THE AO. IT WAS FURTHER SUBMITTED THAT REAS ONS RECORDED BY THE AO ALSO REVEALED THAT THE AO HAS NOT GIVEN ANY REAS ON AS TO HOW DECISION OF A.Y. 1998-99 IS APPLIES TO THE FACTS OF THE ASSE SSEES CASE FOR THE A.Y. 1997-98 AND, WHY DECISION FOR A.Y. 1993-94 TO 1996- 97 ON THE SAME FACTS ARE DISTINGUISHABLE OR ARE NOT TO BE CONSIDER ED. IT WAS, THEREFORE, ARGUED BY THE ASSESSEE BEFORE THE LD. CIT(A) THAT T HERE WAS ABSENCE OF A BONAFIDE GROUND OR MATERIAL FOR REASON TO BELIEVE T HAT INCOME HAD ESCAPED ASSESSMENT, AND THERE IS ALSO NOTHING IN TH E REASONS RECORDED BY THE AO TO INDICATE THAT ANY REAPPRAISAL OF THE EVID ENCE OR MATERIAL ARE MADE WHICH COULD JUSTIFY THE FORMATION OF BELIEF TH AT INCOME HAD ESCAPED ASSESSMENT BY WAY OF WRONGFUL CLAIM OF AGRICULTURAL INCOME BEING EXEMPTED U/S. 10(1) OF THE ACT. 13. AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES O F THE CASE, REASONS RECORDED BY THE AO AND THE SUBMISSIONS OF THE ASSES SEE, THE LD. CIT(A) HELD THAT PROCEEDINGS INITIATED BY THE AO U/S. 147 OF THE ACT AND ISSUING OF NOTICE U/S. 148 OF THE ACT ARE VALID BY OBSERVIN G AND HOLDING AS UNDER: I HAVE CONSIDERED THE DETAILED REPLY OF THE APPELLANT AND FACTS OF THE CASE CAREFULLY, I FIND T HAT THE 7 AO HAS PROPERLY RECORDED REASONS BEFORE ISSUE OF NOTICE U/S. 148 WHICH IS A PRIME CONDITION U/S. 148 FOR ISSUE OF NOTICE. THE ORDER OF GKN DRIVESHAFTS LTD. OF HONBLE SUPREME COURT IS DATED NOVEMBER 25, 2002 WHILE THE AO HAS RECORDED THE REASONS ON 8.1.2002 THAT IS MUCH BEFORE THE JUDGMENT OF HONBLE SUPREME COURT. IN SPITE OF THAT AS EXPLAINED BY HONBLE SUPREME COURT IN THE CASE OF GKN DRIVESHAFTS (INDIA ) LTD. THE REASONS WERE DULY SUPPLIED TO THE APPELLAN T AT THE APPELLATE STAGE WHICH CLEARLY SHOWED THAT REASO NS WERE RECORDED BY AO BEFORE ISSUING OF NOTICE U/S. 148. THE APPELLANTS ASSERTION THAT THE REASONS WERE NOT RECORDED BY THE AO ARE BASELESS. THE APPELLANT HA S RAISED HIS OBJECTIONS MAINLY ON THE FACTS THAT IN T HE A.Y. 1993-94 THE APPELLANTS CLAIM WAS ALLOWED UNDE R SCRUTINY AND THEREAFTER TILL 1997-98 THE APPELLANT S VIEW WAS ACCEPTED U/S. 143(1) OF THE IT ACT AND ONL Y WHEN IN A.Y. 1998-99 THE CASE WAS NOT EMPOWERED TO ISSUE NOTICE FOR THE A.Y. 1997-98 AND 1999-2000 AS IT AMOUNTS TO CHANGE OF OPINION AND THE RULE OF CONSISTENCY IS ALSO VIOLATED. I DO NOT FIND ANY ME RIT IN THE CONTENTIONS OF THE APPELLANT. ONLY THE ASSESSME NT FOR A.Y. 1993-94 WAS COMPLETED IN SCRUTINY AND THEREAFTER NO ASSESSMENT WAS COMPLETED UNDER SCRUTINY AND THE RETURNS WERE ACCEPTED U/S. 143(1) OF THE IT ACT MEANING THEREBY THAT THE AO HAD NOT APPLIED HIS MIND IN THE A.YS. 1994-95 TO 1997-98 AS ONLY INTIMATION WAS SENT TO THE APPELLANT. IN SENDING THE INTIMATION U/S. 143(1) NO OPINION IS FORMED BY THE AO. IT CANNOT BE SAID THAT THE AO HAD MADE OPINION AND THE SAME WAS CHANGED LATER ON WHILE REOPENING THE ASSESSMENT. IN A.Y. 1998-99 THE CASE WAS THOROUGHLY EXAMINED BY THE AO AND AFTER ANALYZING THE JUDGMENT OF THE HONBLE DELHI ITATIN THE CASE O F PROAGRO SEEDS CO. LTD. VS. JCIT (126 TAXMAN 37) AO REACHED TO THE CONCLUSION THAT APPELLANTS INCOME I S NOT AGRICULTURAL INCOME AND IS A BUSINESS INCOME. T HE JUDGMENT OF HONBLE ITAT IN THE CASE OF PRO AGRO WA S NOT AVAILABLE WHILE COMPLETING THE CASE FOR A.Y. 19 93- 94. THE PRINCIPLE OF RES-JUDICATA IS NOT APPLICABL E IN THE INCOME TAX PROCEEDINGS. THE AO ON THE BASIS OF ASSESSMENT ORDER FOR A.Y. 1998-99 WAS OF HE CLEAR OPINION THAT INCOME OF THE APPELLANT HAD ESCAPED ASSESSMENT AND SHE HAS CLEARLY WRITTEN IN THE REASO NS 8 THAT I THEREFORE HAVE REASONS TO BELIEVE THAT INCO ME EXCEEDING RS. 1 LAKH HAS ESCAPED TAX WHICH CLEARLY SHOWS THAT ON THE BASIS OF ASSESSMENT ORDER FOR A.Y . 1998-99 AO HAD MADE ITS CLEAR OPINION THAT APPELLANTS INCOME WAS NOT AGRICULTURAL INCOME AND THEREFORE ON THAT REASON THE INCOME HAD ESCAPED ASSESSMENT . THEREFORE, THE REASONS RECORDED BY THE AO ARE PERFECTLY JUSTIFIED TO REOPEN THE CASE. NEI THER THERE WAS ANY CHANGE OF OPINION NOR ANY RULE OF CONSISTENCY WAS VIOLATED BY THE AO. IT HAS BEEN HELD IN THE CASE OF PRAFUL CUNILAL PATEL : VASANT CHUNILAL PATE VS. ASST. CIT, (1999) 236 ITR 832, (GUJ.) THAT THE APPELLANT CANNOT DEFEND TH E INITIATION OF ACTION ON THE GROUND THAT THE FACTS W ERE ALREADY PLACED ON RECORD AND THE AO MUST HAVE OR OUGHT TO HAVE CONSIDERED THEM. EXPLANATION 1 TO SECTION 147 HAS A BEARING OR DISCLOSURE ASPECT AND IT APPLIED TO THE PROVISO TO SECTION 147 TO THE EXTENT IT ALLOWS INITIATION OF HT PROCEEDINGS U/S. 147 ON ACC OUNT OF NON-DISCLOSURE OF MATERIAL FACTS BY THE ASSESSEE . IT WAS FURTHER HELD THAT ON A PROPER INTERPRETATION OF SECTION 147, IT WOULD APPEAR THAT THE POWER TO MAKE ASSESSMENT OR REASSESSMENT, WHERE THE INITIATION HA S BEEN MADE WITHIN FOUR YEARS OF THE END OF THE RELEV ANT ASSESSMENT YEAR, WOULD BE ATTRACTED EVEN IN CASES WHERE THERE HAS BEEN A COMPLETE DISCLOSURE OF ALL RELEVANT FACTS UPON WHICH A CORRECT ASSESSMENT MIGH T HAVE BEEN BASED IN THE FIRST INSTANCE, AND WHETHER IT IS AN ERROR OF THE OR LAW THAT HAS BEEN DISCOVERED OR FOUND OUT JUSTIFYING THE BELIEF REQUIRED TO INITIAT E THE PROCEEDINGS. THUS, THE WORDS ESCAPED ASSESSMENT WHERE THE RETURN IS FILED, ARE APT TO COVER THE CAS E OR DUE TO ITS NON CONSIDERATION, OR, CAUSED BY A MISTA KE OF LAW APPLICABLE TO SUCH TRANSFER OR TRANSACTION E VEN WHERE THERE HAS BEEN A COMPLETE DISCLOSURE OF ALL RELEVANT FACTS UPON WHICH IS CORRECT ASSESSMENT COU LD HAVE BEEN BASED. EXPLANATION 2 TO SECTION 147 ALSO CLARIFIES THAT WHERE A RETURN OF INCOME HAS BEEN FURNISHED BY THE ASSESSEE BUT NO ASSESSMENT HAS BEEN MADE AND IT IS NOTIFIED BY THE AO THAT THE ASSESSEE HAS UNDERSTAND THE INCOME OR HAS CLAIMED EXCESSIVE LOSS , DEDUCTION , ALLOWANCE OR RELIEF IN THE RETURN , THE SAME WILL BE CONSIDERED AS A CASE OF DEEMED ESCAPEMENT OF 9 INCOME . FROM THE PERUSAL OF EXPLANATION 2 IT IS CLEAR THAT IT ENACTS CERTAIN DEEMING PROVISIONS WHERE, IN ANY OF THE CIRCUMSTANCES STATED ABOVE, INCOME IS DEEMED TO HAVE ESCAPED ASSESSMENT GIVING JURISDICTION TO THE AO TO ACT U/S. {VXL INDIA LTD. VS. ACIT, (1997) 215 ITR 295, 27 (GUJ.); BIRLA VXL LTD. VS. ACIT (1996) 217 ITR 1, 3 (GUJ.)} IN OTHER WORDS, IN THE AFORESTATED DEEMED CASES OF ESCAPEMENT OF INCOME, THE AO CAN INITIATE THE PROCEEDINGS ON FINDING OR DISCOVERING SUCH CASES AN D NO DEBATE WHETHER THEY CONSTITUTE CASES OF ESCAPEME NT OF INCOME WOULD BE PERMISSIBLE. THE APPELLANT HAD CLAIMED THE TOTAL INCOME AS EXEMPT WHICH WAS NOT AGRICULTURAL INCOME WHICH MEANS THE APPELLANT HAD UNDERSTAND THE INCOME AND HAS CLAIMED EXCESSIVE, ALLOWANCE OR RELIEF IN THE RETURN. 2.5 CONSIDERING THE ABOVE FACTS, ARGUMENTS AND LEGAL POSITION, IT IS CLEAR THAT THE AO HAD PRO PER REASON TO BELIEVE THAT THE INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT FOR BOTH THE ASSESSMENT YEAR S AND SHE HAS FOLLOWED THE PROPER PROCEDURE OF RECORDING THE PROPER REASONS FOR ISSUING THE NOTICE U/S. 148. IN REOPENING THE CASE NEITHER THERE WAS ANY CHANGE OF OPINION NOR THERE WAS ANY VIOLATION OF RU LE OF CONSISTENCY. THE REASONS WERE ONLY COMMUNICATED TO THE APPELLANT AT THE APPELLATE STAGE AND APPELLA NTS OBJECTIONS HAVE BEEN DULY CONSIDERED. THEREFORE, GROUND OF THE APPELLANT ON THE ISSUE OF NOTICE U/S. 148 FOR A.YS. 1997-98 & 1999-2000 ARE NOT JUSTIFIED AND THE PROCEEDINGS U/S. 148 ARE HELD TO BE VALID FOR B OTH THE YEARS. ACCORDINGLY THESE GROUNDS ARE DISMISSED . 14. BEFORE US, THE ASSESSEE HAS RAISED A GROUND BY CONTENDING THAT INITIATION OF RE-ASSESSMENT PROCEEDINGS U/S. 147 OF THE ACT AND ISSUANCE OF NOTICE U/S. 148 OF THE ACT ARE BAD IN LAW AND WITHO UT JURISDICTION. 15. THE LEARNED SR. COUNSEL FOR THE ASSESSEE, SHRI S.D. KAPITALA, ADVOCATE HAS SUBMITTED THAT THE FIRST SENTENCE IN T HE REASONS RECORDED BY THE AO TO THE EFFECT THAT THE ASSESSEE COMPANY IS I N THE BUSINESS OF 10 RESEARCH AND DEVELOPMENT OF PARENT SEEDS WHICH ARE SUPPLIED TO OTHER COMPANIES SUCH AS SPIC FOR DEVELOPMENT OF HYBRID SE EDS, WHICH ARE THEN USED BY FARMERS, IS FACTUALLY INCORRECT AND, IS NOT BORNE OUT FROM THE RECORD. HE SUBMITTED THAT R&D ACTIVITY CARRIED ON BY THE ASSESSEE, IF SUCCESSFUL, MAY RESULT IN DEVELOPMENT OF BREEDER SE EDS/FOUNDATION SEEDS, WHICH ARE THEN MULTIPLIED THROUGH ORDINARY AGRICULT URAL OPERATIONS TO OBTAIN SUFFICIENT QUANTITY OF PARENT SEEDS, WHICH A RE SUPPLIED TO PHI SEEDS LTD. (JOINT VENTURE OF THE ASSESSEE COMPANY) IN BULK QUANTITY. THE PHI SEEDS LTD., A JOINT VENTURE COMPANY, PRODUCES C OMMERCIAL HYBRID SEEDS BY USING PARENT SEEDS AS INPUT. HE FURTHER SUBMITTED THAT THE REASONS RECORDED BY THE AO DO NOT STATE THAT THE PR ESENT AO HAS AGREED WITH THE VIEW TAKEN BY THE AO IN THE ASSESSMENT FOR A.Y. 1998-99 BUT THE AO STATES THAT SHE NEED TO EXAMINE THE ISSUE. THE REASONS SO RECORDED BY THE AO DO NOT EVEN STATE THAT FACTS OF THE CASE IN THIS YEAR ARE SAME AS FOR THE A.Y. 1998-99 AND ARE NOT THE SAME AS TO THE FAC TS FOR A.Y. 1993-94. THEREFORE, NEED TO EXAMINE THE ISSUE WAS ONLY THE R EASONS STATED BY THE AO IN ENTERTAINING THE BELIEF THAT INCOME HAD ESCAP ED ASSESSMENT. HE FURTHER SUBMITTED THAT SINCE RECORDING OF REASONS F OR ISSUANCE OF NOTICE U/S. 148 OF THE ACT IS NOT A MERE FORMAL RITUAL, TH E ASSESSMENT PROCEEDINGS INITIATED BY THE AO U/S. 147 OF THE ACT, IN THE LIG HT OF THE REASONS RECORDED BY THE AO, IS NOT VALID. 11 16. LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE REASONS RECORDED BY THE AO DO NOT EXPRESS ANY VIEW OR OPINI ON ON THE ASSESSEES CLAIM OF EXEMPTION OF AGRICULTURAL INCOME U/S. 10(1 ) OF THE ACT AS THERE IS ABSOLUTELY NO ALLEGATION IN THE REASONS THAT THE AS SESSEE HAS NOT CARRIED OUT BASIC AGRICULTURAL OPERATIONS AND, THEREFORE, T HE CLAIM FOR EXEMPTION U/S. 10(1) WAS WRONG. HE, THEREFORE, SUBMIT AS THE REASONS DO NOT CONTAIN SUCH SATISFACTION, THE REOPENING IS INVALID. HE FU RTHER SUBMITTED THAT ASSESSMENT ORDER U/S. 143(3) FOR THE INITIAL A.Y. 1 993-94, WAS MADE AFTER DETAILED ENQUIRY, WHICH HAD BECOME FINAL AND, THERE FORE, IT IS CLEAR THAT AT THE TIME OF ISSUING THE NOTICE U/S. 148, THE AO HAD TWO CONTRADICTORY ORDERS I.E. ASSESSMENT ORDER FOR A.Y. 1993-94 WHERE ASSESSEES CLAIM WAS ACCEPTED AND THE ASSESSMENT ORDER FOR THE A.Y. 1998 -99 WHERE ASSESSEES CLAIM WAS REJECTED BY TAKING A DIFFERENT VIEW THAN THAT OF A.Y. 1993-94, AND THAT IS WHY THE AO FELT THE NEED TO MAKE THE FU RTHER ENQUIRY FOR WHICH PURPOSE A NOTICE U/S. 148 WAS ISSUED. 17. IT WAS FURTHER CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THERE WAS NO APPLICATION OF MIND BY THE AO WHILE RE -OPENING THE ASSESSMENT U/S. 147 OF THE ACT, AND THE LAST SENTEN CE OF THE REASONS RECORDED BY THE AO STATING THAT SHE HAD REASONS TO BELIEVE THAT INCOME HAD ESCAPED ASSESSMENT IS MERELY AN EMPTY VERBIAGE. HE FURTHER SUBMITTED THAT NEED TO EXAMINE THE ISSUE CANNOT SA ID TO BE A VALID REASON TO BELIEVE THAT INCOME HAD ESCAPED ASSESSMENT. IN THE THIS CONNECTION, 12 THE LD. COUNSEL FOR THE ASSESSEE HAS RELIED UPON NU MBER OF DECISION INCLUDING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ASST. CIT VS. RAJESH JHAVERY STOCK BROKERS PVT. LTD. (2007) 2 91 ITR 500 (SC) AND THE RECENT DECISION OF JURISDICTIONAL DELHI HIGH CO URT IN THE CASE OF JAI BHARAT MARUTI LTD. VS. CIT 223 CTR 269 (DELHI). 18. ON THE OTHER HAND, THE LD. STANDING COUNSEL FOR THE DEPARTMENT, SHRI N.P. SAHNI ASSISTED BY JR. STANDING COUNSEL SH RI PRAKASH CHANDRA YADAV HAS SUBMITTED THAT THE COPY OF REASONS RECORD ED BY THE AO HAVE ALREADY BEEN PROVIDED TO THE ASSESSEE BY THE LD. CI T(A), AND THE OBJECTIONS FILED BY THE ASSESSEE AGAINST THE REASON S RECORDED BY THE AO HAS ALSO BEEN DEALT WITH, CONSIDERED AND DECIDED UP ON BY THE LD. CIT(A). AT THE AOS STAGE, THE REASONS WERE MADE KNOWN TO T HE ASSESSEES AUTHORIZED REPRESENTATIVE, WHO HAD APPEARED FOR AND ON BEHALF OF THE ASSESSEE IN RESPONSE TO THE NOTICE ISSUED U/S. 148 BEFORE BY THE AO AND, THUS, THE COPY OF REASONS RECORDED WAS NOT SPECIFIC ALLY GIVEN TO THE ASSESSEE BY THE AO, WHICH HAS DOES NOT RENDER THE P ROCEEDINGS AS VOID AND INVALID. HOWEVER, THE SAME HAS SINCE BEEN GIVE N TO THE ASSESSEE BY THE LD. CIT(A) AND LD. CIT(A) HAS ALSO CONSIDERED T HE ASSESSEES OBJECTION. THEREFORE, FOR THIS REASON, REOPENING O F ASSESSMENT U/S. 147 BY THE AO CANNOT BE HELD TO BE INVALID. HE FURTHER SU BMITTED THAT HAVING REGARD TO THE REASONS RECORDED BY THE AO, IT IS CLE AR THAT THE REOPENING WAS DONE BY THE AO ON THE BASIS OF ASSESSMENT ORDER FOR THE A.Y. 1998- 13 99, WHERE ASSESSEES CLAIM OF PARENT SEEDS PRODUCED BY THE ASSESSEE AS AGRICULTURAL INCOME HAS BEEN REJECTED AFTER GIVING ELABORATE REASONS. HE FURTHER SUBMITTED THAT IN THE LIGHT OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ESS ESS KAY ENGINEERING PVT. L TD. VS. CIT (2001) 247 ITR 818 (SC), IT DOESNT PRECLUDES THE AO TO RE OPEN THE ASSESSMENT OF EARLIER YEAR ON THE BASIS OF FRESH MATERIAL FOUN D IN THE COURSE OF ASSESSMENT OF NEXT ASSESSMENT YEAR. THE ORDER OF T HE HONBLE SUPREME COURT IN THIS CASE RUNS AS UNDER:- THIS IS A CASE OF REOPENING. WE HAVE PERUSED THE DOCUMENTS. WE FIND THERE WAS MATERIAL ON THE BASIS OF WHICH THE INCOME-TAX OFFICER COULD PROCEED ED TO REOPEN THE CASE, IT IS NOT A CASE OF MERE CHANGE OF OPINION. WE ARE NOT INCLINED TO INTERFERE WITH THE DECISION OF THE HIGH COURT MERELY BECAUSE THE CASE OF THE ASSESSEE WAS ACCEPTED AS CORRECT IN THE ORIGINA L ASSESSMENT FOR THIS ASSESSMENT YEAR. IT DOES NOT PRECLUDE THE INCOME-TAX OFFICER TO REOPEN THE ASSESSMENT OF AN EARLIER YEAR ON THE BASIS OF HIS FINDINGS OF FACT MADE ON THE BASIS OF FRESH MATERIA LS IN THE COURSE OF ASSESSMENT OF THE NEXT ASSESSMENT YEA R. THIS APPEAL IS DISMISSED. NO ORDER AS TO COSTS. 19. THE LD. STANDING COUNSEL FOR THE DEPARTMENT FUR THER DREW OUR ATTENTION TO THE DECISION OF HONBLE GUJARAT HIGH C OURT IN THE CASE BHARAT V. PATEL VS. UNION OF INDIA 268 ITR 116 WHERE IT HA S BEEN HELD THAT MERE ACCEPTANCE OF RETURN AND ADJUSTMENT OF RETURN AGAIN ST THE EARLIER DEMAND U/S. 143(1)(A) IS NOT REGULAR ASSESSMENT AND, IN TH E LIBERALIZED AND SIMPLIFIED TAX COLLECTION REGIME, MERE ACCEPTANCE A ND ACKNOWLEDGMENT OF RETURN AND ISSUANCE OF REFUND CANNOT BE ELEVATED TO THE STATUS OF REGULAR 14 ASSESSMENT AND FORMATION OF OPINION ABOUT THE INCID ENCE OF TAX ON A PARTICULAR INCOME OR ITEM MENTIONED IN THE RETURN O F INCOME, AND, IN VIEW OF DEEMING FICTION PROVIDED IN THE EXPLANATION 2 TO SECTION 147 OF THE ACT IMPART, THE AO HAD JURISDICTION TO REOPEN THE ASSES SMENT. ACCORDING TO THE EXPLANATION TO CLAUSE (C) EVEN WHERE AN ASSESSM ENT IS MADE, BUT INCOME CHARGEABLE TO TAX HAS NOT BEEN CORRECTLY ASS ESSED, IT IS TO BE DEEMED THAT SUCH INCOME HAD ESCAPE ASSESSMENT. 20. THE LD. STANDING COUNSEL FOR THE REVENUE THEN H EAVILY RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F ASST. CIT VS. RAJESH JHAVERY STOCK BROKERS PVT. LTD. (SUPRA). HE FURTHER SUBMITTED THAT IN THE LIGHT OF THE FACT THAT THERE BEING NO REGULA R ASSESSMENT COMPLETED U/S. 143(3) AND THE RETURN OF INCOME FILED BY THE A SSESSEE WAS MERELY PROCESSED U/S. 143(1)(A), AND IN THE LIGHT OF THE F ACT THAT ASSESSEES CLAIM OF EXEMPTION OF AGRICULTURAL INCOME HAS BEEN REJECT ED BY THE AO IN THE A.Y. 1998-99, IT IS CLEAR THAT THE AO HAD RELEVANT AND SUFFICIENT MATERIAL BEFORE HER TO ENTERTAIN A BELIEF WITHIN THE MEANING OF SECTION 147 OF THE ACT THAT INCOME HAD ESCAPED ASSESSMENT WITH REGARD TO THE CLAIM OF THE ASSESSEE THAT THE INCOME FROM PRODUCING AND SALE OF HYBRID PARENT SEEDS IS EXEMPTED AS AGRICULTURAL INCOME. HE FURTHER SUB MITTED THAT THE INFORMATION THAT THE ASSESSEES CLAIM HAS BEEN REJE CTED IN THE A.Y 1998- 99 IS SUFFICIENT AND RELEVANT FOR ANY PRUDENTMENT T O FORM A REASONABLE BELIEF THAT INCOME HAD ESCAPED ASSESSMENT. HE, TH EREFORE, SUBMITTED THAT 15 THE LD. CIT(A) WAS VERY MUCH JUSTIFIED IN HOLDING T HAT PROCEEDINGS INITIATED BY THE AO U/S. 147 OF THE ACT ARE VALID A ND WITHIN JURISDICTION. 21. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE DELIBERAT ED UPON THE DECISIONS CITED BY BOTH THE PARTIES. 22. THE REASONS RECORDED BY THE AO ON 08.01.2002 FO R ISSUANCE OF NOTICE U/S. 148 FOR THE ASSESSMENT YEAR UNDER CONSI DERATION ARE AS UNDER: THE A CO. IS IN THE BUSINESS OF RESEARCH AND DEVELOPMENT OF PARENT SEEDS WHICH ARE SUPPLIED TO O THER COS. SUCH AS SPIC FOR DEVT. OF HYBRID SEEDS WHICH A RE THEN USED BY FARMERS. A CLAIMS THAT ITS INCOME I S AGRICULTURAL INCOME. HOWEVER, ASSESSING OFFICER HE LD IN A.Y. 98-99 THAT A INCOME IS BUSINESS INCOME AND N OT AGRICULTURAL INCOME. THE CASE IS IN APPEAL. THE SAME ISSUE NEEDS TO BE EXAMINED THIS YEAR ALSO (TURNOVER THIS YEAR IS RS. 47,4,91,000 NET PROFIT R S. 37,6,00,000). I THEREFORE HAVE REASON TO BELIE THAT INCOME OF MORE THAN RS. 1 LAKH HAS ESCAPED TAX. HENCE, THE C ASE IS FIT FOR REOPENING UNDER SECTION 147 OF THE I.T. ACT 1961. 23. IT IS NOT IN DISPUTE THAT THERE WAS NO REGULAR ASSESSMENT MADE BY THE AO IN PURSUANCE TO THE RETURN FILED BY THE ASSE SSEE BEFORE THE NOTICE U/S. 148 WAS ISSUED. THE RETURN OF INCOME FILED BY THE ASSESSEE WAS MERELY PROCESSED U/S. 143(1)(A) OF THE ACT. FROM T HE REASONS RECORDED BY THE AO, IT IS SEEN THAT THE AO HAS RECORDED OR HAD TAKEN IN THE ACCOUNT THE FOLLOWING FACTS FOR ENTERTAINING THE BELIEF THA T INCOME HAS ESCAPED ASSESSMENT WITHIN THE MEANING OF SECTION 147 OF THE ACT:- 16 (I) THAT ASSESSEE COMPANY IS IN THE BUSINESS OF RESEARCH AND DEVELOPMENT OF PARENT SEEDS, WHICH ARE SUPPLIED AND SOLD TO SPIC (JOINT VENTURE COMPANY) F OR DEVELOPMENT AND PRODUCTION OF HYBRID SEED, WHICH AR E THEN SOLD TO FARMERS BY JOINT VENTURE. (II) ASSESSEES CLAIM THAT ITS INCOME IS AGRICULTURAL INCOME. (III) HOWEVER, THE AO HELD IN A.Y. 1998-99 THAT ASSESSEES SAID INCOME IS BUSINESS INCOME AND NOT AGRICULTURAL INCOME, AND HENCE NOT EXEMPTED FROM TA X UNDER THE ACT. (IV) THE ASSESSMENT FOR ASSESSMENT ORDER 1998-99, WAS UNDER APPEAL. (V) THE SAME ISSUE ARISE IN A.Y. 1998-99 NEEDS TO BE EXAMINED IN THE YEAR UNDER CONSIDERATION ALSO. (VI) THE AO HAS ALSO MENTIONED ABOUT THE AMOUNT OF TURNOVER OF RS. 474,91,000/- AND, THE NET PROFIT OF RS. 3,76,00,000/- OF THE YEAR UNDER CONSIDERATION. (VII) THE AO, THEREFORE, STATED THAT SHE HAD REASON TO BELIEVE THAT INCOME OF MORE THAN RS. 1,00,000/- HAD ESCAPED ASSESSMENT. 17 (VIII) THE AO FOUND THE CASE FIT FOR REOPENING U/S. 147 OF THE ACT. 24. FROM READING AS A WHOLE THE AFORESAID FACTS NAR RATED BY THE AO IN THE REASONS RECORDED FOR ISSUING NOTICE U/S. 148 OF THE ACT, IT IS CLEAR THAT THE ASSESSEES CLAIM THAT INCOME FROM SALE OF HYBRI D PARENT SEEDS WAS AGRICULTURAL INCOME HAS BEEN REJECTED BY THE AO IN THE REGULAR ASSESSMENT MADE FOR THE A.Y. 1998-99 BY HOLDING THAT ASSESSEE S INCOME IS BUSINESS INCOME AND NOT AGRICULTURAL INCOME. IN OTHER WORDS , THE FINDING ARRIVED AND RECORDED IN THE ASSESSMENT ORDER FOR A.Y. 1998- 99 HAS BEEN LOOKED INTO AND PERUSED BY THE AO, AND HE THEN FOUND THAT THE ASSESSEES CLAIM HAS BEEN REJECTED IN A.Y. 1998-99 TREATING THE INCO ME SHOWN BY THE ASSESSEE AS BUSINESS INCOME CHARGEABLE TO TAX. IN THE ASSESSMENT ORDER FOR A.Y. 1998-99, THE AO HAS GIVEN A FINDING THAT T HE ACTIVITY OF DOING RESEARCH AND PRODUCTION OF PARENT SEEDS ARE SAME, A ND THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF RESEARCH AND DEVELOPMENT OF PARENT SEEDS. THE OBSERVATION NOTED BY THE AO IN THE REASONS TO T HE EFFECT THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF RESEARCH AND DEVELOPMENT OF PARENT SEEDS WHICH ARE SUPPLIED TO OTHER COMPANIES SUCH AS SPIC FOR DEVELOPMENT OF HYBRID SEEDS IS THE INFERENCES OF LA W DRAWN BY THE AO FROM THE FACTS FOUND AND DISCUSSED IN THE A.Y. 1998 -99. THEREFORE, THIS OBSERVATION MADE BY THE AO IN THE REASONS CANNOT SA ID TO BE IRRELEVANT FOR THE PURPOSE OF FORMING AN OPINION OR BELIEF THA T INCOME HAD ESCAPED 18 ASSESSMENT WITHIN THE MEANING OF SECTION 147 OF THE ACT, IN AS MUCH AS FOR THE REASONS GIVEN BY THE AO, THE ASSESSEES CLA IM OF AGRICULTURAL INCOME HAS NOT BEEN ACCEPTED BY THE AO IN THE A.Y. 1998-99. THEREFORE, THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE FIRST STATEMENT OF THE REASONS RECORDED IS INCORRECT AND IRRELEVANT HA S NO MERIT. 25. IN THE REASONS, THE AO HAS STATED IN BRIEF THE ACTIVITY OF THE ASSESSEE OF DEVELOPING AND PRODUCING PARENT SEEDS, WHICH ARE SUPPLIES TO SPIC FOR DEVELOPMENT OF HYBRID SEEDS, WHICH ARE THE N USED BY FARMERS AND THIS OBSERVATION OF THE AO IN THE BACKGROUND OF DECISIONS TAKEN IN THE ASSESSMENT ORDER FOR THE A.Y. 1998-99 MAKES IT VERY CLEAR THAT OVER ALL ACTIVITIES OF THE ASSESSEE IN PRODUCING AND SUP PLYING PARENT SEEDS HAVE BEEN TAKEN INTO ACCOUNT BY THE AO, WHILE RECORDING REASONS FOR ISSUANCE OF NOTICE U/S. 148 OF THE ACT. 26. FURTHER, THE AO HAD ALSO TAKEN NOT OF THE AMOUN T OF TURNOVER AS WELL AS THE NET PROFIT SHOWN BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION, WHICH GOES TO SHOW THAT AO HAS LOOKE D INTO STATEMENT OF ACCOUNT FILED BY THE ASSESSEE ALNGWITH THE RETURN O F INCOME. HAVING REGARD TO THE AMOUNT INVOLVED, WHICH HAS BEEN CLAIM ED BY THE ASSESSEE AS EXEMPTED, THE AO, THEREFORE, STATED THAT HE HAD REA SONS TO BELIEVE THAT INCOME OF MORE THAN RS. 1,00,000/- HAD ESCAPED ASSE SSMENT. THIS BELIEF OF THE AO CANNOT SAID TO BE MERELY EMPTY VERBIAGE A S CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE IN AS MUCH AS THIS BEL IEF HAS BEEN RECORDED BY 19 THE AO AFTER CONSIDERING THE NATURE OF THE ACTIVITY CARRIED ON BY THE ASSESSEE, THE AMOUNT OF THE PROFIT AND TURNOVER INV OLVED IN THE PRESENT ASSESSMENT YEAR. THEREFORE, IT WOULD BE WRONG TO S AY THAT THE REASONS RECORDED BY THE AO STATING THAT SHE HAD REASON TO B ELIEVE THAT INCOME OF MORE THAN RS. 1,00,000/- HAS ESCAPED TAX IS MERELY EMPTY VERBIAGE. THE AO ALSO CONCLUDED IN THE REASONS THAT THIS CASE WAS FIT FOR REOPENING U/S. 147 OF THE ACT. 27. THEREFORE, IN THE LIGHT OF ALL THE FACTS TAKEN TOGETHER AS NARRATED BY THE AO IN THE REASONS, IT IS TO BE CONSIDERED AS TO WHETHER THE REASONS RECORDED BY THE AO ARE SUFFICIENT FOR ANY PRUDENTME NT TO ENTERTAIN A BELIEF THAT INCOME HAD ESCAPED ASSESSMENT WITHIN TH E MEANING OF SECTION 147 OF THE ACT. IN THIS CONNECTION, VARIOUS DECISI ONS HAVE BEEN RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS BY THE LD. STANDING COUNSEL FOR THE DEPARTMENT. IT IS IMPORTANT TO NOT E THAT BOTH THE PARTIES HAVE RELIED UPON THE DECISION OF HONBLE SUPREME CO URT IN THE CASE OF ASST. CIT VS. RAJESH JHAVERY STOCK BROKERS PVT. LTD . (SUPRA), WHICH IS THE LAW OF THE LAND AND HAS A BINDING EFFECT AND HA S TO PREVAIL OVER ALL OTHER DECISIONS OF HIGH COURTS OR TRIBUNAL. WE, TH EREFORE, CONSIDER IT SUFFICE TO REFER TO THE DECISION OF HONBLE SUPREME COURT IN THE ABOVE REFERRED CASE OF ASST. CIT VS. RAJESH JHAVERY STOCK BROKERS PVT. LTD. (SUPRA) TO DECIDE WHETHER THE REOPENING OF ASSESSME NT U/S. 147 BY THE AO 20 IN THE INSTANT CASE IS JUSTIFIED HAVING REGARD TO T HE RATIO OR PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN THE ABOVE REFE RRED CASE. 28. THE HONBLE SUPREME COURT IN THE CASE OF ASST. CIT VS. RAJESH JHAVERY STOCK BROKERS PVT. LTD. (SUPRA) HAS OBSERVE D AND HELD AS UNDER:- SECTION 147 AUTHORIZES AND PERMITS THE ASSESSING OFFICER TO ASSESS OR REASSESS INCOME CHARGEABLE TO TAX IF HE HAS REASON TO BELIEVE THAT INCOME FOR ASSESSMENT YEAR HAS ESCAPED ASSESSMENT. THE WORD REASON IN THE PHRASE REASON TO BELIEVE WOULD MEAN CAUSE OR JUSTIFICATION. IF THE ASSESSIN G OFFICER HAS CAUSE OR JUSTIFICATION TO KNOW OR SUPPO SE THAT INCOME HAS ESCAPED ASSESSMENT, IT CAN BE SAID TO HAVE REASON TO BELIEVE THAT AN INCOME HAD ESCAPED ASSESSMENT. THE EXPRESSION CANNOT BE READ TO MEAN THAT THE ASSESSING OFFICER SHOULD HAVE FINALLY ASCERTAINED THE FACT BY LEGAL EVIDENCE OR CONCLUSIO N. THE FUNCTION OF THE ASSESSING OFFICER IS TO ADMINIS TER THE STATUTE WITH SOLICITUDE FOR THE PUBLIC EXCHEQUE R WITH AN INBUILT IDEA OF FAIRNESS TO TAXPAYERS. AS OBSERVED BY THE SUPREME COURT IN CENTRAL PROVINCES MANGANESE ORE CO. LTD. VS. ITO [1991] 191 ITR 662, FOR INITIATION OF ACTION U/S. 147 (A) (AS THE PROVI SION STOOD AT THE RELEVANT TIME) FULFILLMENT OF THE TWO REQUISITE CONDITIONS IN THAT REGARD IS ESSENTIAL. AT THAT STAGE, THE FINAL OUTCOME OF THE PROCEEDINGS IS NOT RELEVANT. IN OTHER WORDS, AT THE INITIATION STAGE, WHAT IS REQUIRED IS REASON TO BELIEVE, BUT NOT THE ESTABLISHED FACT OF ESCAPEMENT OF INCOME. AT THE S TAGE OF ISSUE OF NOTICE, THE ONLY ISSUE WHETHER THERE WA S RELEVANT MATERIAL ON WHICH A REASONABLE PERSON COUL D HAVE FORMED A REQUISITE BELIEF. WHETHER THE MATERI AL WOULD CONCLUSIVELY PROVE THE ESCAPEMENT IS NOT THE CONCERN AT THAT STAGE. THIS IS SO BECAUSE THE FORMATION OF BELIEF BY THE ASSESSING OFFICER IS WIT HIN THE REALM OF SUBJECTIVE SATISFACTION (SEE ITO VS. SELECTED DALURBAND COAL CO. P. LTD. [1996] 217 ITR 597 (SC); RAYMOND WOOLLEN MILLS LTD. VS. ITO [1999] 236 ITR 34 (SC). 21 THE SCOPE AND EFFECT OF SECTION 147 AS SUBSTITUTED WITH EFFECT FROM APRIL 1, 1989, AS ALSO SECTIONS 148 TO 152 ARE SUBSTANTIALLY DIFFERENT FRO M THE PROVISIONS AS THEY STOOD PRIOR TO SUCH SUBSTITUTION . UNDER THE OLD PROVISIONS OF SECTION 147, SEPARATE CLAUSES (A) AND (B) LAID DOWN THE CIRCUMSTANCES UND ER WHICH INCOME ESCAPING ASSESSMENT FOR THE PAST ASSESSMENT FOR THE PAST ASSESSMENT YEARS COULD BE ASSESSED OR REASSESSED. TO CONFER JURISDICTION UND ER SECTION 147(A) TWO CONDITIONS WERE REQUIRED TO BE SATISFIED: FIRSTLY THE ASSESSING OFFICER MUST HAVE REASON TO BELIEVE THAT INCOME, PROFITS OR GAINS CHARGEABLE TO INCOME TAX HAVE ESCAPED ASSESSMENT, AND SECONDLY HE MUST ALSO HAVE TO INCOME TAX HAVE ESCAPED ASSESSMENT, AND SECONDLY HE MUST ALSO GAVE REASON TO BELIEVE THAT SUCH ESCAPEMENT HAS OCCURRED BY REASON OF EITHER OMISSION OR FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY OR TRULY ALL MATERIA L FACTS NECESSARY FOR HIS ASSESSMENT OF THAT YEAR. BOTH TH ESE CONDITIONS WERE CONDITIONS PRECEDENT TO BE SATISFIE D BEFORE THE ASSESSING OFFICER COULD HAVE JURISDICTIO N TO ISSUE NOTICE UNDER SECTION 148 READ WITH SECTION 147(A). BUT UNDER THE SUBSTITUTED SECTION 147 EXISTENCE OF ONLY THE FIRST CONDITION SUFFICES. IN OTHER WORDS, IF THE ASSESSING OFFICER FOR WHATEVER REASON HAS REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT IT CONFERS JURISDICTION TO REOPEN THE ASSESSMENT. IT IS, HOWEVER, TO BE NOTED THAT BOTH THE CONDITIONS MUST BE FULFILLED IF THE CASE FALLS WITH IN THE AMBIT OF THE PROVISO TO SECTION 147. THE CASE AT H AND IS COVERED BY THE MAIN PROVISION AND NOT PROVISO. SO LONG AS THE INGREDIENT OF SECTION 147 ARE FULFILLED, THE ASSESSING OFFICER IS FREE TO INITIAT E PROCEEDINGS UNDER SECTION 147 AND FAILURE TO TAKE STEPS UNDER SECTION 143(3 )WILL NOT RENDER THE ASSESSING OFFICER POWERLESS TO INITIATE RE-ASSESSME NT PROCEEDINGS EVEN WHEN THE INTIMATION UNDER SECTION 143(1) HAD BEEN ISSUED 29. FROM THE SAID DECISION OF HONBLE SUPREME COURT , IT BECOMES CLEAR TO US THAT IF THE A.O. HAS CAUSE OR JUSTIFICATION T O KNOW OR SUPPOSE THAT 22 INCOME HAS ESCAPED ASSESSMENT, IT CAN BE SAID TO HA VE REASON TO BELIEVE THAT AN INCOME HAD ESCAPED ASSESSMENT. AT THE TIME OF RECORDING REASONS FOR INITIATING PROCEEDINGS U/S. 147 OF THE ACT, IT IS NOT NECESSARY THAT THE ASSESSING OFFICER SHOULD HAVE FINALLY ASCERTAINED T HE FACT BY LEGAL EVIDENCE OR CONCLUSION. AT THAT INITIAL STAGE, WHA T IS REQUIRED IS REASON TO BELIEVE BUT NO ESTABLISHED FACT OF ESCAPEMENT O F INCOME. AT THE STAGE OF ISSUE OF NOTICE, THE ONLY QUESTION IS WHETHER TH ERE WAS RELEVANT MATERIAL ON WHICH A REASONABLE PERSON COULD HAVE FO RMED A REQUISITE BELIEF. WHETHER THE MATERIALS WOULD CONCLUSIVELY P ROVE THE ESCAPEMENT IS NOT THE CONCERN AT THAT STAGE. THIS IS SO BECAU SE THE FORMATION OF BELIEF BY THE ASSESSING OFFICER IS WITHIN THE REALM OF SUB JECTIVE SATISFACTION. 30. IN THE LIGHT OF THE AFORESAID POSITION OF LAW L AID DOWN BY THE HONBLE SUPREME COURT WITH REGARD TO THE SCOPE AND EFFECT OF SECTION 147 AND WITH REGARD TO THE MEANING OF EXPRESSION REASO N TO BELIEVE USED IN SECTION 147 OF THE ACT, WE HAVE TO EXAMINE AND ANAL YZE THE FACT OF THE PRESENT CASE TO DECIDE AS TO WHETHER THE ASSESSING OFFICER HAD ANY RELEVANT MATERIAL ON WHICH A REASONABLE PERSON COUL D HAVE FORMED A REQUISITE BELIEF I.E. REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT WITHIN THE MEANING OF SECTION 147 OF THE ACT. 31. FROM THE SAID DECISION, IT IS CLEAR THAT AT THE STAGE OF ISSUING NOTICE U/S. 148 OF THE ACT, THE ONLY QUESTION THAT ARISES FOR CONSIDERATION IS WHETHER THERE WAS RELEVANT MATERIAL ON WHICH A REAS ONABLE PERSON COULD 23 HAVE FORMED THE REQUISITE BELIEF, AND MATERIALS WOU LD CONCUSSIVELY PROVE THE ESCAPEMENT OF INCOME IS NOT THE CONCERN AT THAT STAGE. THIS IS SO BECAUSE THE FORMATION OF BELIEF BY THE ASSESSING OF FICER IS WITHIN THE REALM OF SUBJECTIVE SATISFACTION, AND IT IS NOT NEC ESSARY THAT AT THE TIME OF RECORDING REASON U/S. 148 OF THE ACT, THE AO SHOULD HAVE FINALLY ASCERTAINED THE FACT BY LEGAL EVIDENCE OR CONCLUSIO N. AT THE INITIAL STAGE WHAT IS REQUIRED IS REASON TO BELIEVE AND NOT EST ABLISHED FACT OF ESCAPEMENT OF INCOME. THEREFORE, IN THE LIGHT OF T HIS DECISION, WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE LEARNED COU NSEL FOR THE ASSESSEE THAT AO SHOULD HAVE FINALLY GIVEN A FINDING THAT TH E ASSESSEES INCOME IS NOT AGRICULTURAL INCOME BUT IS A BUSINESS INCOME, A ND THE ASSESSMENT ORDER OF A.Y. 1993-94 MUST HAVE BEEN TAKEN INTO ACC OUNT BY THE AO WHILE ENTERTAINING A BELIEF THAT INCOME HAD ESCAPED ASSESSMENT AT THE TIME WHEN THE NOTICE U/S. 148 WAS ISSUED. IT IS FU RTHER CLEAR FROM THE AFORESAID DECISION THAT INTIMATION ISSUED U/S. 143( 1) IS NOT AN ASSESSMENT AND AT THE STAGE OF ISSUING THE INTIMATION U/S. 143 (1), IT COULD NOT BE SAID THAT AO HAD FORMED ANY OPINION ABOUT THE INCIDENCE OF TAX ON A PARTICULAR CLAIM OR ITEM MENTIONED IN THE RETURN OF INCOME. T HEREFORE, THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THIS IS A CASE OF CHANGE OF OPINION ON THE PART OF THE AO, IS ALSO NOT TENAB LE, AND WE REJECT THE SAID CONTENTION SAME IS THUS REJECTED. 24 32. SINCE THE COPY OF REASONS RECORDED BY THE AO WE RE PROVIDED BY THE LD. CIT(A) TO THE ASSESSEE AND, THE ASSESSEE HAD AV AILED THE OPPORTUNITY TO FILE OBJECTIONS AGAINST THE REASONS SO RECORDED, AND THE ASSESSEES OBJECTIONS HAS BEEN CONSIDERED BY THE LD. CIT(A), WE DO NOT FIND ANY MERIT IN CONTENTION OF THE ASSESSEE THAT PROCEEDING S INITIATED U/S. 147 OF THE ACT ARE TO BE HELD AS INVALID MERELY BECAUSE CO PY OF REASONS WERE NOT SPECIFICALLY PROVIDED BY THE AO TO THE ASSESSEE AT THE ASSESSMENT STAGE THOUGH THE REASONS WERE DULY MADE KNOWN TO THE ASSE SSEES AUTHORIZED REPRESENTATIVE BY THE AO. 33. IN THE AFORESAID CASE OF RAJESH JHAVERY STOCK B ROKERS PVT. LTD., THE HONBLE SUPREME COURT HAS CATEGORICALLY STATED THAT ONLY ISSUE IS TO BE CONSIDERED IS TO SEE WHETHER THERE WAS RELEVANT MAT ERIAL ON WHICH A REASONABLE PERSON COULD HAVE FORMED A REQUISITE BEL IEF THAT INCOME HAS ESCAPED ASSESSMENT WITHIN THE MEANING OF SECTION 14 7 OF THE ACT. THE FACT THAT THE ASSESSEES CLAIM THAT ITS INCOME IS A GRICULTURAL INCOME HAS NOT BEEN ACCEPTED IN THE REGULAR ASSESSMENT MADE U/ S. 143(3) FOR THE A.Y. 1998-99, WHERE THE MATTER WAS THOROUGHLY ANALYSED A ND DISCUSSED AND THE AO HELD THAT THE ASSESSEES CLAIM OF AGRICULTUR AL INCOME IS INCORRECT, IS UNDOUBTEDLY A RELEVANT MATERIAL ON WHICH REASONA BLE PERSON COULD HAVE FORMED A REQUISITE BELIEF REQUIRED U/S. 147 OF THE ACT. THE HONBLE SUPREME COURT IN THE CASE OF ESS ESS KAY ENGINEERIN G PVT. LTD. VS. CIT (SUPRA) HAS CATEGORICALLY HELD THAT REOPENING OF TH E ASSESSMENT U/S. 147 25 ON THE BASIS OF FINDING OF FACTS MADE ON THE FRESH MATERIAL OBTAINED IN THE COURSE OF ASSESSMENT FOR THE NEXT ASSESSMENT YEAR I S JUSTIFIED. IN THE PRESENT CASE, THE AO HAS TAKEN INTO CONSIDERATION T HE FINDING OF FACTS ON THE BASIS OF THE MATERIAL OBTAINED IN THE COURSE OF ASSESSMENT FOR THE A.Y. 1998-99 THAT INCOME FROM PARENT SEEDS IS NOT AN AGR ICULTURAL INCOME BUT A BUSINESS INCOME. IN THIS VIEW OF THE MATTER, WE, T HEREFORE, HOLD WHERE THERE WERE RELEVANT MATERIAL STATED IN REASONS RECO RDED BY THE AO TO ENTERTAIN A BELIEF THAT INCOME HAD ESCAPED ASSESSME NT U/S. 147 OF THE ACT IN AS MUCH AS ASSESSEES CLAIM THAT ITS INCOME IS A GRICULTURAL INCOME IS NOT JUSTIFIED IN THE LIGHT OF THE VIEW TAKEN IN THE ASSESSMENT FOR A.Y. 1998-99. FURTHER, THE WORDS USED BY THE AO IN THE REASONS RECORDED THE SAME ISSUE NEEDS TO BE EXAMINED THIS YEAR ALSO CAN NOT BE READ IN ISOLATION BUT HAVE TO BE READ TOGETHER WITH ALL THE FACTS NARRATED BY THE AO IN THE REASONS RECORDED FOR ISSUING THE NOTICE U/S. 148 OF THE ACT. THE OBSERVATION CATEGORICALLY MADE BY THE AO ARE THAT A SSESSEES TURNOVER IS RS 4,74,91,000/- AND NET PROFIT SHOWN IS RS. 3,76,0 0,000/- AND ASSESSEE IS IN THE BUSINESS OF RESEARCH AND DEVELOPMENT OF PARE NT SEEDS, AND ASSESSEES CLAIM THAT ITS AGRICULTURAL INCOME HAS N OT BEEN ACCEPTED IN THE ASSESSMENT YEAR 1998-99 TAKEN TOGETHER WOULD LEAD T O THE CONCLUSION THAT THE AD-HOC REASON TO BELIEVE THAT INCOME OF MORE TH AN RS. 1,00,000/- HAD ESCAPED ASSESSMENT, AND THE CASE WAS FIT FOR REOPEN ING U/S. 148. THESE FACTS NOTED BY THE AO ARE VERY MUCH SUFFICIENT AND RELEVANT TO ENTERTAIN A 26 BELIEF THAT INCOME HAD ESCAPE ASSESSMENT WITHIN THE MEANING OF SECTION 147 OF THE ACT. 34. THE VIEW WE HAVE TAKEN ABOVE IS FULLY SUPPORTED BY THE PROPOSITIONS LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF RAJESH JHAVERY STOCK BROKERS PVT. LTD. AND BY THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF ESS ESS KAY ENGINEERIN G CO. PVT. LTD. VS. CIT HAVING REGARD TO THE FACTS OF THE PRESENT CASE AND THE LIGHT OF THE REASONS RECORDED BY THE AO. THEREFORE, WE DO FIND ANY FURTHER NECESSITY TO REFER TO THE VARIOUS OTHER DECISIONS OF HIGH COU RTS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE. IN THE SAID DECISION OF HONBLE SUPREME COURT IN THE CASE OF RAJESH JHAVERY STOCK BROKERS P VT. LTD. (SUPRA) RENDERED IN THE CONTEXT OF NEW PROVISIONS OF SECTIO N OF 147 INSERTED W.E.F. 01.04.1989 THE PRINCIPLE LAID DOWN BY THE HONBLE S UPREME COURT IN EARLIER CASES HAS BEEN THOROUGHLY ANALYSED AND DELI BERATED UPON BY THE HONBLE SUPREME COURT 35. FOR THE REASONS GIVEN ABOVE, WE, THEREFORE, UPH OLD THE DECISION OF LD. CIT(A) IN HOLDING THAT THE REOPENING OF THE ASS ESSMENT U/S. 147 AND ISSUANCE OF NOTICE U/S. 148 BY THE AO IN YEAR UNDER CONSIDERATION IS JUSTIFIED AND ARE VALID. THUS, THE GROUND NO. 1(A) , 2 TO 5 RAISED BY THE ASSESSEE ARE REJECTED, AND THE ISSUE INVOLVED THERE IN IS DECIDED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. 27 36. NOW WE SHALL COME TO THE GROUND NOS. 1(B) AND 7 TO 15 REVOLVING AROUND THE ISSUE AS TO WHETHER THE ASSESSEES INCOM E FROM SALE OF ALLEGED PARENT SEEDS IS AGRICULTURAL INCOME OR BUSINESS INC OME. 37. THIS ISSUE HAS BEEN DECIDED BY THE LD. CIT(A) A GAINST THE ASSESSEE IN THE LIGHT OF HIS ORDER DATED 08.09.2004 FOR THE A.Y. 1998-99, WHERE THE ISSUE HAS BEEN ELABORATELY DISCUSSED AND DECIDED UP ON. THE LD. CIT(A) HAS REJECTED THESE GROUNDS RAISED BY THE ASSESSEE B Y OBSERVING AS UNDER: 3. AS PER VARIOUS GROUND THE APPELLANT FOR ALL THE FOUR YEARS HAS MENTIONED THAT THE AO HAS ERRED IN LAW IN BRINGING TO TAX THE AGRICULTURAL INCOME O F THE APPELLANT AS BUSINESS INCOME BY WRONGLY DISALLOWING THE APPELLANTS CLAIM FOR EXEMPTION U/S. 10(1) READ WITH SECTION 2(1A) OF THE IT ACT. THE AO HAS ERRED IN WRONGLY INTERPRETING AND APPLYING THE PROVISIONS OF SECTION 10(1) READ WITH SECTION 2(1A) OF THE IT ACT . THE APPELLANT HAS GIVEN DETAILED ARGUMENTS WHICH AR E SAME ARGUMENTS AS WERE GIVEN IN A.Y. 1998-99. 3.1 THIS ISSUE HAS BEEN ELABORATELY DISCUSSED IN MY ORDER FOR THE A.Y. 1998-99 DT. 8.9.2004 IN APPEAL NO. 60/01-02 IN THE APPELLANTS OWN CASE. AFTER CONSIDERING ALL THE SUBMISSIONS OF THE APPELL ANT AND FACTS OF THE CASE, I HAVE HELD IN THE AFORESAID ORDER THAT THE APPELLANT WAS NOT CARRYING ON AGRICULTURAL ACTIVITIES WITHIN THE MEANING OF SECTI ON 2(1A) AND, THEREFORE, AO WAS JUSTIFIED IN TREATING THE INCOME OF THE APPELLANT AS BUSINESS INCOME. AS DURING THESE FOUR YEARS, THE FACTS ARE ENTIRELY SIM ILAR, FOLLOWING THE SAME ORDER, I HOLD THAT THE AO WAS JUSTIFIED IN TREATING THE INCOME OF THE APPELLANT F ROM SALE OF SEEDS AS BUSINESS INCOME AND NOT AN AGRICULTURAL INCOME. THEREFORE, GROUNDS OF THE APPELLANT RELATING TO THIS INCOME ARE HEREBY DISMISSED. 38. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. 28 39. IN THE COURSE OF HEARING OF THIS APPEAL, IT WAS SUBMITTED BY BOTH THE PARTIES THAT THIS ISSUE IS ALSO INVOLVED IN A.Y. 19 98-99, ALSO AND THE LEADING ORDER ON THE IDENTICAL ISSUE CONFIRMING THE AOS ORDER, HAS BEEN PASSED BY THE LD. CIT(A) IN THE A.Y. 1998-99. THE APPEAL FILED BY THE ASSESSEE IN THE A.Y. 1998-99 INVOLVING THE IDENTICA L ISSUE WAS HEARD ALONGWITH ALL THESE PRESENT APPEALS, AND AN ORDER P ERTAINING TO THE A.Y. 1998-99 HAS BEEN SEPARATELY PASSED BY US WHERE WE H AVE UPHOLD THE ORDER OF THE LD. CIT(A) IN PART IN CONFIRMING THE A OS ACTION IN TREATING THE INCOME FROM SALE OF PARENT SEEDS AS BUSINESS IN COME. IN THE ASSESSMENT YEAR 1998-99, WE HAVE TAKEN A VIEW THAT TEN PERCENT OF TOTAL INCOME FROM PRODUCING AND SALE OF PARENT HYBRID SEE DS IS TO BE CONSIDERED OR RECORDED AS AGRICULTURAL INCOME AND T HE BALANCE IS TO BE ASSESSED AS BUSINESS INCOME LIABLE TO BE TAXED UNDE R THE ACT. THEREFORE, IN THE LIGHT OF OUR DECISION DATED 30.11.2009 FOR T HE A.Y. 1998-99, WHICH WOULD BE APPLICABLE TO THE PRESENT ASSESSMENT YEARS ALSO, THE GROUND NO. 7 TO 15 RAISED BY THE ASSESSEE STAND DECIDED ACCORDIN GLY. 40. NOW, WE COME TO THE NEXT ISSUE WHICH HAS BEEN R AISED BY THE ASSESSEE IN GROUND NOS. 1(C) AND 19 TO 19 READING A S UNDER:- THAT THE ACTION OF THE COMMISSIONER OF INCOME TAX (APPEALS) XXIX CONTRAVENES THE RULE OF CONSISTENCY AND THE PROVISIONS OF ARTICLE 7 OF THE CONVENTION FOR AVOID ANCE OF DOUBLE TAXATION (DTA) ENTERED INTO BETWEEN INDIA AN D THE UNITED STATES OF AMERICA. THAT, THE COMMISSIONER OF INCOME TAX (APPEALS) XXIX ERRED IN ARBITRARILY CONFIRMING 50% OF ADDITIO N OF RS. 8,41,96,000/- MADE BY THE LEARNED ASSESSING OFFICER BY 29 ATTRIBUTING, ON AN ESTIMATED, ARBITRARY AND AD-HOC BASIS, BUSINESS INCOME OF THE HEAD OFFICE TO THE INDIA BRA NCH OFFICE BY REASON OF THE PROBABLE/ ALLEGED USE OF TH E RESEARCH INFORMATION AND DATA PLACED IN A COMMON POOL BY THE HEAD OFFICE/ BRANCH OFFICES OF THE APPELLANT. THAT, ON THE FACTS OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) XXIX ERRED IN NOT CORRECTLY AP PLYING THE PROVISIONS OF ARTICLE 7 OF THE CONVENTION FOR A VOIDANCE OF DOUBLE TAXATION (DTA) ENTERED INTO BETWEEN INDIA AND THE UNITED STATES OF AMERICA. THAT, THE COMMISSIONER OF INCOME TAX (APPEALS) XXIX ERRED IN ARBITRARILY DISREGARDING CATEGORICAL INFORMATION AND EVIDENCE REGARDING INCOME OF THE HE AD OFFICE OF THE APPELLANT FILED BY THE APPELLANT IN R ESPONSE TO SPECIFIC QUERY/ DIRECTIONS OF THE COMMISSIONER OF I NCOME TAX APPEALS XXIX AND HOLDING THAT: A. THE APPELLANT HAS SIMPLY MENTIONED THAT IT HAS NOT EARNED ANY INCOME OF ANY NATURE FROM SALE OF RESEARCH ACTIVITIES PER SE CARRIED IN INDIA. BUT T HE USE OF RESEARCH ACTIVITIES CARRIED OUT IN INDIA AT OTHE R BO OR HO AND TO PRODUCE SEEDS AT OTHER PLACES BY USE O F THIS RESEARCH IS NOT RULED OUT WHICH HAS ALSO NOT B EEN DENIED BY THE APPELLANT. B. THE ACTUAL UTILIZATION OF THE RESEARCH CARRIED IN INDIA AND INCOME GENERATED OUT OF PRODUCTION/ SALE OF SEE DS OF VARIOUS CROPS BY USE OF THIS RESEARCH WAS NOT SUBMITTED BY THE APPELLANT. C. THE BASIS OF ESTIMATION OF INCOME ADOPTED BY THE A O IS JUSTIFIED IN ABSENCE OF ANY OTHER DETAILS PROVID ED BY THE APPELLANT. 41. CONNECTING TO THE GROUND NOS. 16 TO 19 RAISED B Y THE ASSESSEE, THE DEPARTMENT HAS ALSO RAISED ONE SOLITARY GROUND IN T HE APPEAL FILED BY THE REVENUE, WHICH READS AS UNDER: ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, TH E LEARNED LD. CIT(A) HAS ERRED IN DIRECTING THE AO TO TAKE ONLY 50% OF THE TOTAL INCOME FROM UTILIZATION OF RESEARC H DATA/FINDINGS TO BE ATTRIBUTABLE TO INDIA WITHOUT G IVING ANY BASIS FOR SUCH ATTRIBUTION AND WITHOUT REFERRING TO ANY MATERIAL ON RECORD. 30 42. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSEE WAS ASKED BY THE AO VIDE ORDER-SHEET ENTRY DATED 26.03.2003 TO G IVE DETAILS REGARDING UTILIZATION OF RESEARCH DATA/FINDINGS DEVELOPED IN INDIAN BRANCH OFFICE, BY THE H.O. IN THE OTHER PART OF THE WORLD. FURTHER, THE ASSESSEE WAS ASKED TO GIVE DETAILS OF THE AMOUNTS EARNED BY THE HO BY UTI LIZING RESEARCH DATA/INFORMATIONS OR RESULTS PROVIDED BY BRANCH OFF ICE AND TO EXPLANATION AS TO WHY IN THE ABSENCE OF THESE DETAILS, THE CONS IDERATION OR AMOUNT FOR SUCH UTILIZATION BE NOT ESTIMATED ON REASONABLE BAS IS BY TREATING SUCH INCOME AS ATTRIBUTABLE TO OPERATIONS CARRIED OUT IN INDIA. THE AO HAD MENTIONED IN HIS ASSESSMENT ORDER THAT THE ASSESSEE VIDE LETTER DATED 24.03.2003 HAD STATED THAT THE EXPENSES WERE INCURR ED FOR SCIENTIFIC AGRICULTURAL RESEARCH AND, IN THE EVENT, THE ASSESS EES INCOME FROM RESEARCH ACTIVITY IS TO BE TAXED AS BUSINESS INCOME , THE ENTIRE SCIENTIFIC AGRICULTURAL RESEARCH EXPENSES MAY BE ALLOWED U/S. 35 OF THE ACT. HOWEVER, LATER ON, THE ASSESSEE VIDE ITS REPLY DATE D 28.03.2003 HAD WITHDRAWN THIS CLAIM OF DEDUCTION OF RESEARCH EXPEN SES U/S. 35 OF THE ACT. THE ASSESSEES REPLY DATED 28.03.03 IN RESPON SE TO THE QUERY RAISED BY THE AO VIDE ORDER SHEET ENTRY DATED 26.03.03 REA DS AS UNDER AS REPRODUCED BY THE LD. CIT(A) IN HIS ORDER: POOL OF INFORMATION COLLECTED FROM RESEARCH UNITS OF ALL BRANCHES AT THE HEAD OFFICE IS SHARED AMONGST ALL BRANCHES. THIS INFORMATION INCLUDES CURRENT AND ARCHIVED INFORMATION. IT MAY BE NOTED THAT THE HO HAS A LIBRARY OF RESEARCH INFORMATION GOING BACK TO 1926 AND ALL INFORMATION IS FREELY 31 AVAILABLE FOR REFERENCING AT AL TIME TO THE INDIAN RESEARCH UNIT. THIS INFORMATION IS CATALOGUED AND MAY BE REFERENCED FOR FURTHER RESEARCH AND DEVELOPMENT. IN SUCH A WORK ENVIRONMENT, NO SPECIF IC INFORMATION IS AVAILABLE REGARDING THE UTILIZATION OF THE RESEARCH DATA BY THE HEAD OFFICE IN OTHER PARTS OF THE WORLD OF REGARDING ANY AMOUNT EARNED BY THE HO BY UTILIZING THE RESEARCH/SEEDS IN OTHER PARTS OF T HE WORLD. IT IS THEREFORE NOT POSSIBLE TO QUANTIFY OR ASSIGN ANY VALUE IN ANY MANNER TO THE INFORMATION EXCHANGED BETWEEN THE HO AND THE RU. 43. THE ASSESSEE FURTHER STATED BEFORE THE AO THAT ARTICLE 7(3) OF THE INDO-US DTAA PROVIDES THAT NO ESTIMATE OF ATTRIBUTA BLE PROFITS SHALL BE MADE IN RESPECT OF THE INFORMATION THAT IS SHARE BI LATERALLY BETWEEN THE H.O. AND THE PE, AND BECAUSE OF THE FACT THAT THE R ESEARCH EXPENSES INCURRED BY THE INDIAN BRANCH HAS BEEN FULLY REIMBU RSED BY THE HO, THE ASSESSEE WOULD NOT CLAIM THE SAME AS DEDUCTION FROM THE INCOME OF THE INDIAN BRANCH, AND, ACCORDINGLY THE ASSESSEE HAS AL READY WITHDRAWN SUCH CLAIM. 44. FURTHER, THE AO HAS OBSERVED IN HIS ASSESSMENT ORDER AS UNDER:- FROM ABOVE IT IS CLEAR THAT THE ASSESSEE HAS NOT FURNISHED THE DETAIL OF UTILIZATION OF RESEARCH INFORMATION OBTAINED BY HEAD OFFICE FROM ITS BRANCH OFFICE AND IS UTILIZED WORLD OVER, NOR IT HAS FURNI SHED HOW MUCH INCOME HAS BEEN EARNED BY THE HEAD OFFICE THERE FROM. AS NARRATED IN DETAIL IN THE PRECEDING PARAGRAPHS, THESE ACTIVITIES ARE CARRIED OUT IN IND IAN BRANCH OFFICE BUT THE BENEFITS ARE REAPED OUT SIDE INDIA. NO INCOME FROM UTILIZATION OF THESE INFORMATION HAS BEEN SHOWN OR ATTRIBUTATED TO THE ACCOUNT OF INDIAN BRANCH OFFICE. IN FACT, THE COMPANY EARNED HUGE PR OFIT FROM THESE ACTIVITIES CARRIED OUT THROUGH ITS BRANC HS ALL OVER THE WORLD. THEREFORE, THE PAYMENTS HAVE BEEN RECEIVED BY THE LEAD HEAD OFFICE FROM ITS VARIOUS 32 BRANCHES ABROAD. IN CASE OF A MULTINATIONAL COMPAN Y THEY HAVE THE BENEFITS THAT THEY RECEIVE PAYMENTS S OME WHERE, WHEREAS THE ACTUAL ACTIVITY IS CARRIED OUT S OME WHERE ELSE. IN THE INSTANT CASE, ALL THE RESEARCH WORK IS CARRIED OUT IN INDIA, THE RESEARCH INFORMATION IS M ADE AVAILABLE TO THE HEAD OFFICE FOR SIMULTANEOUS UTILI ZATION BY THE HO AND ITS BRANCH OFFICES ALL OVER THE WORLD . 45. THEREAFTER, THE AO REFERRED TO ARTICLE 7 OF IND O-US DTAA AND DECIDED THIS ISSUE AS UNDER:- FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE ARGU MENT BASED ON THE LAST SENTENCE OF ARTICLE 7(3) OF THE D TAA REGARDING PROFIT DETERMINATION IN SUCH SITUATION IN THE HAND OF PE IS NOT APPLICABLE IN THIS CASE. IT IS BECAU SE THIS SENTENCE MENTION ABOUT CHARGES OF INCOME OF THE NAT URE OF ROYALTY, FEES OR OTHER SIMILAR PAYMENTS IN RETURN FOR THE USE OF PATENT KNOW-HOW OR OTHER RIGHTS, OR BY WAY O F COMMISSION OR OTHER CHARGES FOR SPECIFIC SERVICES P ERFORM OR FOR MANAGEMENT. ON THE CONTRARY, THE INCOME BE ING REFERRED TO HERE IS NOT ANY OF THESE INCOME MENTION ED IN ARTICLE 7(2) OF DTAA IT PERMITS ATTRIBUTATION OF PR OFIT TO THE PE ASSUMING IT TO BE DISTINCT AND INDEPENDENT ENTER PRISES VIS--VIS THE HO AND OTHER ENTERPRISES OF HO. FURT HER, SINCE THE ASSESSEE HAS FAILED TO PROVED THE DETAILS OF THE RESEARCH INFORMATION UTILIZED BY HO AND OTHER BRANC HES ABROAD AND NO QUANTIFICATION OF INCOME EARNED THERE FROM IS MADE. ARTICLE 7(2) HAS BEEN RELIED UPON ONCE AGAIN FOR ESTIMATION OF PROFIT ATTRIBUTABLE TO PE. IN ORDER TO ESTIMATE THE DEEMED INCOME ATTRIBUTABLE TO PE, IT IS ASSUMED THAT THE INCOME FROM UTILIZATION OF RESEARCH INFORMATION WOULD BE IN THE SAME RATIO W.R .T. RESEARCH EXPENSES, AS GROSS SALE TO GROSS EXPENSES RELATING TO THE PRODUCTION OF SEEDS IN INDIA. ACCORDINGLY, THE INCOME ATTRIBUTABLE TO THE BRANCH OFFICE IN THIS A. Y. IS ESTIMATED AS UNDER:- INCOME FROM UTILIZATION OF RESEARCH DATA WHICH IS ATTRIBUTED TO BRANCH OFFICE: =(SALE/NET PRODUCTION EXPENSES)*(RESEARCH EXPE NSES) =RS.(47,491,000/13,402,000)*(21,651,000)=RS. 7,67,2 1,000 HOWEVER, FROM THE ESTIMATED INCOME ATTRIBUTABLE TO PE AS ARRIVED ABOVE, THE EXPENSE RELATING TO RESEARCH EXPENSES 33 WHICH HAS BEEN REIMBURSED BY THE HO IS ALLOWED FOR DEDUCTION TO ARRIVE AT THE NET PROFIT FROM SUCH ATT RIBUTION, DESPITE THE CLAIM BY THE ASSESSEE TO THE CONTRARY. 46. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPE AL BEFORE THE LD. CIT(A). 47. THE ASSESSEES SUBMISSIONS AND ARGUMENTS MADE B EFORE THE LD. CIT(A) ON THIS ISSUE HAS BEEN REPRODUCED BY THE LD. CIT(A) IN PARA 4.2 OF HIS ORDER. THE ASSESSEE OBJECTED TO THE ADDITIO NS MADE BY THE AO FOR THREE REASONS: - I. THE RESEARCH UNIT IN INDIA IS NOT A PERMANENT ESTAB LISHMENT (PE) FALLING UNDER THE EXCLUSIONARY CLAUSE OF ARTIC LE 5(3)(E) OF THE INDO-US DOUBLE TAX AVOIDANCE TREATY. II. WITHOUT PREJUDICE, THE ASSESSING OFFICER HAS WRONGL Y APPLIED THE PROVISIONS OF ARTICLE 7(2) READS WITH A RTICLE 7(3) BY ATTRIBUTING PROFITS TO THE HEAD OFFICE ON PRO-RA TA BASIS. III. WITHOUT PREJUDICE, THE ASSESSING OFFICER HAS WRONGL Y REJECTED THE CLAIM THAT ANY INCOME ATTRIBUTABLE FOR SERVICES RENDERED BY THE PE TO THE HEAD OFFICE IS EXEMPT UND ER ART. 7(3) OF THE TREATY. 48. THE FIRST CONTENTION OF THE ASSESSEE THAT RESEA RCH UNIT OF THE ASSESSEE IN INDIA IS SEPARATE AND INDEPENDENT TO TH E PARENT SEEDS 34 PRODUCTION UNIT, AND, THEREFORE, IT DOESNT CONSTIT UTE A PE IN TERMS OF ARTICLE 5 OF THE INDO-US TREATY HAS NOT BEEN ACCEPT ED BY THE LD. CIT(A). 49. THE OTHER CONTENTIONS OF THE ASSESSEE WERE ALSO REJECTED BY THE LD. CIT(A) BY HOLDING AS UNDER:- I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND FACTS OF THE CASE CAREFULLY. THIS IS A FACT THAT THE APPELLANT HAD ITS BO IN INDIA WHICH I S CARRYING ON THE RESEARCH ACTIVITIES AS WELL AS SALE OF SEEDS. BOTH THE ACTIVITIES OF THE APPELLANT ARE IN TER- LINKED AND INTERDEPENDENT. THEREFORE THE APPELLANT IS CARRYING ON ITS BUSINESS IN INDIA THROUGH ITS BO WH ICH IS PE OF THE APPELLANT IN INDIA. IT HAS ALSO BEEN ACCEPTED BY THE APPELLANT THAT ITS RESEARCH ACTIVIT IES ARE BEING POOLED AT HO AND THEY ARE ACCESSIBLE TO A LL OTHER BRANCHES AS WELL AS HO OF THE APPELLANT COMPANY. THE APPELLANTS ACTIVITIES ARE TOO FOLD T HAT IS CONDUCTING THE RESEARCH AND UTILIZATION OF RESEA RCH IN PREPARATION OF PARENT/HYBRID SEEDS OF HIGH QUALI TY OF VARIOUS CROPS AND SALE THEREOF. THEREFORE, THE RESEARCH IS INTERWOVEN WITH THE ACTIVITIES OF THE S ALE OF HYBRID SEEDS FOR COMMERCIAL EXPLOITATION. RESEARCH ACTIVITY IS NOT THE SOLE ACTIVITY OF THE PE IN INDI A. THE APPELLANT IS CARRYING THE COMMERCIAL RESEARCH WHICH FRUCTIFIES IN PREPARATION & SALE OF PARENT HYBRID SEEDS. THE RESEARCH CONDUCTED BY THE APPELLANT IS MAIN CORE ACTIVITY WHICH IS COMMERCIALLY EXPLOITED BY THE APPELLANT BY SELLING OF HYBRID/PARENT SEEDS. T HIS ACTIVITY BY NO STRETCH OF IMAGINATION CAN BE TREATE D AS AUXILIARY OR PREPARATORY ACTIVITIES IN THE APPELLAN TS CASE. THE RESEARCH ACTIVITY CARRIED ON BY THE APPELLANT AT THE BRANCH OFFICE (PE) IN INDIA ITSELF FORMS AN ESSENTIAL AND SIGNIFICANT PART OF THE ACTI VITY OF THE ENTERPRISE AS A WHOLE. THE RESEARCH ACTIVIT IES ARE INTERRELATED, COORDINATED, INTERDEPENDENT AND INTERWOVEN WITH THE PREPARATION AND SALE OF HYBRID SEEDS. IN ANY CASE, A FIXED PLACE OF BUSINESS WHOS E GENERAL PURPOSE IS ONE WHICH IS IDENTICAL TO THE GENERAL PURPOSE OF THE WHOLE ENTERPRISE DOES NOT EXERCISE A PREPARATORY OR AUXILIARY ACTIVITY. ACCORDINGLY THE APPELLANTS CASE IS NOT COVERED IN 35 ARTICLES 5(3)(E) OF THE DTAA. THE APPELLANT IS INVESTING LOT OF MONEY IN INDIA FOR CONDUCTING THES E RESEARCH WHICH ARE BEING UTILIZED NOT ONLY IN INDIA BUT AT OTHER PLACES ALSO. THE AO HAS ALSO MENTIONED IN HIS SUBMISSION THAT CONTENTION OF THE ASSESSEE THAT THE APPELLANT IS NOT EARNING ANY INCOME FROM THE RESEAR CH CARRIED OUT IN INDIA IS TOTALLY INCORRECT. THE APPELLANTS ARGUMENTS THAT IT HAD TWO PE IS TOTALLY MISLEADING AND BEYOND ANY LEGAL COMPREHENSION. THE APPELLANT HAS ITS BRANCH OFFICE IN INDIA WHICH IS CARRYING ON TWO ACTIVITIES NAMELY RESEARCH ACTIVITI ES AND PRODUCTION AND SELL OF PARENT AND HYBRID SEEDS. THE APPELLANT ITSELF IN HIS REPLY TO AO VIDE SUBMIS SION DT. 28.03.03 STATED THAT THE APPELLANT HAD ONE PE WHICH IS CARRYING ON TWO ACTIVITIES. THEREFORE IT IS UNDISPUTED FACT THAT THE APPELLANT HAD PE IN INDIA IN THE FORM OF BRANCH OFFICE WHICH IS CARRYING ON RESEARCH ACTIVITIES AND IS ALSO INVOLVED IN PREPARA TION AND SALE OF PARENT SEEDS. AS PER REPORT OF AO, FROM THE WEBSITE OF THE APPELLANT IT IS ALSO CLEAR THAT THE APPELLANT WAS T HE FIRST TO COMMERCIALIZE RICE HYBRIDS IN INDIA, WITH THE 1993 RELEASE OF PHB 31. THE MAJOR HYBRID, PIONEER SELL TODAY IS PHB71, RELEASED IN 1995. THE COMPANY ALSO MARKETS AND SELLS HYBRID OF IMPROVED VARIETIES OF SORGHUM, SUNFLOWER, SOYBEAN, ALFALFA, CANOLA AND WHEAT AS WELL AS FORAGE AND GRAIN ADDITIVES. IT HA S BEEN MENTIONED BY THE APPELLANT ON THE WEBSITE THAT WORLDWIDE, PIONEER SELLS PRODUCTS THROUGH A VARIETY OF ORGANIZATIONS, INCLUDING WHOLLY OWNED SUBSIDIARIES, JOINT VENTURES, SALES REPRESENTATIVES , AND INDEPENDENT DEALERS. THEREFORE THE INCOME OF THE P E IS TO BE TAXED IN INDIA AS PER PROVISIONS OF ARTICL E 7 OF THE DTAA. ALL OVER THE WORLD THE APPELLANTS BUSIN ESS COMPRISES OF CONDUCTING THE RESEARCH AND UTILIZATIO N OF THE SAME IN PREPARATION OF SEEDS AND SALES THERE OF. THE SAME BUSINESS MODEL IS IN INDIAN PE. THE HO HAS REIMBURSED ONLY THE COST OF EXPENSES INCURRED I N INDIA. NO MARK UP PRICE WAS PAID BY HO. THE APPELLANTS ARGUMENTS THAT APPELLANTS INCOME FROM RESEARCH ACTIVITIES IS NOT LIABLE TO BE TAXED IN V IEW OF THE PROVISION OF ARTICLE 7(3) IS ALSO NOT JUSTIFIED AS THE ARTICLE 7(3) SPECIFIES ONLY THE PAYMENT LIKE FTS OR ROYALTY OR SERVICES OF SIMILAR NATURE WHILE IN THE 36 APPELLANTS CASE THE RESEARCH IS COMMERCIAL BUSINES S ACTIVITY OF THE APPELLANT. THEREFORE APPELLANTS ARGUMENTS ON THIS BASIS IS NOT JUSTIFIED. THE APPE LLANT HAS ALSO MENTIONED THAT IN A.Y. 1993-94 AND EARLIER YEARS NO INCOME WAS ATTRIBUTED TO THE PE ON ACCOUNT OF RESEARCH AND THEREFORE IN THESE YEARS WHICH ARE UNDER APPEAL NO INCOME IS LIABLE TO BE ADDED. THIS ARGUMENT IS ALSO UNSUSTAINABLE AS IN EARLIER YEARS THIS ISSUE HAS NOT BEEN DISCUSSED BY THE AO AND THE PRINCIPLE OF RES-JUDICATA IS NOT APPLICABLE. THE APPELLANT HAS SIMPLY MENTIONED THAT IT HAS NOT EARNED OF ANY NATURE FROM SALE OF RESEARCH ACTIVITIES PER SE CARRIED IN INDIA. BUT THE USE OF RESEARCH ACTIVITIES CARRIED OUT IN INDIA, AT OTHER BO OR HO AND TO PRODUCE SEEDS AT OTHER PLACES BY THE USE OF THIS RESEARCH IS NOT RULED OUT WHICH HAS ALSO NOT B EEN DENIED BY THE APPELLANT. THE APPELLANT HAS ADMITTE D THAT RESEARCH CARRIED OUT IS ACCESSIBLE TO ANY BO O R HO. THE APPELLANT HAS ALSO ADMITTED THAT THERE IS POOL OF RESEARCH AT HO WHICH IS USED BY ALL BO. TH E VARIOUS CROPS BY USE OF THIS RESEARCH WAS NOT SUBMITTED BY THE APPELLANT. THEREFORE, KEEPING RELIANCE ON THE PROVISIONS OF ARTICLE 7(2) OF DTAA THE INCOME HAS TO BE ESTIMATED ON THE REASONABLE BASIS AS THERE ARE EXCEPTIONAL DIFFICULTIES IN DETERMINATION OF THE PROFITS ATTRIBUTABLE TO PE ON ACCOUNT OF UTILIZ ATION OF EXPENDITURE ON RESEARCH ACTIVITIES AND EXPENDITU RE ON PRODUCTION ON TOTAL SALES. THE BASIS OF ESTIMAT ION OF INCOME ADOPTED BY THE AO IS JUSTIFIED IN ABSENCE OF ANY OTHER DETAILS PROVIDED BY THE APPELLANT. HOWEV ER, AS PER THE PROVISIONS OF ARTICLE 7(5) OF DTAA ONLY THAT MUCH PROFIT CAN BE ATTRIBUTED TO THE PE AS DERIVED FROM THE ASSETS AND ACTIVITIES OF THE PE IN INDIA. IN THE APPELLANTS CASE THE INCOME IS GENERATED ONLY WHEN THE SEEDS PREPARED ON THE BASIS OF RESEARCH AR E SOLD. THE INCOME FROM SALE OF SEED IN INDIA HAS BE EN TAXED SEPARATELY. WHEN THE INCOME IS GENERATED OUTSIDE INDIA OR HO BY USE OF RESEARCH CARRIED OUT IN INDIA, THEN ALL THE ACTIVITIES ARE NOT TAKING PLACE IN INDIA. THE PREPARATION OF SEEDS AND ITS SALE HAS T AKEN PLACE OUTSIDE INDIA. THEREFORE, ONLY THE PROFIT WH ICH IS ATTRIBUTABLE TO ACTIVITIES I.E. RESEARCH WILL BE TAXABLE IN INDIA. CONSIDERING THESE FACTS AND CIRCUMSTANCES AND LEGAL POSITION ONLY 50% OF INCOME 37 ESTIMATED BY AO CAN BE CONFIRMED. THEREFORE, THESE GROUNDS ARE PARTLY ALLOWED. 50. STILL AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFO RE US. 51. THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OU TSET HAS SUBMITTED THAT THIS ITEM ABOUT APPORTIONMENT OF HO INCOME TO INDIAN OPERATIONS CANNOT BE CONSIDERED IN THE PRESENT ASSESSMENT IN A S MUCH AS WHILE REOPENING THE PRESENT ASSESSMENT U/S. 147 OF THE AC T, THE AO HAS NOT RECORDED ANY REASON TO ENTERTAIN A BELIEF THAT INCO ME EARNED BY THE HO IS ATTRIBUTABLE TO OPERATIONS CARRIED OUT IN INDIA AND IS ASSESSABLE IN INDIA. HE, THEREFORE, CONTENDED THAT IN SO FAR A THIS ADDI TION OF ALLEGED ATTRIBUTION OF PROFITS TO THE PE IN INDIA IS CONCER NED, THE ISSUANCE OF NOTICE U/S. 148 AND THE ASSESSMENT MADE CONSEQUENTL Y IS ILLEGAL AND INVALID. IN THIS CONNECTION, THE LD. COUNSEL FOR T HE ASSESSEE HAS RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN TH E CASE OF JAI BHARAT MARUTI LTD. VS. CIT (SUPRA). HE FURTHER SUBMITTED THAT THERE IS NO DISPUTE TO THE FACT THAT THERE IS NOT EVEN A WHISPER OR MEN TION OF ANY ESCAPEMENT OF INCOME ON ACCOUNT OF ATTRIBUTION OF PROFITS TO T HE INDIAN PE IN THE REASONS RECORDED FOR THE ISSUANCE OF NOTICE U/S. 14 8 OF THE ACT AND, HENCE, IN THE LIGHT OF THE DECISION OF THE HONBLE DELHI H IGH COURT IN THE CASE OF JAI BHARAT MARUTI LTD. VS. CIT (SUPRA), THIS INCOME CANNOT BE ADDED IN THE IMPUGNED ASSESSMENT EVEN IT IS HELD THAT SOME A TTRIBUTION OF INCOME CAN BE MADE UNDER THE ARTICLE 7(3) OF DTAA BETWEEN INDIA AND USA. 38 52. IN SO FAR AS THIS PRELIMINARY CONTENTION RAISED BY THE LD. COUNSEL FOR THE ASSESSEE IS CONCERNED, THE LD. STANDING COUNSEL FOR THE DEPARTMENT HAS SUBMITTED THAT THE ISSUE WITH REGARD TO THE ATT RIBUTION OF HO PROFIT TO PE IN INDIA IS CLOSELY OR DIRECTLY CONNECTED OR REL ATED TO THE ITEM WHETHER THE INCOME FROM PRODUCTION OF PARENT SEEDS IS AGRIC ULTURAL INCOME OR NOT, WHICH WAS MADE THE REASONS FOR INITIATING PROCEEDIN GS U/S. 147 OF THE ACT BY THE AO. THE ISSUE WHETHER THE RESEARCH ACTIVITY OF THE ASSESSEE IS INDEPENDENT AND DISTINCT FROM THE ACTIVITY OF PRODU CING PARENT SEEDS IS A VITAL ISSUE WHILE DECIDING THE BASIC ISSUE AS TO WH ETHER INCOME FROM PARENT SEEDS IS AGRICULTURAL INCOME OR NOT. THEREF ORE, THE RESEARCH UNDERTAKEN BY THE ASSESSEE TO DEVELOP OR PRODUCING BREEDER OR HYBRID SEEDS IS UNDOUBTEDLY CLOSELY CONNECTED TO THE VERY BASIC ISSUE ABOUT THE TAXABILITY OF INCOME FROM SALE OF PARENT SEEDS, AND , THUS, THE ISSUE ABOUT THE APPORTIONMENT OF PROFIT TO PE IN INDIA BECAUSE OF USE OF RESEARCH ACTIVITY CARRIED OUT IN INDIA BY HO IS CLOSELY CONN ECTED OR RELATED TO THE ISSUE IN RESPECT OF WHICH THE AO HAS RECORDED THE R EASONS FOR ISSUING NOTICE U/S. 148 OF THE ACT. HE, THEREFORE, SUBMITT ED THAT EVEN IN THE LIGHT OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JAI BHARAT MARUTI LTD. VS. CIT (SUPRA), THE AOS ACTION IN CON SIDERING THE ISSUE IN THE PRESENT REASSESSMENT IS VALID. 53. WE HAVE HEARD BOTH THE PARTIES ON THIS PRELIMIN ARY OBJECTION RAISED BY THE ASSESSEE AGAINST THE VALIDITY OF AOS ACTION WHETHER THE ADDITION 39 ON ACCOUNT OF APPORTIONMENT OF PROFIT ATTRIBUTABLE TO PE IN INDIA FOR USE OF RESEARCH ACTIVITY CARRIED OUT IN INDIA BY HO CAN BE MADE IN THE PRESENT REASSESSMENT NOTWITHSTANDING THE FACT THAT NO SPECI FIC REASON RELATING TO THIS ISSUE WERE RECORDED BY THE AO WHILE REOPENING THE ASSESSMENT U/S. 147 OF THE ACT OR AT THE TIME OF ISSUANCE OF NOTICE U/S. 148 OF THE ACT. WITHOUT GOING TO DELIBERATE UPON THE VARIOUS CONTEN TION RAISED BY BOTH THE PARTIES ON THIS ISSUE, THIS ISSUE IS NO MORE DE BATABLE IN THE LIGHT OF THE INSERTION OF EXPLANATION 3 BELOW SECTION 147 BY THE FINANCE NO 2 (ACT), 2009 WITH RETROSPECTIVE EFFECT FROM 01.04.1989, WHE RE IT HAS BEEN PROVIDED THAT FOR THE PURPOSE OF ASSESSMENT OR REAS SESSMENT U/S. 147, THE AO MAY ASSESS OR REASSESS THE INCOME IN RESPECT OF ANY ISSUE, WHICH HAS ESCAPED ASSESSMENT AND SUCH ISSUE COMES TO HIS NOTI CE SUBSEQUENTLY IN THE COURSE OF THE PROCEEDINGS U/S. 147, NOTWITHSTAN DING THAT THE REASONS FOR SUCH ISSUE HAVE NOT BEEN INCLUDED IN THE REASON S RECORDED UNDER SUB- SECTION 148 OF THE ACT. THEREFORE, IN THE LIGHT OF THE PROVISIONS CONTAINED IN EXPLANATION 3 TO SECTION 147 OF THE ACT INSERTED BY THE FINANCE NO. 2 (ACT) W.E.F. 01.04.2009, THIS VERY PRELIMINARY OBJE CTION OF THE ASSESSEE IS REJECTED. 54. NOW, WE SHALL PROCEED TO DECIDE THE ISSUE ON ME RIT AS TO WHETHER THE LD. CIT(A) WAS JUSTIFIED IN CONFIRMING THE AOS ORDER IN MAKING ADDITION ON ACCOUNT OF ATTRIBUTION OF PROFITS OF H. O. TO PE IN INDIA. 40 55. THE SR. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEES LIAISON OFFICE WAS CONVERTED INTO BRANCH OFFICE VID E RBI APPROVAL DATED 18.10.1992 TO CARRY OUT, INTER-ALIA, TO CONDUCT AGR I-GENETIC RESEARCH FOR DEVELOPMENT OF NEW PRODUCTS AND TO MAKE AVAILABLE P ARENT SEEDS TO JOINT VENTURE COMPANY UNDER A PARENT SEEDS CHARGES ARRANG EMENT PROVIDED THE RESULTS OF THE RESEARCH WORK ARE MADE AVAILABLE TO INDIAN COMPANIES, AND IN THAT VIEW OF THE MATTER THE INDIAN BRANCH OF THE ASSESSEE COMPANY HAS BEEN CARRYING OUT TWO DISTINCT ACTIVITIES:- (I) CONDUCTING AGRI-GENETIC RESEARCH, THE RESULTS OF WH ICH TO BE MADE AVAILABLE TO INDIAN COMPANIES; AND (II) PRODUCTION OF PARENT SEEDS AND ITS SALES TO JOINT V ENTURE COMPANY UNDER AN ARRANGEMENT 56. IT WAS FURTHER SUBMITTED BY THE LD. SR. COUNSEL FOR THE ASSESSEE THAT AGRICULTURAL RESEARCH CONDUCTED BY THE RESEARCH UNI T RESULTS IN DEVELOPMENT OF PARENT BREEDER/FOUNDATION SEEDS IN S MALL QUANTITIES, AND THESE BREEDER/FOUNDATION SEEDS ARE USED AS INPUTS A S SEED FOR MULTIPLICATION AND SALE OF PARENT SEED. HE FURTHER POINTED OUT THAT RESEARCH ACTIVITY IS IN-HOUSE AND EXCLUSIVE, AND TH E RESEARCH MATERIAL AND KNOW-HOW ARE NEITHER SOLD NOR LICENSED OR OTHERWISE TRANSFERRED TO ANY THIRD PARTY INCLUDING PRODUCTION UNIT OF THE INDIAN BRANCH. RESEARCH UNIT IS VERTICALLY INTEGRATED TO THE RESEARCH UNIT OF TH E HEAD OFFICE IN USA, AND THE EXPENDITURE OF RESEARCH ARE SEPARATELY RECO RDED IN THE BOOKS OF 41 ACCOUNTS AND ARE FULLY REIMBURSED BY THE HEAD OFFIC E. HE FURTHER SUBMITTED THAT THE ASSESSEE IS NOT IN THE BUSINESS OF SELLING, LICENSING, OR OTHERWISE TRANSFERRING RESEARCH MATERIAL/KNOW-HOW T O ANY OUTSIDE PARTY NOR DOES IT CARRY OUT RESEARCH FOR THIRD PARTY ON J OB BASIS. HE, THEREFORE, SUBMITTED THAT THE RESEARCH ACTIVITY IS NOTHING BUT PREPARATORY AND AUXILIARY ACTIVITY TO THE MAIN BUSINESS OF ASSESSEE COMPANY, WHICH IS PRODUCTION AND SALE OF HYBRID PARENT SEEDS. IN IND IA, THE ASSESSEES BRANCH OFFICE IS ENGAGED IN THE PRODUCTION AND SALE OF HYBRID PARENT SEEDS TO JOINT VENTURE GROUP COMPANY. HE, THEREFORE, SUB MITTED THAT THE RESEARCH ACTIVITY ARE PREPARATORY AND AUXILIARY TO THE MAIN BUSINESS OF ASSESSEE, AND ARE THUS, COVERED BY EXCLUSIONARY CLA USE OF ARTICLE 5(3)(E) OF THE TREATY BETWEEN INDIA AND USA. 57. THE LD. SR. COUNSEL FOR THE ASSESSEE FURTHER SU BMITTED THAT IN THE LIGHT OF THE PROVISIONS CONTAINED IN ARTICLE 5(3)(E ) OF THE DTAA BETWEEN INDIA AND USA, IT IS CLEAR THAT SCIENTIFIC ACTIVITI ES ARE AUXILIARY ACTIVITIES, AND AS SUCH, DOING AGRI-GENETIC RESEARCH BY INDIAN BRANCH OF ASSESSEE COMPANY CANNOT BE CONSIDERED TO BE A PERMANENT ESTA BLISHMENT AS CONTEMPLATED UNDER ARTICLE 5(3)(E) OF THE TREATY BE TWEEN INDIA AND USA. IN SUPPORT OF THIS CONTENTION, THE ASSESSEE RELIED UPON THE FOLLOWING DECISIONS:- I. IN MORGAN STANLEY AND CO. 292 ITR 416 42 II. U.A.E. EXCHANGE CENTRE LTD. VS. UNION OF INDIA (200 9) 223 CTR (DEL) 250 58. IN THIS CONNECTION, THE LD. COUNSEL FOR THE ASS ESSEE FURTHER SUBMITTED THAT RESEARCH UNIT IS AN INDEPENDENT AND DISTINCT UNIT OF WHICH ENTIRE COST WAS BORNE BY THE HEAD OFFICE IN USA, AN D IT IS SOLELY ENGAGED IN SCIENTIFIC RESEARCH. HE, THEREFORE, SUBMITTED T HAT THE RESEARCH ACTIVITY OF THE INDIAN BRANCH DO NOT CONSTITUTE PERMANENT ES TABLISHMENT AS CONTEMPLATED UNDER THE PROVISIONS CONTAINED IN THE TREATY ENTERED INTO BETWEEN INDIA AND USA. 59. HE FURTHER CONTENDED THAT NO ATTRIBUTION OF PRO FIT CAN BE MADE FOR SPECIFIC RESEARCH ACTIVITIES PERFORMED BY THE INDIA N BRANCH FOR THE HEAD OFFICE BECAUSE LAST SENTENCE USED IN ARTICLE 7(3) O F THE TREATY BETWEEN INDIA AND USA. AT THIS STAGE, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE PROVISIONS CONTAINED IN ARTICLE 7 OF INDO-US DTAA DEALING WITH COMPUTATION OF BUSINESS PROFIT OF PE I N INDIA. HE SUBMITTED THAT AS PER PROVISIONS CONTAINED IN ARTICLE 7(1)(A) , ONLY PROFITS ATTRIBUTABLE TO THE P.E. ARE TAXABLE IN INDIA, AND 7(1)(A) AND 7(1)(C) INCORPORATE LIMITED FORCE OF ATTRACTION RULE BUT, O N THE FACT, THESE CLAUSES ARE NOT APPLICABLE TO THE PRESENT CASE AS NO ACTIVI TY IS CARRIED ON BY THE ASSESSEE IN INDIA EXCEPT P.E. HE FURTHER SUBMITTED THAT ARTICLE 7(1) MUST BE READ AND INTERPRETED IN CONJUNCTION WITH PARAGRA PH 2, 3, 5 AND 6 OF THIS ARTICLE I.E. ARTICLE 7, AND IN THAT SENSE OF THE TE RM, THE INDIAN BRANCH MUST 43 BE TREATED AS A DISTINCT ENTITY AND PROFIT CENTER, AND ATTRIBUTION UNDER ARTICLE 7(1), (2) AND (5) CAN BE MADE ONLY ON THE B ASIS AS TO WHAT AN OUTSIDER WOULD CHARGE THE HEAD OFFICE FOR RENDERING SUCH SERVICES AT ARMS LENGTH. IN SUPPORT OF THIS CONTENTION, THE LD . COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE CIRCULAR NO. 5 DATED 28.0 9.2004 ISSUED BY THE CBDT AND THE DECISION OF HONBLE SUPREME COURT IN T HE CASE OF CIT VS. HUYNDAI HEAVY INDUSTRIES CO. LTD. (291 ITR 482), AN D IN THE CASE OF MORGAN STANLEY & CO. (292 ITR 416) AND THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF SET SATELLITE (SIN GAPORE) PVT. LTD. (218 CTR 452). 60. HE, THEREFORE, SUBMITTED THAT THE FORMULA ADOPT ED BY THE AO AND BY THE LD. CIT(A) FOR DETERMINING THE DEEMED INCOME IN INDIA THROUGH RESEARCH ACTIVITIES IS ARBITRARY, WHIMSICAL AND CON TRARY TO THE FACTS OF THE CASE AND AS WELL AS CONTRARY TO THE EXPLANATION 1 T O SECTION 9(1)(I) OF THE ACT. IT WAS FURTHER SUBMITTED BY THE LD. COUNSEL F OR THE ASSESSEE WHAT CAN BE AT BEST BE TAXED AS INCOME ARISING FROM OPERATIO N IN INDIA, WHICH BY APPLYING ARMS LENGTH PRINCIPLE CAN ONLY BE A CERTA IN PERCENTAGE OF THE COST OF RESEARCH ACTIVITIES AS MARK-UP, AS HAS BEEN DONE BY THE AO IN THE LATER YEAR STARTING FROM A.Y. 2002-03 ONWARDS ON TH E BASIS OF TRANSFER PRICING ADJUSTMENT U/S. 92 CA (3) OF THE ACT. IT I S IMPORTANT TO NOTE THAT FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK BORNE BY THE PE IN INDIA HAVE REMAINED STATIC FOR ALL THESE YEARS. HE FURTH ER POINTED OUT THAT FOR ALL 44 THE YEARS STARTING FROM A.Y. 1993-94 UPTO DATE, THE HEAD OFFICE HAS BEEN REIMBURSING THE ENTIRE EXPENDITURE ON RESEARCH, AND NO ATTRIBUTION WAS MADE BY THE REVENUE ON ACCOUNT OF BUSINESS CONNECTI ON OR PE RIGHT UPTO AND INCLUDING A.Y. 1998-99. HE FURTHER CONTENDED T HAT THE PRESENT ACTION OF THE AO IN THIS ASSESSMENT YEAR IS CONTRARY TO TH E STAND TAKEN BY THE AO IN EARLIER YEARS. 61. WITH REGARD TO THE FACT THAT ASSESSEE HAS MADE AN APPLICATION UNDER MAP, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT MERE BECAUSE THE ASSESSEE HAS MADE AN APPLICATION UNDER MAP CANNOT B E A GROUND TO ASSUME THAT THERE IS AN ADMISSION ON THE PART OF TH E ASSESSEE THAT INCOME OF HEAD OFFICE IS ALSO TAXABLE IN INDIA BEING ATTRI BUTABLE TO THE ACTIVITIES CARRIED OUT BY IT AT BRANCH OFFICE IN INDIA. HE FU RTHER SUBMITTED THAT BUSINESS PROFIT OF ASSESSEE COMPANY CAN ONLY BE TAX ED IN INDIA ONLY IF THERE IS A PE IN INDIA, AND THERE IS NO ADMISSION B Y THE ASSESSEE THAT THERE EXIST A PE IN INDIA SO AS TO ATTRACT PROVISIONS OF ARTICLE 7 OF DTAA BETWEEN INDIA AND USA. IN THIS RESPECT, THE LD. CO UNSEL FOR THE ASSESSEE HAS RELIED UPON THE DECISION IN THE CASE OF MOTOROL A INC. VS. DY. CIT 96 TTJ 1 (DEL)(SB). 62. HE FURTHER SUBMITTED THAT THE ASSESSEE WAS NOT ENGAGED IN THE BUSINESS OF SALE OF GERM-PLASM SEEDS (HYBRID BREED ER SEEDS), WHICH WERE DEVELOPED AND PRODUCED BY DOING RESEARCH ACTIVITIES , AND THUS, THERE WAS 45 NO COMMERCIAL EXPLOITATION OF THE RESEARCH OF DEVEL OPING AND PRODUCING GERM PLASM SEEDS BY THE ASSESSEE. 63. THE LD. SPECIAL COUNSEL FOR THE REVENUE, ON THE OTHER HAND, HAS SUBMITTED THAT IN THE LIGHT OF THE APPROVAL GRANTED BY THE RBI FOR CONVERSION OF LIAISON OFFICE TO BRANCH OFFICE TO CA RRY OUT CERTAIN ACTIVITIES AS PROVIDED N THE LETTER OF APPROVAL, IT IS CLEAR T HAT THE ASSESSEE HAS BEEN ENGAGED IN THE AGRI-GENETIC RESEARCH FOR DEVELOPMEN T OF NEW PRODUCTS AND TO MAKE AVAILABLE PARENT SEEDS TO ITS JOINT VENTURE COMPANY. HE FURTHER SUBMITTED THAT THE CONTENTION OF THE ASSESSEE THAT RESEARCH ACTIVITIES AND THE ACTIVITY OF PRODUCING OF PARENT SEEDS, WHICH AR E SUPPLIED TO JOINT VENTURE COMPANY, ARE INDEPENDENT AND DISTINCT, IS C ONTRARY TO THE FACTS IN AS MUCH AS, IN THE PRESENT CASE, THE BOOKS OF RESEA RCH UNIT AS WELL AS PRODUCTION UNIT ARE COMMON, FUNDS ARE COMMON, MANAG EMENT ARE COMMON, AND WHATEVER HYBRID BREEDER SEEDS HAS BEEN PRODUCED BY THE ASSESSEE HAS BEEN UTILIZED AS SEED FOR MULTIPLICATI ON OF PARENT SEEDS, WHICH ARE IN TURN SUPPLIED TO THE JOINT VENTURE COM PANY. HE, THEREFORE, SUBMITTED THAT THE DEVELOPMENT AND PRODUCTION OF HY BRID BREEDER SEED IS A NECESSARY INPUT TO PRODUCE HYBRID PARENT SEEDS, A ND THEREFORE, BOTH THE ACTIVITIES CANNOT BE SAID TO BE DISTINCT AND INDEPE NDENT TO EACH OTHER. HE, THEREFORE, SUBMITTED THAT THE ASSESSEES ACTIVITIES OF MAKING AGRI-GENETIC RESEARCH TO DEVELOP AND PRODUCE HYBRID BREEDER SEED S AND THEN PRODUCING PARENT SEEDS, WHICH ARE SUPPLIED TO THE JOINT VENTU RE COMPANY, ARE THE 46 CORE BUSINESS ACTIVITIES OF THE ASSESSEE AND NOT A MERE PREPARATORY OR AUXILIARY ACTIVITIES AS CONTEMPLATED UNDER ARTICLE 5(3)(E) OF THE INDO-US TREATY. IN THIS RESPECT, THE LD. SPECIAL COUNSEL F OR THE DEPARTMENT RELIED UPON THE FINDINGS AND OBSERVATIONS MADE BY THE LD. CIT(A) IN PARA 4.6 OF HIS ORDER. 64. HE FURTHER SUBMITTED THAT SEEDS PRODUCED IN ANY ONE CROP ARE MOSTLY DISCARDED AND THEN SOLD IN THE MARKET, AND T HE SALES PROCEEDS OF DISCARDED SEEDS HAS BEEN ADJUSTED AGAINST THE EXPEN SES INCURRED TOWARDS THE RESEARCH OPERATION ACTIVITIES OF DEVELOPING AND PRODUCING HYBRID BREEDER SEEDS, AND ONLY THE NET EXPENSES ARE BEING REIMBURSED BY THE HEAD OFFICE. THIS MAKES IT CLEAR THAT THE PRODUCTS PRODUCED BY THE ASSESSEE ARE BEING SOLD IN INDIA. HE, THEREFORE, SUBMITTED THAT THE ASSESSEE COMPANYS ACTIVITIES OF DEVELOPING AND PR ODUCING HYBRID BREEDER SEEDS, WHICH ARE USED AS INPUT FOR PRODUCIN G PARENT SEEDS, ARE CORE ACTIVITY OF ASSESSEES BUSINESS. HE FURTHER P OINTED OUT A FACT THAT DETERMINATION OF THE PRICE OF SEEDS SOLD BY THE ASS ESSEE TO THE JOINT VENTURE COMPANY IS ALSO MADE BY THE HO. HE, THEREF ORE, SUBMITTED THAT THE DECISION OF HONBLE DELHI HIGH COURT IN THE CAS E OF UAE EXCHANGE INDUSTRY, MORGAN STANLEY ETC. ARE NOT APPLICABLE TO THE PRESENT CASE, IN AS MUCH AS THE PRESENT CASE IS A CASE WHERE PRIMARY AN D CORE BUSINESS ACTIVITY ARE BEING CARRIED OUT BY THE BRANCH OFFICE OF THE ASSESSEE COMPANY. 47 65. WITH REGARD TO THE INTERPRETATION OF ARTICLE 7, HE FURTHER SUBMITTED THAT THE MANNER IN WHICH THE PROFIT HAS BEEN ATTRIB UTED TO THE OPERATIONS CARRIED OUT IN INDIA, BY THE AO IS PROPER AND JUSTI FIED AND, THUS, THE ADDITION MADE BY THE AO IS TO BE RESTORED. 66. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF BOT H THE PARTIES AND HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHO RITIES BELOW. VARIOUS DOCUMENTS AND PAPERS PLACED BEFORE US HAVE BEEN LOO KED INTO. WE HAVE DELIBERATED UPON THE PROVISIONS OF LAW VIZ-A`-VIZ., PROVISIONS CONTAINED IN DTAA BETWEEN INDIA AND USA, AND HAVE DELIBERATED UP ON THE VARIOUS DECISIONS CITED AT THE BAR. 67. IN ORDER TO RESOLVE THE CONTROVERSY, IT IS NECE SSARY FOR US TO DECIDE FIRST AS TO WHETHER THERE EXIST A PE IN INDIA IN TH E NATURE OF BRANCH OFFICE, IN RESPECT OF WHICH APPROVAL HAS BEEN GRANTED BY TH E RBI TO CARRY OUT CERTAIN ACTIVITIES MENTIONED IN THE LETTER OF APPRO VAL ISSUED BY THE RBI. 68. WE, THEREFORE, FIND IT NECESSARY TO REFER TO TH E MEANING OF PERMANENT ESTABLISHMENT AS DEFINED UNDER ARTICLE 5 OF INDO-US TREATY, WHICH IS SETOUT AS UNDER:- PERMANENT ESTABLISHMENT 1. FOR THE PURPOSES OF THIS CONVENTION, THE TERM PERMANENT ESTABLISHMENT MEANS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF AN ENTERPRIS E IS WHOLLY OR PARTLY CARRIED ON. 2. THE TERM PERMANENT ESTABLISHMENT INCLUDES ESPECIALLY:- (A) A PLACE OF MANAGEMENT; (B) A BRANCH; 48 (C) AN OFFICE; (D) A FACTORY; (E) A WORKSHOP; (F) A MINE, AN OIL OR GAS WELL, A QUARRY, OR ANY OTHER PLACE OF EXTRACTION OF NATURAL RESOURCES; (G) A WAREHOUSE, IN RELATION TO A PERSON PROVIDING STOR AGE FACILITIES FOR OTHERS; (H) A FARM, PLANTATION OR OTHER PLACE WHERE AGRICULTURE , FORESTRY, PLANTATION OR RELATED ACTIVITIES ARE CARR IED ON; (I) A STORE OR PREMISES USED AS SALES OUTLET; (J) AN INSTALLATION OR STRUCTURE USED FOR EXPLORATION O R EXPLOITATION OF NATURAL RESOURCES, BUT ONLY IF SO U SED FOR PERIOD OF MORE THAN 120 DAYS IN ANY TWELVE-MONTHS PERIOD; (K) A BUILDING SIDE OR CONSTRUCTION, INSTALLATION OR ASSEMBLY PROJECT OR SUPERVISORY ACTIVITIES IN CONNE CTION THEREWITH, WHERE SUCH SITE, PROJECT OR ACTIVITIES ( TOGETHER WITH OTHER SUCH SITES, PROJECTS OR ACTIVITIES, IF A NY) CONTINUE FOR A PERIOD OF MORE THAN 120 DAYS IN ANY TWELVE-MONTH PERIOD; (L) THE FURNISHING OF SERVICES, OTHER THAN INCLUDED SER VICES AS DEFINED IN ARTICLE 12 (ROYALTIES AND FEES FOR IN CLUDED SERVICES), WITHIN A CONTRACTING STATE BY AN ENTERPR ISE 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 T HAN 90 DAYS WITHIN ANY TWELVE-MONTHS PERIOD; OR (II) THE SERVICES ARE PERFORMED WITHIN THAT STATE FOR RELATED ENTERPRISE (WITHIN THE MEANING OF PARAGRAPH 1OF ARTICLE 9 (ASSOCIATED ENTERPRISES) 3. NOTWITHSTANDING THE PRECEDING PROVISIONS OF THIS ARTICLE, THE TERM PERMANENT ESTABLISHMENT SHALL B E DEEMED NOT TO INCLUDE ANY ONE OR MORE OF THE FOLLOW ING:- (A) THE USE OF FACILITIES SOLELY FOR THE PURPOSE OF STORAGE, DISPLAY, OR OCCASIONAL DELIVERY OF GOODS OR MERCHANDISE BELONGING TO THE ENTERPRISE; (B) THE MAINTENANCE OF A STOCK OF GOODS OR MERCHANDISE BELONGING TO THE ENTERPRISE SOLELY FOR THE PURPOSE OF STORAGE, DISPLAY, OR OCCASIONAL DELIVER Y; (C) THE MAINTENANCE OF A STOCK OF GOODS OR MERCHANDISE BELONGING TO THE ENTERPRISE SOLELY FOR THE PURPOSE OF PROCESSING BY ANOTHER ENTERPRISE; 49 (D) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR THE PURPOSE OF PURCHASING GOODS OR MERCHANDISE, OR OF COLLECTING INFORMATION, FOR THE ENTERPRISE; (E) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR THE PURPOSE OF ADVERTISING, FOR THE SUPP LY OF INFORMATION, FOR SCIENTIFIC RESEARCH OR FOR OTHER A CTIVITIES WHICH HAVE A PREPARATORY OR AUXILIARY CHARACTER, FO R THE ENTERPRISE. 4. NOTWITHSTANDING THE PROVISIONS OF PARAGRAPHS 1 A ND 2, WHERE A PERSON - OTHER THAN AN AGENT OF AN INDEPEND ENT STATUS TO WHOM PARAGRAPH 5 APPLIES IS ACTING IN A CONTRACTING STATE, THAT SHALL BE DEEMED TO HAVE A PERMANENT ESTABLISHMENT IN THE FIRST-MENTIONED STAT E, IF; (A) HE HAS AND HABITUALLY EXERCISES IN THE FIRST-ME NTIONED STATE AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE ENTERPRISE, UNLESS HIS ACTIVITIES ARE LIMITED TO TH OSE MENTIONED IN PARAGRAPH 3 WHICH, IS EXERCISED THROUG H A FIXED PLACE OF BUSINESS, WOULD NOT MAKE THAT FIXED PLACE OF BUSINESS A PERMANENT ESTABLISHMENT UNDER THE PROVISIONS OF THAT PARAGRAPH. (B) HE HAS NO SUCH AUTHORITY BUT HABITUALLY MAINTAI NS IN THE FIRST-MENTIONED STATE A STOCK OF GOODS OR MERCH ANDISE FROM WHICH HE REGULARLY DELIVERS GOODS OR MERCHANDI SE ON BEHALF OF THE ENTERPRISE, AND SOME ADDITIONAL AC TIVITIES CONDUCTED IN THAT STATE ON BEHALF OF THE ENTERPRISE HAVE CONTRIBUTED TO THE SALE OF THE GOODS OR MERCHANDISE ; OR 5. AN ENTERPRISE OF A CONTRACTING STATE SHALL NOT B E DEEMED TO HAVE A PERMANENT ESTABLISHMENT IN THE OTH ER CONTRACTING STATE MERELY BECAUSE IT CARRIES ON BUSI NESS IN THAT OTHER STATE THROUGH A BROKER, GENERAL COMMI SSION AGENT, OR ANY OTHER AGENT OF AN INDEPENDENT STATUS, PROVIDED THAT SUCH PERSONS ARE ACTING IN THE ORDINA RY COURSE OF THEIR BUSINESS. HOWEVER, WHEN THE ACTIVI TIES OF SUCH AN AGENT ARE DEVOTED WHOLLY OR ALMOST WHOLLY O N BEHALF OF THAT ENTERPRISE AND THE TRANSACTIONS BETW EEN THE AGENT AND THE ENTERPRISE ARE NOT MADE UNDER ARMS L ENGTH CONDITIONS, HE SHALL NOT BE CONSIDERED AN AGENT OF INDEPENDENT STATUS WITHIN THE MEANING OF THIS PARAG RAPH. 50 6. THE FACT THAT A COMPANY WHICH IS A RESIDENT OF A CONTRACTING STATE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS RESIDENT OF THE OTHER CONTRACTING STATE, OR WHICH CARRIED ON BU SINESS IN THAT OTHER STATE (WHETHER THROUGH A PERMANENT ESTABLISHM ENT OR OTHERWISE), SHALL NOT OF ITSELF CONSTITUTE EITHER C OMPANY A PERMANENT ESTABLISHMENT OF THE OTHER. 69. ITEM E OF PARA (3) OF ARTICLE 5 OF INDO-US TR EATY PROVIDES THAT THE TERM PERMANENT ESTABLISHMENT SHALL NOT INCLUD E THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR THE PURPOSE OF ADVERTISING, FOR THE SUPPLY OF INFORMATION FOR SCIENTIFIC RESEARCH OR FO R OTHER ACTIVITIES WHICH HAS A PREPARATORY OR AUXILIARY CHARACTER, FOR THE E NTERPRISE. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE BRANCH OFFI CE OF THE ASSESSEE COMPANY EXIST SOLELY FOR SCIENTIFIC RESEARCH AND FO R OTHER ACTIVITIES, WHICH HAVE PREPARATORY OR AUXILIARY CHARACTER. THE LD. S TANDING COUNSEL FOR THE DEPARTMENT, ON THE OTHER HAND, SUBMITTED THAT THE B RANCH OFFICE OF THE ASSESSEE COMPANY IN INDIA DOES NOT EXIST SOLELY FOR SCIENTIFIC RESEARCH OR FOR OTHER ACTIVITIES, WHICH HAVE PREPARATORY OR AUX ILIARY CHARACTER FOR THE ENTERPRISE. HAVING REGARD TO THE NATURE OF THE ACT IVITIES CARRIED OUT BY THE BRANCH OFFICE OF THE ASSESSEE COMPANY IN INDIA, WE, THEREFORE, HAVE TO SEE WHETHER THE ASSESSEE IS MAINTAINING BRANCH OFFICE F OR INDIA SOLELY FOR SCIENTIFIC RESEARCH OR FOR OTHER ACTIVITIES WHICH H AVE A PREPARATORY AND AUXILIARY CHARACTER FOR THE ASSESSEE COMPANY. THE CLAUSE (E) OF ARTICLE 5(3) CAN BE EXPANDED ITEM-WISE AS UNDER:- 51 (I) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR THE PURPOSE OF ADVERTISING, FOR THE ENTERPRISE; (II) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR SUPPLY OF INFORMATION, FOR THE ENTERPRISE; (III) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR SCIENTIFIC RESEARCH, FOR THE ENTERPRISE; (IV) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR OTHER ACTIVITIES, WHICH HAVE A PREPARATORY OR AUXILIARY CHARACTER, FOR THE ENTERPRISE; 70. THE ASSESSEES CLAIM IS THAT THE ASSESSEE COMPA NY IS MAINTAINING BRANCH OFFICE IN INDIA SOLELY FOR SCIENTIFIC RESEAR CH FOR THE ASSESSEE COMPANY OR FOR OTHER ACTIVITIES, WHICH HAVE PREPARA TORY OR AUXILIARY CHARACTER FOR THE ASSESSEE COMPANY. 71. THERE IS NO DISPUTE AS TO THE FACT THAT RESERVE BANK OF INDIA VIDE APPROVAL DATED 18.10.1992 HAS ALLOWED THE ASSESSEE COMPANY TO CONVERT ITS LIAISON OFFICE INTO A BRANCH OFFICE IN INDIA FO R THE PURPOSE OF UNDERTAKING FOLLOWING ACTIVITIES:- I. TO REPRESENT THE PARENT COMPANY (PCC) ON COMMERCIAL AND BUSINESS MATTERS IN INDIA; 52 II. TO CONDUCT AGRI-GENETIC RESEARCH FOR THE DEVELOPMENT OF NEW PRODUCTS AND TO MAKE AVAILABLE PARENT SEED TO JOINT VENTURE COMPANY UNDER A PARENT SEED CHARGE ARRANGEMENT PROVIDED THE RESULTS OF THESE RESEARCH WORK ARE MADE AVAILABLE TO INDIAN COMPANIES; III. TO UNDERTAKEN EXPORT AND IMPORT OF PCCS PRODUCTS; IV. TO SUPERVISE AND PROMOTE PIONEERS TECHNICAL AND FINANCIAL COLLABORATION WITH INDIAN COMPANIES. FROM THE NATURE OF ACTIVITIES AND THE PURPOSE OF WH ICH THE ASSESSEE WAS ALLOWED PERMISSIONS TO CONVERT ITS LIAISON OFFI CE INTO BRANCH OFFICE, IT IS SEEN THAT THE ASSESSEE WAS ALLOWED TO REPRESENT PARENT COMPANY ON COMMERCIAL AND BUSINESS MATTER IN INDIA, AND TO CON DUCT AGRI-GENETIC RESEARCH FOR THE DEVELOPMENT OF NEW PRODUCT AND TO MAKE AVAILABLE PARENT SEED TO JOINT VENTURE COMPANY UNDER A PARENT SEED CHARGE ARRANGEMENT PROVIDED THE RESULTS OF THESE RESEARCH WORKS ARE MADE AVAILABLE TO INDIAN COMPANIES, AND TO UNDERTAKE EXP ORT AND IMPORT OF PARENT COMPANIES PRODUCT, AND TO SUPERVISE AND PROM OTE PARENT COMPANYS FINANCIAL AND TECHNICAL COLLABORATION WIT H INDIAN COMPANIES. FROM THE OVERALL ACTIVITIES OF THE ASSESSEE CARRIED OUT BY ITS BRANCH OFFICE IN INDIA, AS SO EXPLAINED BY THE ASSESSEE BEFORE TH E AUTHORITIES BELOW, IT IS SEEN THAT THE ASSESSEE COMPANY IN INDIA IS ENGAGED IN THE BUSINESS OF 53 PRODUCTION AND SALE OF VARIOUS VARIETY OF PARENT SE EDS, WHICH ARE SOLD TO ITS JOINT VENTURE COMPANY. FOR PRODUCTION OF PAREN T SEEDS IN LARGE QUANTITIES, THE FIRST REQUIREMENT IS THE AVAILABILI TY OF HYBRID BREEDER SEEDS OR HYBRID GERM PLASM, WHICH WOULD BE SOWN FOR RAISING CROPS OF PARENT SEEDS. IT IS THE CLAIM OF THE ASSESSEE THAT THE HYBRID BREEDER SEEDS ARE DEVELOPED OR PRODUCED BY THE ASSESSEE AS AN ONG OING RESEARCH AND DEVELOPMENT PROGRAMME TAKING ABOUT 8-10 YEARS FOR D EVELOPING THE SUCCESSFUL HYBRID BREEDER SEEDS OF DESIRED QUALITY. THESE HYBRID BREEDER SEEDS ARE DEVELOPED AND PRODUCED BY THE ASSESSEE AS AN ONGOING RESEARCH AND DEVELOPMENT PROGRAMME, AND ARE USED AS INPUT OR AS SEEDS FOR THE PURPOSE OF PRODUCING AND MULTIPLYING PARENT SEEDS, WHICH ARE THEN SOLD TO THE JOINT VENTURE COMPANY. IN THE LIGHT OF THE VER Y ACTIVITIES OF DEVELOPING AND PRODUCING HYBRID BREEDER SEEDS BY TH E ASSESSEE AND THEN USING THEM AS INPUT OR AS SEEDS FOR PRODUCING PAREN T SEEDS, IT IS CLEAR TO US THAT ALL THE AFORESAID ACTIVITIES UNDERTAKEN BY THE ASSESSEE ARE NOTHING BUT ONE COMPOSITE INTEGRATED ACTIVITY INTENDED TO BE CA RRIED OUT BY THE ASSESSEE FOR THE PURPOSE OF PRODUCING PARENT SEEDS, WHICH ARE BEING SUPPLIED TO THE JOINT VENTURE COMPANY AS PER THE AP PROVAL GRANTED BY THE RBI. IT WAS THE DOMINANT OBJECT AND PURPOSE OF THE ASSESSEE COMPANY TO MAKE AVAILABLE PARENT SEEDS TO JOINT VENTURE COMPAN Y. IT IS ALSO CLEAR THAT THE ASSESSEE WOULD NOT BE IN A POSITION TO MAKE AVA ILABLE PARENT SEEDS TO JOINT VENTURE COMPANY UNLESS AND UNTIL THE ASSESSEE DEVELOPS AND 54 PRODUCES HYBRID BREEDER SEEDS, WHICH ARE USED AS IN PUT AND ARE BEING MULTIPLIED TO OBTAIN PARENT SEEDS IN LARGE QUANTITI ES, WHICH ARE IN TURN SUPPLIED TO JOINT VENTURE COMPANY. THUS, THE DOMIN ANT PURPOSE OF OBJECT OF THE ASSESSEE COMPANY TO SEEK APPROVAL FROM RBI F OR CONVERSION OF ITS LIAISON OFFICE INTO BRANCH OFFICE IN INDIA FOR THE PURPOSE OF UNDERTAKING VARIOUS ACTIVITIES MENTIONED IN THE APPROVAL LETTER WAS TO CONDUCT AGRI- GENETIC RESEARCH FOR THE DEVELOPMENT OF NEW PRODUCT S AND TO MAKE AVAILABLE PARENT SEEDS TO JOINT VENTURE COMPANY. T HE SOLE OBJECT OF THE ASSESSEE COMPANY TO OPEN A BRANCH OFFICE IN INDIA W AS NOT TO DO SOLELY ANY SCIENTIFIC RESEARCH OR AGRI-GENETIC RESEARCH BU T AT THE SAME TIME THE OBJECT OF THE ASSESSEE WAS TO PRODUCE PARENT SEEDS FOR MAKING THEM AVAILABLE TO ITS JOINT VENTURE COMPANY. THEREFORE, CONDUCTING AGRI- GENETIC RESEARCH FOR THE DEVELOPMENT OF NEW PRODUCT S AND MAKING AVAILABLE PARENT SEEDS TO JOINT VENTURE COMPANY ARE INTER-DEPENDENT, INTER-CONNECTED AND INTER LACING. THIS VIEW HAS AL READY BEEN TAKEN BY US WHILE DECIDING THE ISSUE ABOUT THE ASSESSEES CLAIM AS TO WHETHER THE INCOME FROM PRODUCING AND SUPPLY OF PARENT SEEDS TO JOINT VENTURE COMPANY IS AGRICULTURAL INCOME OR NOT, IN ITA NO. 4 925/DEL/2004 PERTAINING TO THE A.Y. 1998-99 FILED BY THE ASSESSE E, WHERE VIDE ORDER DATED 30.11.2009. WE HAVE OBSERVED AND HELD AS UND ER: 47. AT THIS JUNCTURE, WE CONSIDER IT APPROPRIATE TO SEE WHETHER THE ASSESSEES ACTIVITY OF DEVELOPIN G HYBRID PARENT SEED, I.E. BREEDER SEED, AND ACTIVITY OF MULTIPLICATION OF PARENT SEED BY SOWING BREEDER SEE D, 55 ARE TOTALLY DISTINCT AND SEPARATE TO EACH OTHER AS SO CLAIMED BY THE ASSESSEE. IT IS THE CASE OF THE ASS ESSEE THAT RESEARCH UNIT DEVELOPING BREEDER SEED IS A SEL F- CONTAINED UNIT AND ITS OBJECT IS TO DEVELOP ELITE GERMPLASM SEEDS OR HYBRID PARENT SEEDS KNOW AS BREEDER SEEDS, WHICH ARE CAPABLE OF PRODUCING COMMERCIAL HYBRID SEEDS. THE ASSESSEE HAS EXPLAINED BEFORE THE AUTHORITIES BELOW THE VARIOUS COMPONENTS AND STAGES OF ITS ACTIVITY OF DEVELOPING HYBRID PAR ENT SEEDS, WHICH HAS BEEN REPRODUCED BY THE LD. CIT(A) IN PARE 3.3 TO 3.7 OF HIS ORDER. THE RELEVANT PORTION OF LD. CIT(A)S ORDER HAS ALREADY BEEN REPRODUCED ABOVE HEREIN BY US. 48. FROM THE NATURE OF ACTIVITY CARRIED OUT BY THE ASSESSEE, IT IS CLEAR THAT THE BREEDER SEEDS DE VELOPED OR PRODUCED BY THE ASSESSEE ARE SOWN TO OBTAIN LARG E QUANTITIES OF PARENT SEEDS, WHICH ARE BEING SUPPLIE D TO JOINT VENTURE COMPANY FOR A PRICE. THE ASSESSEE UNDERTAKES THE PRODUCTION OF PARENT SEED THROUGH MULTIPLICATION OF BREEDER SEED, WHICH ARE DEVELOPED BY THE ASSESSEE AFTER A LONG DRAWN PROCESS OF COMBININ G TWO OR MORE TRAITS OF DIFFERENT SEEDS INTO ONE SEED . THE ASSESSEE WAS ALLOWED PERMISSION UNDER SECTION 29(1) (A) OF THE FOREIGN EXCHANGE REGULATION ACT, 1973 FOR OPENING A BRANCH OFFICE IN INDIA BY THE RESERVE BAN K OF INDIA VIDE LETTER DATED 18 NOVEMBER, 1992. IT IS IMPORTANT TO NOTE THAT THIS PERMISSION WAS GRANTED TO THE ASSESSEE IN PURSUANCE TO ASSESSEES APPLICATION DATED 22 ND OCTOBER, 1992. THE ASSESSEE WAS GRANTED PERMISSION FOR CONVERSION OF ITS LIAISON OFFICE AT NEW DELHI INTO A BRANCH OFFICE FOR THE PURPOSE OF UNDERTAKING THE FOLLOWING ACTIVITIES:- V. TO REPRESENT THE PARENT COMPANY (PCC) ON COMMERCIAL AND BUSINESS MATTERS IN INDIA; VI. TO CONDUCT AGRI-GENETIC RESEARCH FOR THE DEVELOPMENT OF NEW PRODUCTS AND TO MAKE AVAILABLE PARENT SEED TO JOINT VENTURE COMPANY UNDER A PARENT SEED CHARGE ARRANGEMENT PROVIDED THE RESULTS OF TH ESE RESEARCH WORK ARE MADE AVAILABLE TO INDIAN COMPANIE S; VII. TO UNDERTAKEN EXPORT AND IMPORT OF PCCS PRODUCTS; VIII. TO SUPERVISE AND PROMOTE PIONEERS TECHNICAL AND FINANCIAL COLLABORATION WITH INDIAN COMPANIES. 56 49. FROM THE NATURE OF ACTIVITIES FOR THE PURPOSE OF WHICH THE ASSESSEE WAS ALLOWED A PERMISSION FOR CONVERSION OF ITS LIAISON OFFICE INT O A BRANCH OFFICER, IT IS EVIDENT THAT THE ASSESSEE WAS ALLOWED TO CONDUCT AGRI-GENETIC RESEARCH FOR THE DEVELOPMENT OF NEW PRODUCTS AND TO MAKE AVAILABLE PARENT SEED TO JOINT VENTURE COMPANY UNDER A PARENT SEED CHARGE ARRANGEMENT PROVIDED THE RESULTS OF THE SE RESEARCH WORK ARE MADE AVAILABLE TO INDIAN COMPANIE S. THEREFORE, CONDUCTING AGRI-GENETIC RESEARCH FOR THE DEVELOPMENT OF NEW PRODUCTS AND MAKING AVAILABLE PARENT SEED TO JOINT VENTURE COMPANY UNDER A PARENT SEED CHARGE ARRANGEMENT IS ONE AND COMPOSITE ACTIVI TY INTENDED TO BE CARRIED OUT BY THE ASSESSEE WHILE SE EKING A PERMISSION FROM RBI. BOTH THE ACTIVITIES OF CONDUCTING AGRI-GENETIC RESEARCH FOR THE DEVELOPMEN T OF NEW PRODUCTS AND MAKING AVAILABLE PARENT SEED TO JOINT VENTURE COMPANY ARE INTER-DEPENDENT, INTER CONNECTED AND INTER-LACING. THE ASSESSEE WOULD NOT BE IN A POSITION TO MAKE AVAILABLE PARENT SEED TO JOIN T VENTURE COMPANY FOR ENABLING IT TO PRODUCE COMMERCIAL HYBRID SEED UNLESS AND UNTIL THE ASSESSE E DEVELOPS BREEDER SEEDS WHICH ARE MULTIPLIED TO OBTA IN PARENT SEEDS IN LARGE QUANTITY AND THEN SUPPLYING T HE PARENT SEEDS IN LARGE QUANTITY TO JOINT VENTURE COM PANY. IF WE LOOK TO THE DOMINANT AND PRIMARY OBJECT AND INTENTION OF THE ASSESSEE COMPANY IN OBTAINING PERMISSION FROM RBI TO UNDERTAKE THE CERTAIN ACTIVI TIES, IT IS MORE THAN CLEAR THAT THE ASSESSEES ACTIVITY OF DEVELOPING BREEDER SEEDS BY RESEARCH AND PRODUCING PARENT SEEDS IN LARGE QUANTITY FOR THE PURPOSE OF SUPPLYING THE SAME TO JOINT VENTURE COMPANY CANNOT, BY ANY STRETCH OF IMAGINATION, BE SAID TO BE TO TOTALL Y DISTINCT, SEPARATE AND INDEPENDENT TO EACH OTHER SO AS TO CONSIDER THE ACTIVITY OF PRODUCING PARENT SEEDS BEING DISSOCIATED FROM ACTIVITY OF DEVELOPING BREEDER SEE DS. THIS SORT OF CONTENTION ADVANCED THE ASSESSEE IS TO TALLY MISCONCEIVED AND BASELESS. THE ACTIVITY OF DEVELOP ING BREEDER SEED IS NOTHING BUT A PART OF ONE AND COMPO SITE INTEGRATED ACTIVITY OF PRODUCING PARENT SEEDS OF DE SIRED RESULTS FOR THE PURPOSE OF SUPPLYING IT TO THE JOIN T VENTURE COMPANY. THE ASSESSEES CONTENTION THAT BREEDER SEEDS ARE DEVELOPED IN DIFFERENT FIELD OR P LOT OF LAND THAN THAT OF PRODUCING PARENT SEED IS NOT MATE RIAL 57 AND RELEVANT, AND IT DOES NOT CHANGE THE VERY DOMIN ANT AND PRIMARY OBJECT AND INTENTION OF THE ASSESSEE TO CONDUCT AGRI-GENETIC RESEARCH FOR THE DEVELOPMENT O F NEW PRODUCTS AND TO MAKE AVAILABLE PARENT SEED TO J OINT VENTURE COMPANY UNDER A PARENT SEED CHARGE ARRANGEMENT. IT IS VERY COMMON AND USUAL IN ANY INDUSTRY THAT VARIOUS ACTIVITIES NECESSARY TO MANUFACTURE OR PRODUCE ANY ARTICLE OR THING OR GOOD S ARE CARRIED OUT BY THAT INDUSTRY AT DIFFERENT PLACE S OR FACTORIES OR WORKSHOP OR SITES AND MERE BECAUSE VARIOUS STAGES OR STEPS NECESSARY TO MANUFACTURE AN Y ITEM OR THINGS OR GOODS OR ARTICLES ARE PERFORMED O R CARRIED OUT AT DIFFERENT PLACES, SITES, WORKSHOPS, FACTORY IT WOULD NOT MEAN THAT ALL SUCH ACTIVITIES CARRIED OUT TO MANUFACTURE A FINAL PRODUCT ARE INDEPENDENT AND DISTINCT TO EACH OTHER. IT IS WELL SETTLED THAT IN ORDER TO DETERMINE THE TRUE AND CORRECT NATURE OF ANY ACTIVI TY, THE TREATMENT OR LABEL OR NAME GIVEN BY THE ASSESSE E IN ITS BOOKS OR DOCUMENTS OR PAPERS IS NOT CONCLUSIVE AND WHAT IS CONCLUSIVE AND RELEVANT IS THE TRUE NATURE AND SUBSTANCE OF THE ACTIVITY HAVING REGARD TO THE INTE NTION OF THE PARTY COUPLED WITH ALL RELEVANT SURROUNDING CIRCUMSTANCES OF A GIVEN CASE. THEREFORE, THE TREA TMENT GIVEN BY THE ASSESSEE IN ITS ACCOUNTS OR OTHER DOCUMENTS CANNOT BE A SOLE DETERMINATIVE FACTOR TO DETERMINE THE TRUE AND CORRECT NATURE OF ANY TRANSACTION OR ACTIVITY BUT ALL OTHER SURROUNDING A ND RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE ARE TO BE TAKEN NOTE OF AND BE CONSIDERED. IT IS ALSO EQUALL Y TRUE THAT PURCHASE OR ACQUISITION OF RAW MATERIAL IN ONE PARTICULAR YEAR AND MANUFACTURING OR PRODUCING FINA L GOODS FROM THOSE RAW MATERIAL IN ANY LATER YEAR WOU LD NOT MAKE THE ACTIVITY OF PURCHASING OR ACQUIRING RA W MATERIAL IN ONE YEAR AND ACTIVITY OF MANUFACTURING FINAL GOODS USING SAID RAW MATERIALS IN LATER YEAR A TOTA LLY DISTINCT AND INDEPENDENT ACTIVITY TO EACH OTHER WHE N BOTH ACTIVITIES ARE UNDERTAKEN BY THE SAME PERSON I N THE COURSE OF BUSINESS OF MANUFACTURING GOODS ETC. IN ORDER TO TREAT VARIOUS ACTIVITIES OR STAGES OR STEP S NECESSARY TO MANUFACTURE ANY ITEM AS ONE AND COMPOSITE ACTIVITY, IT IS NOT NECESSARY THAT ALL SU CH VARIOUS ACTIVITIES OR STAGES OR STEPS SHOULD BE CAR RIED OUT IN ONE YEAR. THEREFORE, THE ASSESSEES CONTENT ION THAT BECAUSE OF TIME GAP OF SEVERAL YEARS BETWEEN T HE 58 ACTIVITY OF DEVELOPING BREEDER SEEDS AND PRODUCING PARENT SEEDS AFTER SOWING BREEDER SEEDS, BOTH THESE ACTIVITIES SHOULD BE CONSIDERED TO BE TOTALLY DISTI NCT AND INDEPENDENT TO EACH OTHER IS NOT ACCEPTABLE. FROM T HE VARIOUS COMPONENTS AND STAGES OF PRODUCING OR DEVELOPING HYBRID PARENT SEEDS KNOWN AS BREEDER SEE DS AND THEN PRODUCING PARENT SEEDS IN LARGE QUANTITY A FTER SOWING BREEDER SEEDS AS NARRATED OR STATED BY THE ASSESSEE, IT IS NOTICED BY US THAT THE BREEDER SEED S ARE DEVELOPED THROUGH FIXATION OF DESIRED TRAITS BY RAI SING SUCCESSIVE GENERATIONS OF CROPS TO ARRIVE AT PURE I N BRED LINES (ELITE GERM PLASMA OR BREEDER SEEDS OR HYBRID PARENT SEEDS, BY WHATEVER NAME IT MAY BE CALLED) WHICH ARE THEN HYBRIDED WITH IN BRED LINES OR ELITE GERM PLASMA OF ANOTHER SET OF DESIRED TRAITS AND SO ON AND SO FORTH TAKING ABOUT 7-10 YEARS TO DEVELOP A SUCCESSFUL HYBRID PARENT SEED, AND ONLY THEN IT CAN BE USED FOR COMMERCIAL PRODUCTION OF PARENT SEED FOR SUPPLY TO ASSESSEES JOINT VENTURE COMPANY. THE ASSESSEE HAS INCURRED HUGE EXPENDITURES IN DEVELOPI NG A SUCCESSFUL HYBRID PARENT SEED OR ELITE HYBRID GER M PLASMA. THE DIFFERENT BREEDER SEEDS OF DISTINCT TRA ITS ARE PRODUCED BY SOWING AND PLANTING A VAST VARIETY OF S EEDS INDIVIDUALLY AND EACH PLANT IS HARVESTED INDIVIDUAL LY AND THEREAFTER TWO SEEDS OF DIFFERENT TRAITS ARE HY BRIDED BY WAY OF PROCESS WHERE TWO PLANTS OR SEEDS ARE CROSSED OVER NUMBER OF GENERATIONS OF CROPS UNTIL T HE TWO TRAITS OF DESIRED RESULT ARE FIXED IN ONE HYBRI D SEED, AND HYBRID PARENT SEED ARE THEN MULTIPLIED TO OBTAI N A LARGE QUANTITY OF HYBRID PARENT SEEDS FOR THE PURPO SE OF SUPPLYING IT TO JOINT VENTURE COMPANY. THE WHOLE PROCESS OF SOWING AND PLANTING A VAST VARIETY OF SE EDS INDIVIDUALLY, AND RAISING CROPS YEAR AFTER YEAR, PRODUCING HYBRID PARENT SEEDS OF DESIRED RESULT, MULTIPLICATION OF HYBRID PARENT SEEDS AND THEN SUPPLYING THE SAME TO JOINT VENTURE COMPANY IS NOTH ING BUT ONE SINGLE INTEGRATED ACTIVITY WHERE ALL OPERAT IONS ARE UNDERTAKEN OR CARRIED OUT BY THE SAME ASSESSEE WITH A VIEW TO SUPPLY MULTIPLIED PARENT SEEDS TO IT S JOINT VENTURE COMPANY AS PER OBJECT AND INTENTION OF THE ASSESSEE SPECIFIED IN THE APPROVAL GRANTED BY RBI. 50. IN THIS VIEW OF THE MATTER, WE ARE IN AGREEMENT WITH THE LD. CIT(A)S FINDING THAT THE TW O ACTIVITIES ARE COMPLETELY INTERLINKED, INTERLACED A ND 59 DEPENDENT ON EACH OTHER, AND CANNOT BE DIVORCED OR DISSOCIATED FROM EACH OTHER. THE PRODUCTION OF PARE NT SEEDS IS UNDOUBTEDLY IN CONTINUATION OF THE DEVELOP MENT AND PRODUCTION OF ELITE HYBRID GERMPLASMS OR HYBRID PARENT SEEDS KNOWN AS BREEDER SEEDS. THESE TWO ACTIVITIES OF THE ASSESSEE HAVE GOT TO BE UNDERSTOO D AS CONNOTING ONE INTEGRATED ACTIVITY OF MAKING AVAILAB LE PARENT SEEDS TO ITS JOINT VENTURE COMPANY 72. IN THE LIGHT OF THE DISCUSSIONS MADE ABOVE WE A RE, THEREFORE, IN AGREEMENT WITH CONCLUSION ARRIVED AT BY THE LD. CIT (A) IN HOLDING THAT THE RESEARCH ACTIVITY AND THE SALE OF PARENT SEEDS BY T HE ASSESSEE COMPANY ARE INTER-LINKED, INTER-LACING AND INTER-DEPENDENT. 73. HAVING SAID SO, WE HAVE TO DECIDE WHETHER THE A FORESAID ACTIVITIES OF DOING AGRI-GENETIC RESEARCH FOR PRODUCING NEW PR ODUCTS AND MAKING AVAILABLE AND SALE OF PARENT SEEDS TO JOINT VENTURE COMPANY CAN BE CONSIDERED TO BE THE ACTIVITY IN THE NATURE OF PREP ARATORY OR AUXILIARY CHARACTER. 74. THERE IS NO QUARREL AS TO THE PROPOSITION THAT PREPARATORY AND AUXILIARY BUSINESS ACTIVITIES DO NOT CONSTITUTE A P E EVEN IF THEY ARE PERFORMED THROUGH A FIXED PLACE OF BUSINESS. ANY A CTIVITY OF A PREPARATORY AND/OR AUXILIARY NATURE IS EXEMPTED FRO M PE STATUS. THE ESSENTIAL AND SIGNIFICANT ACTIVITIES WITHIN THE FRA MEWORK OF THE BUSINESS PURPOSE OF THE ENTERPRISE WOULD CONSTITUTE CORE BU SINESS ACTIVITIES, AND IN THAT EVENT, THE BUSINESS OPERATIONS IN THE NATURE O F CORE BUSINESS ACTIVITIES WOULD INVARIABLY CONSTITUTE A PE. THE CORE BUSINES S ACTIVITIES WOULD 60 INCLUDE MANAGEMENT, EXPLOITATION OF NATURAL RESOURC ES, MANUFACTURING TRANSPORTATION AND SALES. SALES ACTIVITIES INCLUDE S PRE-SALES ACTIVITIES, SUCH AS SOLICITATION AND NEGOTIATION OF SALES. IN THE CASE ON HAND, THERE IS A COMBINATION OF DEVELOPING AND PRODUCING BREEDER S EEDS AND SALES OF PARENT SEEDS TO ASSESSEES JOINT VENTURE COMPANY, W HICH WOULD UNDOUBTEDLY LEAD THE BRANCH OFFICE TO PE STATUS. I T IS NOT THE CASE WHERE MERE AND/OR SOLE SCIENTIFIC RESEARCH IS BEING CARRI ED ON BY THE BRANCH OFFICE BUT IT IS THE CASE WHERE THE ASSESSEE CARRIE S ON AGRI-GENETIC RESEARCH TO DEVELOP AND PRODUCE BREEDER SEEDS, WHICH ARE USE D AS INPUT AND/OR SEEDS FOR PRODUCING PARENT SEEDS, WHICH ARE IN TURN SOLD TO JOINT VENTURE COMPANY. EVEN THE DISCARDED SEEDS PRODUCED DURING THE COURSE OF DEVELOPING AND PRODUCING BREEDER SEEDS ARE BEING SO LD IN INDIA, AND THE PROCEEDS REALIZED THEREFROM ARE ADJUSTED AGAINST TH E RESEARCH EXPENSES IN THE BOOKS INSTEAD OF SHOWING THE SAME SEPARATELY AS INCOME IN THE BOOKS. THE INFORMATION OR RESULTS OR DATAS COLLECTED DURIN G THE COURSE OF DEVELOPING AND PRODUCING HYBRID BREEDER SEEDS ARE B EING SUPPLIED TO THE HO AND IN TURN O VARIOUS GROUP COMPANIES OVER THE W ORLD. HAVING REGARD TO THE VARIOUS STAGES OF DEVELOPING AND PRODUCING B REEDER SEEDS AND THEN PRODUCING PARENT SEEDS FROM BREEDER SEEDS, IT IS CL EAR BEYOND ANY DOUBT THAT THE ACTIVITY OF DEVELOPING AND PRODUCING BREED ER SEEDS BY DOING EXTENSIVE RESEARCH IS AN ESSENTIAL AND SIGNIFICA NT PART OF THE ACTIVITY OF THE BRANCH OFFICE IN SUPPLYING PARENT SEEDS TO I TS JOINT VENTURE 61 COMPANY. IN THIS VIEW OF THE MATTER, WE FIND OURSE LVES IN FULL AGREEMENT WITH THE LEARNED CIT(A) IN OBSERVING AND HOLDING TH AT THE ASSESSEE S TWO FOLD ACTIVITIES OF CONDUCTING THE RESEARCH AND UTIL IZATION OF THE RESEARCH IN PREPARATION OR PRODUCTION OF PARENT/HYBRID SEEDS OF HIGH QUALITY OF VARIOUS CROPS AND SALES THEREOF ARE INTERWOVEN, INT ER-RELATED, COORDINATED, INTER-LINKED AND INTER-DEPENDENT, AND THE RESEARCH ACTIVITY OF THE ASSESSEE IS NOT THE SOLE ACTIVITY OF ITS BRANCH OFFICE IN IN DIA BUT THE RESEARCH CONDUCTED BY THE ASSESSEE IS THE MAIN CORE ACTIVIT Y, WHICH IS COMMERCIALLY EXPLOITED BY THE ASSESSEE BY WAY OF S ELLING OF HYBRID/PARENT SEEDS. 75. IN THE LIGHT OF THE FACTS OF THE PRESENT CASE, THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF U.A.E. EXCH ANGE CENTRE LTD. VS. UNION OF INDIA (2009) 223 CTR (DEL) 250: (2009) 22 DTR (DEL) 33: 2009-TIOL-84-HC-DEL-IT ON WHICH HEAVY RELIANCE HAS BEEN PLACED BY THE LD. SENIOR COUNSEL FOR THE ASSESSEE, IS NOT APP LICABLE TO THE PRESENT CASE AS DISCUSSED BELOW:- THE HONBLE DELHI HIGH COURT IN THE CASE OF U.A.E. EXCHANGE CENTRE LTD. VS. UNION OF INDIA (2009) 223 CTR (DEL) 250: (2009) 22 DTR (DEL) 33: 2009-TIOL-84-HC-DEL-IT HAD AN OCCASIO N TO CONSIDER AS TO WHETHER THE INCOME OF THE NON-RESIDENT IS TAXABL E IN INDIA IN VIEW OF HAVING A LO AT FIVE PLACES IN INDIA. THE EXCLUSION ARY CLAUSE FOUND IN THAT CASE WAS SIMILAR TO ART. 5(4)(E) OF THE AGREEMENT B ETWEEN INDIA AND SOUTH 62 KOREA. THE HONBLE HIGH COURT OBSERVED THAT THE PL AIN MEANING OF THE WORD AUXILIARY IS FOUND IN BLACK LAW DICTIONARY, 7 TH EDITION AT P. 130 WHICH READS AS AIDING OR SUPPORTING, SUBSIDIARY. IN THAT CASE, THE ONLY ACTIVITY OF THE LO IN INDIA WAS SIMPLY DOWNLOADED I NFORMATION, WHICH WAS CONTAINED IN THE MAIN SERVERS LOCATED IN UAE BA SED ON WHICH CHEQUES WERE DRAWN ON BANKS IN INDIA WHEREUPON THE SAID CHEQUES WERE COURIERED OR DISPATCHED TO THE BENEFICIARIES IN IND IA KEEPING IN MIND HE INSTRUCTIONS OF THE NRI REMITTER. SUCH AN ACTIVITY WAS HELD AS AN ACTIVITY IN AID OR SUPPORT OF THE MAIN ACTIVITY. THE HONBL E DELHI HIGH COURT FURTHER OBSERVED THAT THE ACTIVITY CARRIED ON BY TH E LO IN INDIA DID NOT IN ANY MANNER, WHATSOEVER CONTRIBUTE DIRECTLY OR INDIR ECTLY TO THE EARNING OF PROFITS OR GAINS BY THE PETITIONER IN UAE. COMMISS ION FOR THE SERVICES OF REMITTANCE OFFERED BY THE PETITIONER WAS ALSO EARNE D IN UAE. NOW FROM THE ABOVE IT IS CLEAR THAT IF THE ACTIVITY CARRIED OUT IN INDIA CONTRIBUTES DIRECTLY OR INDIRECTLY TO THE EARNING OF PROFITS OR GAINS BY THE NON-RESIDENT THEN EXTENT OF CONTRIBUTION IS TO BE TAXED IN INDIA . IN THE INSTANT CASE BEFORE US, IT IS NOT IN DISPUTE THAT THE ASSESSEE H AS ENGAGED IN THE ACTIVITY OF DEVELOPING AND PRODUCING BREEDER SEEDS BY DOING EXTENSIVE RESEARCH OVER A NUMBER OF GENERATIONS OF CROPS FROM YEAR TO YEAR AND THE INFORMATION OR DATA OR RESULTS FOUND DURING THE COU RSE OF SUCH ACTIVITIES OF DEVELOPING AND PRODUCING BREEDER SEEDS ARE TRANSFER RED TO THE HEAD OFFICE, WHICH IS ACCESSIBLE TO OTHER BRANCHES ALL O VER THE WORLD, AND THE 63 BREEDER SEEDS SO DEVELOPED AND PRODUCED BY THE ASSE SSEE IS USED AS RAW MATERIAL OR INPUT OR AS SEED FOR THE PURPOSE OF PRO DUCING HYBRID PARENT SEEDS WHICH ARE IN TURN SOLD AND SUPPLIED TO THE JO INT VENTURE COMPANY BY THE ASSESSEE. THE INFORMATION OR DATA OR RESULT CO LLECTED BY THE ASSESSEE DURING THE COURSE OF DEVELOPING AND PRODUCING BREED ER SEEDS ARE USED OR APPLIED BY THE HEAD OFFICE AND OTHER BRANCHES OF TH E ASSESSEE COMPANY ALL OVER THE WORLD FOR THE PURPOSE OF PRODUCING HYB RID SEEDS. WE FURTHER FIND THAT ALL THE INFORMATION OR DATA OR RESULTS OB TAINED BY THE ASSESSEE IN THE COURSE OF DEVELOPING AND PRODUCING HYBRID BREED ER SEEDS OR HYBRID GERMPLASMS ARE ACCESSIBLE TO ANY OTHER BRANCH OFFIC E OR HEAD OFFICE OF THE ASSESSEE COMPANY. THERE EXIST A POOL OF RESEAR CH AVAILABLE AT HEAD OFFICE WHICH IS USED BY OTHER BRANCH OFFICES ALL OV ER THE WORLD. HENCE, THE RESEARCH ACTIVITY CARRIED OUT BY THE BRANCH OFF ICE IN INDIA IN THE COURSE OF DEVELOPING AND PRODUCING HYBRID BREEDER SEEDS IS TO BE CONSIDERED FOR THE PURPOSE OF DETERMINING INCOME ACCRUING TO THE A SSESSEE COMPANY IN INDIA, AND THE QUANTUM IS TO BE ASCERTAINED ON THE BASIS OF THE PROFIT OF THE HEAD OFFICE ATTRIBUTABLE TO THE BRANCH OFFICE IN IN DIA. IT, THUS, MAKES IT CLEAR THAT ACTIVITY CARRIED OUT IN INDIA CONTRIBUTE S DIRECTLY OR INDIRECTLY TO THE EARNING OF PROFITS OR GAINS BY THE HEAD OFFICE FROM DEVELOPING AND PRODUCING HYBRID SEEDS AND, THEREFORE, THE INCOME T O THE EXTENT OF THE CONTRIBUTION MADE BY THE BRANCH OFFICE IN INDIA TO THE HEAD OFFICE IS TO BE TAXED IN INDIA. 64 76. IN THE PRESENT CASE, THE INCOME OF THE HEAD OFF ICE OR OTHER BRANCH OFFICES ALL OVER THE WORLD IS GENERATED OUTSIDE IND IA BY USE OF THE DATA OR INFORMATION OR RESULTS PROVIDED BY THE BRANCH OFFIC E TO HEAD OFFICE, AND ALL THE ACTIVITY OF PRODUCING HYBRID SEEDS BY THE H EAD OFFICE OR OTHER BRANCH OFFICES ALL OVER THE WORLD ARE NOT TAKING PL ACE IN INDIA. SINCE THE PREPARATION OR PRODUCTION OF HYBRID SEEDS AND ITS S ALE BY THE HEAD OFFICE OR OTHER BRANCH OFFICES ALL OVER THE WORLD IS TAKEN PLACE OUTSIDE INDIA, ONLY THE PROFIT WHICH IS ATTRIBUTABLE TO THE ACTIVI TIES CARRIED OUT IN INDIA I.E. USE OF THE RESULT OF THE RESEARCH PROVIDED BY THE BRANCH OFFICE IN INDIA TO H.O., WILL ONLY BE TAXABLE IN INDIA. IN THIS VI EW OF THE MATTER WE, THEREFORE, HOLD THAT THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF U.A.E. EXCHANGE CENTRE LTD. VS. UNION OF INDIA ( SUPRA) DOES NOT ADVANCE THE ASSESSEES CASE ANY FURTHER. 77. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO PLACE D RELIANCE UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MORGAN STANLEY AND CO. 292 ITR 416, WHERE THE HONBLE SUPREME COURT HA D OBSERVED AND HELD WITH REFERENCE TO THE ARTICLE 5(3)(E) OF THE T REATY AS UNDER:- IN OUR VIEW, THE SECOND REQUIREMENT OF ARTICLE 5(1) OF THE DTAA IS NOT SATISFIED AS REGARDS BACK OFFICE FUNCTIONS. WE HAV E EXAMINED THE TERMS OF THE AGREEMENT ALONG WITH THE ADVANCE RULING APPLICATION MADE BY MS CO. INVITING THE AAR TO GIVE ITS RULING. IT IS CLEAR FROM A REA DING OF THE ABOVE AGREEMENT/APPLICATION THAT MSAS IN INDIA WOULD BE ENGAGED IN SUPPORTING THE FRONT OFFI CE FUNCTIONS OF MS CO IN FIXED INCOME AND EQUITY RESEARCH AND IN PROVIDING IT ENABLED SERVICES SUCH AS 65 DATA PROCESSING SUPPORT CENTER AND TECHNICAL SERVIC ES AS ALSO RECONCILIATION OF ACCOUNTS. IN ORDER TO DE CIDE WITHER A P.E. STOOD CONSTITUTED ONE HAS TO UNDERTAK E WHAT IS CALLED A FUNCTIONAL AND FACTUAL ANALYSIS OF EACH OF THE ACTIVITIES TO BE UNDERTAKEN BY AN ESTABLISHMENT. IT IS FROM THAT POINT OF VIEW, WE A RE IN AGREEMENT WITH THE RULING OF THE AAR THAT IN THE PRESENT CASE ARTICLE 5(1) IS NOT APPLICABLE AS THE SAID MSAS WOULD BE PERFORMING IN INDIA ONLY BACK OFFICE OPERATIONS. THEREFORE TO THE EXTENT OF THE ABOVE B ACK OFFICE FUNCTIONS THE SECOND PART OF ARTICLE 5(1) IS NOT ATTRACTED. THE SUPREME COURT FURTHER OBSERVED (P. 177/PB IV) THERE IS ONE MORE ASPECT WHICH NEEDS TO BE DISCUSSED NAMELY, EXCLUSION OF P.E. UNDER ARTICLE 5 (3). UNDER ARTICLE 5(3)(E) ACTIVITIES WHICH ARE PREPARAT ORY OR AUXILIARY IN CHARACTER WHICH ARE CARRIED OUT AT A FIXED PLACE OF BUSINESS WILL NOT CONSTITUTE A P.E. ARTICLE 5(3) COMMENCES WITH A NON OBSTANTE CLAUSE. IT STAT ES THAT NOTWITHSTANDING WHAT IS A FIXED PLACE OF BUSIN ESS SOLELY FOR ADVERTISEMENT, SCIENTIFIC RESEARCH OR FO R ACTIVITIES WHICH ARE PREPARATORY OR AUXILIARY IN CHARACTER. IN THE PRESENT CASE WE ARE OF THE VIEW THAT THE ABOVE MENTIONED BACK OFFICE FUNCTIONS PROPOSED TO BE PERFORMED BY MSAS IN INDIA FALL UNDER ARTICLE 5(3)(E) OF THE DTAA. THEREFORE, IN OUR VIEW IN THE PRESENT CASE MSAS WOULD CONSTITUTE A FIXED PLACE P .E. UNDER ARTICLE 5(1) OF THE DTAA AS REGARDS ITS BACK OFFICE OPERATIONS. 78 HOWEVER, IN THE LIGHT OF THE VIEW WE HAVE TAKEN ABOVE HOLDING THAT RESEARCH ACTIVITIES CARRIED OUT BY THE BRANCH OFFIC E IN INDIA ARE NOT AN INDEPENDENT AND DISTINCT ACTIVITY TO THE ACTIVITY O F PRODUCING AND SALE OF PARENT SEEDS SOLD TO JOINT VENTURE COMPANY, AND THE SAID RESEARCH ACTIVITY/IES ARE CORE BUSINESS ACTIVITIES, THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF MORGAN STANLEY AND CO. 292 ITR 416 (SC) IS NOT 66 APPLICABLE TO THE FACTS OF THE PRESENT ASSESSEES C ASE IN AS MUCH AS THE RESEARCH ACTIVITIES OF DEVELOPING AND PRODUCING HYB RID BREEDER SEEDS, WHICH ARE USED AS INPUT OR SEED FOR PRODUCING PAREN T SEEDS, CANNOT BE HELD TO HELD TO BE THE FUNCTIONS OF BACK OFFICE SUP PORTING THE BUSINESS OF THE BRANCH CARRYING ON BUSINESS OF PRODUCTION AND S ALE OF PARENT SEED. IF ONE HAS TO MAKE FUNCTIONAL AND FACTUAL ANALYSIS OF EACH OF THE ACTIVITIES UNDERTAKEN BY BRANCH OFFICE IN INDIA, IT IS MORE TH AN CLEAR THAT THE ACTIVITY OF DOING EXTENSIVE RESEARCH TO DEVELOP AND PRODUCE BREEDER SEEDS, WHICH ARE USED AS SEED FOR PRODUCING HYBRID PARENT SEEDS ARE CORE BUSINESS ACTIVITY OF PRODUCING HYBRID PARENT SEEDS SOLD TO T HE JOINT VENTURE COMPANY. THUS, THE SAID DECISION MENTIONED JUST AB OVE GIVES NO ASSISTANCE TO THE ASSESSEE S CASE BEING BASED ON D IFFERENT FACTS. 79. IN THE LIGHT OF DISCUSSIONS MADE ABOVE, WE, THE REFORE, HOLD THAT THE ASSESSEES CASE IS NOT COVERED BY EXCLUSIONARY PROV ISIONS CONTAINED IN ARTICLE 5(3)(E) OF THE TREATY BETWEEN INDIA AND USA . CONSEQUENTLY, WE HOLD THAT THE ASSESSEES BRANCH OFFICE IN INDIA DO CONSTITUTE A PE WITHIN THE MEANING OF ARTICLE 5 OF DTAA BETWEEN INDIA AND USA, AND THE INCOME OF THE PE IS, THUS, TO BE TAXED IN INDIA AS PER PROVISIONS OF ARTICLE 7 OF DTAA. 80. ARTICLE 7(1) OF THE DTAA BETWEEN INDIA AND USA PROVIDES THAT THE PROFITS OF AN ENTERPRISE OF A CONTACTING STATE SHAL L BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRACTING 67 STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED TH EREIN AND IF THE ENTERPRISE CARRIES ON BUSINESS IN OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THERE IN, THE PROF ITS OF AN ENTERPRISE MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THE M AS IS ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT; OR SALES IN THE OTHER STATE OF GOODS OR MERCHANDISE OF THE SAME OR SIMILAR KIND AS THOSE SO LD THROUGH THAT PERMANENT ESTABLISHMENT; OR OTHER BUSINESS ACTIVITI ES CARRIED ON IN THE OTHER STATE OF THE SAME OR SIMILAR KIND AS THOSE EF FECTED THROUGH THAT PERMANENT ESTABLISHMENT. 81. ARTICLE 7(2) OF THE TREATY PROVIDES THAT SUBJEC T TO THE PROVISIONS OF ARTICLE 7(3), WHERE AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING STATE BE A TTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROFITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND INDEPENDENT ENTERPRISE EN GAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILAR CONDIT IONS AND DEALING WHOLLY AT ARMS LENGTH WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT AND OTHER ENTERPRISES CONTROLLING, CO NTROLLED BY OR SUBJECT TO THE SAME COMMON CONTROL AS THAT ENTERPRISE. IN ANY CASE WHERE THE CORRECT AMOUNT OF PROFITS ATTRIBUTABLE TO A PERMANE NT ESTABLISHMENT IS INCAPABLE OF DETERMINATION OR THE DETERMINATION THE REOF PRESENTS EXCEPTIONAL DIFFICULTIES, THE PROFITS ATTRIBUTABLE TO THE PERMANENT 68 ESTABLISHMENT MAY BE ESTIMATED ON A REASONABLE BASI S. THE ESTIMATE ADOPTED SHALL, HOWEVER, BE SUCH THAT THE RESULT SHA LL BE IN ACCORDANCE WITH THE PRINCIPLES CONTAINED IN ARTICLE 7. 82. IN THE LIGHT OF THE ARTICLE 7(1) & (2) OF INDO- US TREATY, THE INDIAN PERMANENT ESTABLISHMENT SHOULD BE TREATED AS SEPARA TE PROFIT CENTER AND PROFITS TO BE ATTRIBUTED TO IT SHOULD BE WORKED OUT BY FOLLOWING ARMS LENGTH PRINCIPLE AS SO HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. HYUNDAI HEAVY INDUSTRIES COMPANIES LTD. 291 ITR 482, IN THE CASE OF MORGAN STANLEY 292 ITR 416, IN THE CASE OF ISHIKAWAJAMA HARIMA HEAVY INDUSTRIES LTD. 288 ITR 408, AND THE D ECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF SET SATELLITE (SIN GAPORE) PVT. LTD. REPORTED IN 218 CTR 452. FROM THE SAID DECISIONS I T IS CLEAR THAT IT IS THE ARMS LENGTH PRICE, WHICH SHOULD BE CONSTITUTE THE BASIS FOR COMPUTING THE PROFIT OF THE PERMANENT ESTABLISHMENT IN INDIA FOR PROVIDING SERVICES TO THE HEAD OFFICE. HOWEVER, IF THE CORRECT AMOUNT OF ATTRIBUTION IS INCAPABLE OF DETERMINATION OR POSES EXCEPTIONAL DIF FICULTIES, THE ATTRIBUTION MAY BE ESTIMATED ON A REASONABLE BASIS, AND THE RESULT OF SUCH ESTIMATION SHOULD BE IN ACCORDANCE WITH THE PRINCIP LES CONTAINED IN ARTICLE 7. 83. AT THIS STAGE, IT IS DEEMED NECESSARY BY US TO CONSIDER THE IMPACT OF DTAA ON THE PROVISIONS OF LOCAL ENACTMENT I.E. INCO ME TAX ACT. IT IS WELL SETTLED THAT WHERE LIABILITY TO TAX ARISES UND ER THE LOCAL ENACTMENT, 69 THE PROVISIONS OF SECTION 4 AND 5 OF THE ACT PROVID E FOR TAXATION OF GLOBAL INCOME OF AN ASSESSEE CHARGEABLE TO TAX THEREUNDER, THEN IT IS SUBJECT TO THE PROVISIONS OF AN AGREEMENT ENTERED INTO BETWEEN THE CENTRAL GOVERNMENT AND THE GOVERNMENT OF A FOREIGN COUNTRY FOR AVOIDANCE OF DOUBLE TAXATION AS ENVISAGED UNDER SECTION 90 TO TH E CONTRARY, IF ANY, AND SUCH AN AGREEMENT WILL ACT AS AN EXCEPTION TO OR MO DIFICATION OF SECTION 4 AND 5 OF THE INCOME TAX ACT. THE PROVISIONS OF SUC H AGREEMENT CANNOT FASTEN A TAX LIABILITY WHERE LIABILITY IS NOT IMPOS ED BY A LOCAL ACT. WHERE TAX LIABILITY IS IMPOSED BY THE ACT, THE AGREEMENT MAY BE RESORTED TO EITHER REDUCING THE TAX LIABILITY OR ALTOGETHER AVO IDING THE TAX LIABILITY. IN CASE OF ANY CONFLICT BETWEEN THE PROVISIONS OF THE AGREEMENT AND THE ACT, THE PROVISIONS OF THE AGREEMENT WOULD PREVAIL OVER THE PROVISIONS OF THE ACT AS IS CLEAR FROM THE PROVISIONS OF S. 90(2) OF THE ACT. HENCE, WE HAVE TO SEE FIRST AS TO WHETHER ANY TAX LIABILITY IS IMP OSED ON THE PRESENT ASSESSEE (A NON-RESIDENT COMPANY) UNDER THE ACT. 84. AS PER S. 5(2) OF THE IT ACT, THE TOTAL INCOME OF A NON-RESIDENT ALSO INCLUDES INCOME WHICH ACCRUES OR ARISES OR IS DEEME D TO ACCRUE OR ARISE TO HIM IN INDIA DURING THE PREVIOUS YEAR. SEC. 9 SPEC IFIES THE INCOMES WHICH ARE DEEMED TO ACCRUE, OR ARISE IN INDIA. THE RELEV ANT SECTION IS S. 9(1)(I) IS REPRODUCED AS UNDER: 9. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA:- 70 (I) ALL INCOME ACCRUING OR ARISING, WHETHER DIRECTL Y OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, OR THROUGH OR FROM ANY PROPERTY IN INDIA, OR THROUG H OR FROM ANY ASSET OR SOURCE OF INCOME IN INDIA OR THROUGH T HE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA; EXPLANATION 1: FOR THE PURPOSE OF THIS CLAUSE- (A) IN THE CASE OF A BUSINESS OF WHICH ALL THE OPER ATIONS ARE NOT CARRIED OUT IN INDIA, THE INCOME OF THE BUS INESS DEEMED UNDER THIS CLAUSE TO ACCRUE OR ARISE IN INDI A SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRI BUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA; (B) IN THE CASE OF A NON-RESIDENT, NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA TO HIM THROUGH O R FROM OPERATIONS WHICH ARE CONFINED TO THE PURCHASE OF GO ODS IN INDIA FOR THE PURPOSE OF EXPORT; (C) IN THE CASE OF A NON-RESIDENT, BEING A PERSON E NGAGED IN THE BUSINESS OF RUNNING OF A NEWS AGENCY OR OF P UBLISHING NEWSPAPERS, MAGAZINES OR JOURNALS, NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA TO HIM THROUGH O R FROM ACTIVITIES WHICH ARE CONFINED TO THE COLLECTION OF NEW AND VIEW IN INDIA FOR TRANSMISSION OUT OF INDIA; (D) IN THE CASE OF A NON-RESIDENT, BEING- (1) AN INDIVIDUAL WHO IS NOT A CITIZEN OF INDIA; OR (2) A FIRM WHICH DOES NOT HAVE ANY PARTNER WHO IS A CITIZEN OF INDIA OR WHO IS RESIDENT IN INDIA; OR (3) A COMPANY WHICH DOES NOT HAVE ANY SHAREHOLDER WHO IS A CITIZEN OF INDIA OR WHO IS RESIDENT IN INDIA, NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN IND IA TO SUCH INDIVIDUAL, FIRM OR COMPANY THROUGH OR FROM OP ERATIONS WHICH ARE CONFINED TO THE SHOOTING OF ANY CINEMATOG RAPH FILM IN INDIA; EXPLANATION 2: XXX XXX XXX 85. THEREFORE, WE HAVE TO SEE WHETHER THERE IS ANY BUSINESS CONNECTION OF ASSESSEE NON-RESIDENT COMPANY IN INDIA, AND WHET HER THROUGH SUCH BUSINESS CONNECTION, ANY INCOME IS ACCRUING OR ARIS ING TO THE ASSESSEE COMPANY. AS ALREADY DISCUSSED IN DETAIL HEREINABOV E, THE ASSESSEE HAS A BRANCH OFFICE IN INDIA TO UNDERTAKE VARIOUS ACTIVIT IES A PER PERMISSION GRANTED BY THE RBI, AND THE RESULT OF THE AGRI-GENE TIC RESEARCH CONDUCTED 71 IN THE COURSE OF DEVELOPING AND PRODUCING HYBRID BR EEDER SEEDS ARE PROVIDED TO THE HO IN USA. THERE EXISTS A RELATION BETWEEN A BUSINESS OF PRODUCING HYBRID BREEDER SEEDS IN USA BY THE ASSESS EE NON-RESIDENT COMPANY WHICH YIELD PROFITS OR GAINS AND THE ACTIVI TY OF PROVIDING RESULT OF RESEARCH CONDUCTED BY BRANCH OFFICE IN INDIA WHI CH CONTRIBUTES DIRECTLY OR INDIRECTLY TO THE EARNING OF THOSE PROF ITS OR GAINS. THERE EXISTS A PE IN INDIA, AND THE ASSESSEE COMPANY HAS A BUSIN ESS CONNECTION IN INDIA. THUS, SUCH PART OF PROFITS OR GAINS EARNED IN USA AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS OR ACTIVITIES CARRIE D OUT IN INDIA, SHALL BE TAXABLE IN INDIA. 86. AS ALREADY DISCUSSED ABOVE, IN THE LIGHT OF THE ARTICLE 7(1) AND (2) OF INDO-US TREATY, THE INDIAN PERMANENT ESTABLISHME NT IS TO BE TREATED AS A SEPARATED PROFIT CENTER, AND PROFITS TO BE ATTRIB UTED TO IT SHOULD BE WORKED OUT BY FOLLOWING ARMS LENGTH PRINCIPLE. IN THIS CONNECTION AS TO THE METHOD OF DETERMINING PROFIT ATTRIBUTABLE TO PE IN INDIA, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE REV ENUE AUTHORITIES BELOW HAVE NOT MADE OUT ANY CASE FOR ANY EXCEPTIONAL DIFF ICULTY OR HAS NOT ESTABLISHED THAT THE PRESENT CASE IS AN UNUSUAL ONE BUT, ON THE OTHER HAND, AFTER THE INSERTION OF TRANSFER PRICING PROVISIONS IN THE INCOME TAX ACT EFFECTIVE FROM A.Y. 2002-03, THE AO HAS DETERMINED THE ARMS LENGTH PRICE OF THE SERVICES RENDERED BY INDIAN BRANCH OFF ICE I.E. INDIAN P.E. TO THE US HEAD OFFICE, AT A PERCENTAGE RANGING FROM 12 .5% TO 18% OF THE 72 COST OF THE SERVICES. WE ARE IN AGREEMENT WITH THIS CONTENTION ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE, AND IN THE LIG HT OF THE PROVISIONS CONTAINED IN ARTICLE 7(2), WE HOLD THAT THE ARMS L ENGTH PRINCIPLE WOULD BE APPLIED FOR ATTRIBUTION OF PROFIT OF THE US HEAD OFFICE TO THE PE IN INDIA IN RESPECT OF THE SERVICES RENDERED BY THE IN DIAN PE TO THE HO, AND THE MANNER OF COMPUTATION OF PROFIT ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA ADOPTED BY THE AO, AS PARTIALLY CONFIR MED BY THE LD. CIT(A), IS NOT IN ORDER. IN THE PRESENT CASE, THE INDIAN B RANCH OFFICE MUST BE TREATED AS A DISTINCT AND INDEPENDENT ENTITY AND PR OFIT CENTER, AND THE ATTRIBUTION OF PROFIT UNDER ARTICLE 7(1) AND (2) CA N BE MADE ONLY ON THE BASIS AS TO WHAT AN OUTSIDER WOULD CHARGE THE HEAD OFFICE FOR PROVIDING THE RESULT OF RESEARCH AT ARMS LENGTH. IN OTHER W ORDS, PROFITS TO BE ATTRIBUTED TO BRANCH OFFICE IN INDIA ARE THOSE THAT BRANCH OFFICE IN INDIA WOULD HAVE MADE IF INSTEAD OF DEALING WITH ITS HEAD OFFICE, IT HAD BEEN DEALING WITH AN ENTIRELY SEPARATE ENTERPRISE UNDER THE SAME CONDITIONS AND AT PRICES PREVAILING IN THE ORDINARY MARKET. THIS METHOD CORRESPONDS TO THE ARMS LENGTH PRINCIPLE. HENCE, IN DETERMININ G THE PROFITS ATTRIBUTABLE TO BRANCH OFFICE IN INDIA, WHICH CONST ITUTES A PERMANENT ESTABLISHMENT, IT IS NECESSARY TO DETERMINE THE PRI CE OF THE SERVICES RENDERED BY THE BRANCH OFFICE IN INDIA TO THE HEAD OFFICE ON THE BASIS OF ARMS LENGTH PRINCIPLE. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE RESEARCH EXPENSES INCURRED BY THE BRANCH OFFICE, AS REDUCED BY THE 73 AMOUNT REALIZED BY THE ASSESSEE BY WAY OF SALE OF D ISCARDED SEEDS, HAS BEEN REIMBURSED BY THE H.O., AND THE NET RESEARCH E XPENSES INCURRED BY THE BRANCH OFFICE HAS NOT BEEN CLAIMED AS DEDUCTION AGAINST ITS INCOME REALIZED FROM PRODUCING AND SALE OF PARENT SEEDS IN INDIA. THE AMOUNT REALIZED BY THE BRANCH OFFICE FROM THE HO HAS NOT B EEN SEPARATELY INCLUDED NOR THE RESEARCH EXPENSES HAS BEEN CLAIMED AS DEDUCTION IN THE PROFIT AND LOSS ACCOUNT. BUT, THE FACT REMAINS THA T THE RESEARCH RESULT HAS BEEN PROVIDED BY THE BRANCH OFFICE TO THE HO, AND T HE BRANCH OFFICE HAS ALREADY REALIZED NET RESEARCH EXPENSES FROM HO. TH IS FACT IS TO BE TAKEN INTO ACCOUNT WHILE DETERMINING THE ARMS LENGTH PRI CE AND THE MARK-UP ON THE COST INCURRED BY THE BRANCH OFFICE. SINCE THE AO AS WELL AS LD. CIT(A) HAS NOT DETERMINED THE PROFIT ATTRIBUTABLE T O THE BRANCH OFFICE IN INDIA IN THE MANNER PROVIDED UNDER ARTICLE 7(2) SUB JECT TO THE PROVISIONS OF ARTICLE 7(3), AND SINCE IN SUBSEQUENT ASSESSMENT YEARS FROM THE A.Y. 2002-03, THE AO DID NOT FIND ANY DIFFICULTY AT ALL IN DETERMINING THE ARMS LENGTH PRICE OF THE SERVICES RENDERED BY THE INDIAN BRANCH OFFICE TO THE US HEAD OFFICE, WE RESTORE THIS PART OF THE ISSUE ABOU T THE DETERMINATION OF THE PRICE OF THE SERVICES RENDERED BY THE INDIAN BR ANCH OFFICE TO THE HEAD OFFICE AT ARMS LENGTH PRICE TO THE FILE OF THE AO AFTER PROVIDING REASONABLE OPPORTUNITIES OF BEING HEARD TO THE ASSE SSEE. THE ASSESSEE SHALL PRODUCE AND FURNISH ALL THE DETAILS AND PARTI CULARS BEFORE THE AO IN ORDER TO DETERMINE THE PROFIT ATTRIBUTABLE TO THE R ESEARCH ACTIVITY CARRIED 74 OUT IN INDIA, AND USED BY THE HO FOR ITS BUSINESS C ARRIED ON THERE. THE AO SHALL DECIDE THE ISSUE AS PER LAW, IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, AND AFTER CONSID ERING THE ASSESSEES SUBMISSIONS BY PASSING A SPEAKING AND REASONED ORDE R. WE ORDER ACCORDINGLY. ITA NO. 1869/DEL/2005 & 2290/DEL/2005, A.Y. 1999-20 00 87. NOW, WE SHALL COME TO THE APPEAL FILED BY THE A SSESSEE AS WELL AS BY THE REVENUE PERTAINING TO THE A.Y. 1999-2000. 88. IN THE ASSESSEES APPEAL, THE FIRST ISSUE RAISE D IN GROUND NO. 1 TO 5 IS AGAINST THE INITIATION OF RE-ASSESSMENT PROCEEDINGS U/S. 147 OF THE ACT BY THE AO. 89. IN THIS ASSESSMENT YEAR THE ASSESSEE FILED ORI GINAL RETURN OF INCOME ON 29.12.1999 DECLARING TOTAL INCOME AT RS. 4,99,00 0/-. THE AO THEREAFTER INITIATED RE-ASSESSMENT PROCEEDINGS U/S. 147 OF THE ACT AND ISSUED NOTICE U/S. 148 ON 11.01.2002. ON AN APPEAL, THE CIT(A) C ONFIRMED THE AOS ACTION IN INITIATING PROCEEDINGS U/S. 147 AND IN IS SUING NOTICE U/S. 148 OF THE ACT FOR THE REASONS SIMILAR TO THE REASONS GIVE N BY HIM IN THE A.Y. 1997-98, THIS POSITION THAT ISSUE WITH REGARD TO TH E VALIDITY OF REASSESSMENT PROCEEDINGS U/S. 147 IS IDENTICAL IN B OTH THE ASSESSMENT YEARS I.E. A.Y. 1997-98 AND A.Y. 1999-2000 IS NOT I N DISPUTE. THEREFORE, IN THE LIGHT OF OUR DECISION GIVEN ABOVE ON THIS IS SUE IN THE A.Y. 1997-98, WE UPHELD THE ORDER OF THE CIT(A) IN CONFIRMING THE AOS ACTION IN 75 INITIATING PROCEEDINGS U/S. 147 OF THE ACT AND IN I SSUING NOTICE U/S. 148 OF THE ACT. THEREFORE, THE GROUNDS OF THE ASSESSEE ON THE ISSUE OF VALIDITY OF NOTICE U/S. 148 OF THE ACT FOR THE A.Y. 1999-2000, ARE REJECTED, AND THE PROCEEDING INITIATED U/S. 147 BY THE AO ARE HELD TO BE VALID. 90. FURTHER, IN THE ASSESSEES APPEAL, THE ASSESSEE HAS RAISED GROUNDS ABOUT THE NATURE OF INCOME EARNED FROM PRODUCING AN D SALE OF PARENT SEEDS. THIS ISSUE HAS BEEN RAISED IN THE GROUND NOS . 6 TO 15. 91. IN THE LIGHT OF OUR DECISION ON THE IDENTICAL I SSUE IN THE A.Y. 1998- 1999, WHICH HAVE BEEN FOLLOWED IN THE A.Y. 1997-98, WE DECIDE THE ISSUE RAISED IN THESE GROUND NOS. 6 TO 15 IN THE TERMS OF OUR ORDER PASSED IN THE A.Y. 1998-99, AND DIRECT THE AO TO MODIFY THE ASSES SMENT ORDER ACCORDINGLY. 92. NOW, WE COME TO THE NEXT ISSUE RAISED BY THE AS SESSEE IN GROUND NOS. 16 TO 19, WHICH ARE IDENTICAL AND SIMILAR TO T HE GROUND NOS. 16 TO 19 RAISED IN THE A.Y. 1997-98. THEREFORE, IN THE LIGH T OF OUR ORDER ON THESE GROUNDS IN THE A.Y. 1997-98, THESE GROUNDS STAND DE CIDED ACCORDINGLY. THIS WILL ALSO TAKE CARE OF A SOLITARY GROUND RAISE D BY THE REVENUE IN THE A.Y. 1999-2000, WHICH IS IDENTICAL TO THE SOLITARY GROUND RAISED BY THE REVENUE IN THE A.Y. 1997-98. ITA NO. 1870/DEL/2005 & 2291/DEL/2005, A.Y. 2000-01 93. IN THIS A.Y. 2000-01, THE ASSESSEE HAS RAISED ONLY TWO ISSUES AS UNDER:- (I) WHETHER INCOME DERIVED FROM PRODUCING PARENT SEEDS IS AGRICULTURAL INCOME OR NOT, 76 (II) WHETHER ASSESSMENT OF 50% OF AD-HOC AMOUNT BEI NG INCOME ATTRIBUTABLE TO THE INDIAN BRANCH OFFICE IN THE HANDS OF THE ASSESSEE IS JUSTIFIED. 94. THE REVENUE HAS ALSO TAKEN A GROUND THAT THE CI T(A) HAS REDUCED THE ALLOCATION OF INCOME TO THE INDIAN BRANCH BY 50 % OF THE AMOUNT DETERMINED BY THE AO AS SIMILARLY RAISED IN THE A.Y . 1997-98 AND 1999- 2000. 95. WE HAVE HEARD BOTH THE PARTIES AND HAVE PERUSED THE MATERIAL ON RECORD. 96. THE ISSUE NO. 1 HAS ALREADY BEEN DECIDED IN THE A.Y. 1998-99, WHICH HAS BEEN FOLLOWED IN THE A.Y. 1997-98 AND 199 9-2000. THEREFORE, IN THE LIGHT OF OUR ORDER PASSED IN THE A.Y. 1998-9 9, THIS ISSUE STAND DECIDE ACCORDINGLY. 97. THE ISSUE NO. 2 ABOUT ALLOCATION OF INCOME TO T HE INDIAN BRANCH IS IDENTICAL TO THE ISSUE RAISED BY THE ASSESSEE AS WE LL AS BY THE REVENUE IN THE A.Y. 1997-98 AND 1999-2000. THE ISSUES HAS BEE N DECIDED BY US IN THE A.Y. 1997-98, WHICH HAS BEEN FOLLOWED BY US IN THE A.Y. 1998-99, VIDE THIS COMMON ORDER. THEREFORE, THIS ISSUE NO. 2 STAND DECIDED ACCORDINGLY. ITA NO. 1871/DEL/2005 & 2292/DEL/2005, A.Y. 2001-02 98. IN THIS A.Y. 2001-02, THE ASSESSEE HAS RAISED I DENTICAL TWO ISSUES AS RAISED IN THE A.Y. 2000-01. THE DEPARTMENT HAS ALS O RAISED ONE ISSUE ABOUT EXTENT OF ALLOCATION OF INCOME TO THE BRANCH OFFICE, WHICH IS 77 IDENTICAL TO THE GROUND RAISED BY THE REVENUE IN TH E A.Y. 1997-98, 1999- 2000 AND 2000-01. THE ISSUES RAISED IN THIS ASSESS MENT YEARS ARE IDENTICAL TO THE ISSUES RAISED BY THE ASSESSEE AS W ELL AS BY THE REVENUE IN THE A.Y. 1997-98, 1999-2000 AND 2000-01, AND THESE ISSUES HAS BEEN DECIDED BY US IN THE A.Y. 1997-98, WHICH HAS BEEN F OLLOWED IN THE A.Y. 1999-2000 AND 2000-01, VIDE THIS COMMON ORDER. THE REFORE, THE ISSUES RAISED IN A.Y. 2001-02 STAND DECIDED ACCORDINGLY IN THE TERMS OF OUR ORDER FOR THE A.Y. 1997-98. 99. IN THE RESULT, ALL THE ASSESSEES APPEAL AS WEL L AS THE REVENUES APPEAL FOR ALL THESE ASSESSMENT YEARS I.E. A.Y. 199 7-98, 1999-2000, 2000- 01 AND 2001-02 ARE PARTLY ALLOWED IN THE MANNER AS INDICATED ABOVE. 100. THIS DECISION PRONOUNCED IN THE OPEN COURT ON 24 TH DECEMBER 2009. (B.C. MEENA) ACCOUNTANT MEMBER (C.L. SETHI) JUDICIAL MEMBER DATED: 24 TH DECEMBER, 2009. *NITASHA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. BY ORDER DEPUTY REGISTRAR