EPCOS AG, Nashik V. Deputy Commissioner of Income tax,

ITA 222/PUN/2017

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 6984 (ITAT-PUNE)
• Duration Of Justice: 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 30-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NIRUPAMA KOTRU
• Assessee Lawyers: SHRADDHA SWARUP
• Keywords: Business income; Double taxation relief; Principle of natural justice; Application of stay; Permanent establishment
• Section: 143(3); 5(2); 234B; 28; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 496 /P U N/20 1 6 / ASSESSMENT YEAR : 20 11 - 12 THE DY. COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION), CIRCLE - 1, PUNE . / APPELLANT VS. EPCOS AG, PUNE C/O EPCOS INDIA PVT. LTD., PLOT NO.E, 22 - 25, MIDC, SATPUR, NASHIK 422007 . / RESPONDENT PAN: AA ACE9787H . / ITA NO S . 222 & 223 /P U N/20 17 / ASSESSMENT YEAR S : 201 2 - 1 3 & 2013 - 14 EPCOS AG, PUNE C/O EPCOS INDIA PVT. LTD., PLOT NO.E, 22 - 25, MIDC, SATPUR, NASHIK 422007 . / APPELLANT PAN: AAACE9787H VS. THE DY. COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION), CIRCLE - 1, PUNE . / RESPONDENT SA NOS. 123 & 124 /PUN/2017 ARISING OUT OF ITA NOS. 222 & 223 /PUN/2017 ASSESSMENT YEARS : 20 12 - 1 3 & 2013 - 14 EPCOS AG, PUNE C/O EPCOS INDIA PVT. LTD., PLOT NO.E, 22 - 25, MIDC, SATPUR, NASHIK 422007 . / APPELLANT PAN: AAACE9787H 2 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 VS. THE DY. COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION), CIRCLE - 1, PUNE . / RESPONDENT ASSESSEE BY : SHRI ARIJIT CHAKRAVARTY AND MS. SHRADDHA SWARUP REVENUE BY : MS. NIRUPAMA KOTRU, CIT / DATE OF HEARING : 13 . 12 .2017 / DATE OF PRONOUNCEMENT: 15 . 1 2 .2017 / ORDER PER SUSHMA CHOWLA, JM: OUT OF THIS BUNCH OF APPEALS, APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF DCIT (INTERNATIONAL TAXATION), CIRCLE 1, PUNE DATED 25 . 0 1.201 6 RELATING TO ASSESSMENT YEAR 20 11 - 12 PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT 1961 (IN SHORT THE ACT). THE OTHER TWO APPEALS FILED BY THE ASSESSEE ARE AGAINST SEPARATE ORDERS OF DCIT (IT) - 1, PUNE BOTH DATED 26.12.2016 RELATING TO ASSESSMENT YEARS 2012 - 13 & 20 13 - 14 PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT. THE STAY APPLICATIONS MOVED BY THE ASSESSEE FOR ASSESSMENT YEARS 2012 - 13 AND 2013 - 14 WERE ALSO PLACED FOR HEARING ALONG WITH QUANTUM APPEALS. 2 . IN THIS BUNCH OF APPEALS, THE REVENUE IS IN APPEAL AGAINST THE ORDER OF DISPUTE RESOLUTION PANEL (IN SHORT THE DRP) IN ASSESSMENT YEAR 2011 - 12 AND THE ASSESSEE IS IN APPEAL AGAINST THE ORDERS OF ASSESSING OFFICER RELATING TO ASSESSMENT YEARS 2012 - 13 & 20 13 - 14. THE ISSUE RAISED IN ALL THE THREE APPEALS 3 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 IS IDENTICAL AND HENCE, ALL THE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE REVENUE IN ITA NO. 4 96 /PUN/201 6 , RELATING TO ASSESSMENT YEAR 20 11 - 12 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - I. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE HON. DRP, MUMBAI, ERRED IN HOLDING THAT ASSESSEE DOES NOT HAVE A PE IN INDIA DEHORS THE FINDING OF THE A.O. THAT THE FUNCTIONS OF EPCOS AG ARE PERFORMED THROUGH THE INDIAN SUBSIDIARIES BY ISSUANCE OF DIRECTIONS THROUGH EMAILS ETC. AND THE ENTIRE SPECTRUM OF ACTIVITIES OF THE INDIAN SUBSIDIARIES ARE MONITORED BY THE ASSESSEE THUS HAVING CONTROL AND MANAGEMENT OF INDIAN SU BSIDIARIES AND THEREBY CONSTITUTING A PE IN INDIA. II. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE HON.DRP, MUMBAI ERRED IN LAW BY CONCLUDING THAT A DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) IS AN ALTERNATIVE TAXATION REGIME AND NOT A N EX E M P TION REGIME AND THAT DTAA IS FOR THE PURPOSE O F SHIFTING ONUS ON THE DEPARTMENT TO PROVE TO THE CONTRARY IN RESPECT OF THE EXEMPTION CLAIMED BY THE ASSESSEE. III. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE HON.DRP, MUMBAI ERRED IN LAW BY HOLDING THAT EVEN IF A PE EXISTS BUT IF THE RECEIPTS SOURCED FROM INDIA ARE NOT ATTRIBUTABLE TO THE PE, THEN THE CASE OF THE ASSESSEE WOULD STILL FALL UNDER ART.12(2) AND EXCLUSION CLAUSE PROVIDED IN ART.12(5) WOULD NOT BE INVOKED THEREBY NOT TRIGGERING ART.7 OF THE TREATY FOR THE RATE PURPOSE. CASES TO RELY UPON 1 ) CIT VS UNITED BREW E RIES (1973) (89 ITR 17), MYSORE HIGH COURT 2 ) SMITH STONE & KNIGHT LTD VS LORD, MAYOR, ALDERMAN AND CITIZENS OF BIRMINGHAM (1939) 4 ALL ER 116 (KB) 4. THE ASSESSEE IN ITA NO.222/PUN/2017, RELATING TO ASSESSMENT YEAR 2012 - 13 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - ALL THE GROUNDS OF APPEAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER GROUND NO. 1 - NON - CONSTITUTION OF PERMANENT ESTABLISHMENT ('PE') OF THE APPELLANT IN INDIA 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) - I, PUNE, ('AO') ERRED IN PROPOSING AND THE DISPUTE RESOLUTION PANEL ('DRP') FURTHER ERRED IN NOT INTERFERING WIT H THE CONCLUSION OF THE AO THAT THE APPELLANT INDIAN SUBSIDIARY CONSTITUTES ITS 'BUSINESS CONNECTION' IN INDIA UNDER SECTION 9( 1 )(I) OF THE INCOME - TAX ACT, 1961 ('THE ACT') OR A 'PERMANENT 4 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 ESTABLISHMENT' ('PE') IN IN DIA UNDER ARTICLE 5(1), 5(2), 5(5) AND 5 (6) OF THE INDIA - GERMANY TAX TREATY ('TAX TREATY'). 1.2 THE AO AND THE DRP FAILED TO APPRECIATE THAT THE APPELLANT OPERATES ENTIRELY FROM OUTSIDE INDIA, HAS NO FIXED PLACE OF BUSINESS IN INDIA AS ENVISAGED UNDER SECTION 9(1)(I) OF THE ACT OR ARTICLE 5(1) OR 5(2) OF THE TAX TREATY DIRECTLY OR IN THE FORM ITS INDIAN SUBSIDIARY AND FURTHER ARTICLE 5(5) AND 5(6) OF THE TAX TREATY DO NOT APPLY TO ITS CASE AS THEY RELATE ONLY TO LOCAL INDIAN AGENTS ENGAGED IN BUYING AND SELLING GOODS IN INDIA ON BEHALF OF THEIR OVERSEAS PRINCIPAL WHICH IS NOT THE FACT IN THE CASE OF THE APPELLANT AND THE APPELLANT CLAIMS RELIEF ACCORDINGLY. 1.3 IT IS PRAYED THAT THE AO BE DIRECTED TO TAX ITS INDIA SOURCE INCOME FROM ITS INDIAN SUBSIDIARY IN THE FORM OF FEES FOR TECHNICAL SERVICE S AND INTEREST AT 10 % ON GROSS BASIS UNDER ARTICLES 11 AND 12 OF THE TAX TREATY AS OFFERED IN THE RETURN OF INCOME. GROUND NO.2 - NO ATTRIBUTION OF INCOME DEEMED TO ACCRUE / ARISE IN INDIA POSSIBLE TO THE ALLEGED PE OF THE APPELLANT IN INDIA 2.1 WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AO ERRED IN PROPOSING AND THE DRP F U RTHER ERRED IN NOT INTERFERING WITH THE AO'S CONCLUSION THAT THE APPELLANT'S IN DIA SOURCE INCOME TAXABLE ON DEEMED ACCRUAL BASIS IS ATTRIBUTABLE TO THE ALLEGED PE IN IN DIA UNDER ARTICLE 7 OF THE TAX TREATY. 2.2 THE AO AND THE DRP FAILED TO APPRECIATE THAT SINCE THE APPELLANT OPERATES ENTIRELY FROM OUTSIDE INDIA (GERMANY) AND CARRIES OUT NO OPERATIONS IN INDIA, NO INCOME CAN BE ATTRIBU TED TO THE ALLEGED PE IN INDIA UNDER ARTICLE 7 OF THE TAX TREATY, AND EVEN OTHERWISE PURSUANT TO ARTICLE 7(3) OF THE TAX TREATY, THE TAXATION ON GROSS BASIS AT HIGHER RATES OF 20 % ON GROSS BASIS UNDER SECTION 115A / 44D OF THE ACT IS UNWARRANTED AND THE TA XATION OUGHT TO BE AT 10 % ON GROSS BASIS UNDER ARTICLES 11 AND 12 OF THE TAX TREATY AS OFFERED IN THE RETURN OF INCOME AND THE AO BE DIRECTED ACCORDINGLY. GROUND NO. 3 - DENIAL OF RECOURSE TO NON - DISCRIMINATION CLAUSE - ARTICLE 24 OF THE TAX TREATY DENIED 3.1. WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACTS AND THE IN THE CIRCUMSTANCES OF THE CASE, THE AO HAS ERRED IN PROPOSING AND THE DRP HAS FURTHER ERRED IN NOT INTERFERING WITH THE AO'S CONCLUSION OF NOT GRANTING BENEFIT OF ARTICLE 24 OF THE TAX TREAT Y RELATING TO NON - DISCRIMINATION TO THE FACTS OF THE APPELLANT'S CASE. 3.2. THE AO AND THE DRP FAILED TO APPRECIATE THAT UNDER ARTICLE 24 - NON - DISCRIMINATION OF THE TAX TREATY, THE APPELLANT AND ITS ALLEGED PE IN INDIA CANNOT BE SUBJECTED TO TAXATION REQUIREMENT WHICH IS MORE BURDENSOME TH A N THE TAXATION OF RESIDENT IN INDIA FOR ITS ALLEGED PE AND THE AO BE DIRECTED TO TAX THE INCOME ON NET BASIS BASED ON AUDITED FINANCIAL STATEMENTS FILED BEFORE HIM AT ASSESSMENT STAGE AS AGAINST 20 % ON GROSS BASIS UNDER SECTION 115A/44D OF THE ACT. 5 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 GROUND NO.4 - ERRONEOUS CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT 4.1 WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN CHARGING INTEREST OF RS.1,71,75,494/ - UNDER SECTIONS 234B OF THE ACT WHILE COMPUTING THE DEMAND PAYABLE PURSUANT TO THE IMPUGNED ASSESSMENT ORDER. 4.2 THE AO FAILED TO APPRECIATE THAT THE APPELLANT IS NOT LIABLE TO PAY ANY ADVANCE TAX UNDER SECTION 209 OF THE ACT WHICH IS PAYABLE ON INCOME POST REDUCTION OF ENTIRE INCOME - TAX DEDUCTIBLE OR COLLECTIBLE AT SOURCE AS IS THE CASE OF THE APPELLANT AND NOT THE ACTUAL TAX DEDUCTED OR COLLECTED AT SOURCE AND THE AO BE DIRECTED TO DELETE THE INTEREST CHARGED UNDER SECTION 2 34B OF THE ACT. GROUND NO. 5 - LACK OF ADEQUATE OPPORTUNITY 5.1 WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN NOT GRANTING SUFFICIENT OPPORTUNITY TO THE APPELLANT BEFORE PASSING THE ORDER UNDER SECTION 144C(1) OF THE ACT AND THE DRP FURTHER ERRED IN NOT CONSIDERING THE OBJECTIONS / SUBMISSIONS OF THE APPELLANT WHILE GIVING DIRECTIONS UNDER SECTION 144C(5) OF THE ACT AND THE SAID ORDERS / DIRECTIONS BEING PASSED IN VIOLATION OF THE PRI NCIPLES OF NATURAL JUSTICE BE KINDLY QUASHED OR SET ASIDE. 5. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT THE ISSUE RAISED IN THE PRESENT BUNCH OF APPEALS IS SQUARELY COVERED BY DIFFERENT ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE STARTING FROM ASSESSMENT YEAR 2000 - 01 TO 2010 - 11. OUR ATTENTION WAS DRAWN TO THE LATEST ORDER IN ASSESSMENT YEAR 2010 - 11, WHEREIN THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE IN TURN, RELYING ON EARLIER ORDERS OF THE TRIBU NAL IN ASSESSEES OWN CASE. EXPLAINING THE FACTS OF THE CASE, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE WAS A NON - RESIDENT ENTITY OF GERMANY AND WAS RENDERING SERVICES TO THE INDIAN ENTITIES. THE ASSESSEE HAD RE CEIVED SUPPORT SERVICE CHARGES AGAINST SERVICES RENDERED AND AS PER PROVISIONS OF INDO - GERMAN TREATY OFFERED THE RECEIPTS TO TAX @ 10%. THE ASSESSEE HAD ALSO OFFERED INTEREST INCOME SIMILARLY. THE ASSESSING OFFICER ON THE OTHER HAND, APPLYING PROVISIONS OF SECTION 115A R.W.S. 44DA OF THE ACT HAD TAXED THE INCOME ATTRIBUTABLE TO PERMANENT ESTABLISHMENT (IN SHORT PE) @ 20%. 6 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TRIBUNAL HAS HELD THAT IN THE ABSENCE OF PE, THE PROVISI ONS OF INDO - GERMAN TREATY WOULD APPLY AND CONSEQUENTLY, RECEIPTS WERE SUBJECT TO TAX @ 10%. THE SAID DECISION HAS BEEN FOLLOWED IN THE OTHER YEARS, WHICH ARE AS UNDER: - SR. NO. DECISION CITATION DATE OF ORDER A.Y. 1 ACIT VS. EPCOS AG [2009] 120 TTJ 29 (PUNE) 30 JUNE 2008 2003 - 04 2 EPCOS AG VS. DY.CIT ITA NO.1413/PN/2010 6 APRIL 2011 2006 - 07 3 EPCOS AG VS. DDIT ITA NO.2535/PN/2012 31 JANUARY 2014 2008 - 09 4 DY.DIT VS. EPCOS AG ITA NOS.786 TO 790/PN/2012 26 MARCH 2014 2000 - 01 TO 2002 - 03, 2004 - 05 & 2005 - 06 5 DDIT VS. EPCOS AG ITA NO.513/PN/2013 20 MARCH 2014 2007 - 08 6 DDIT VS. EPCOS AG ITA NO.846/PN/2014 24 SEPTEMBER 2015 2009 - 10 7 DDIT VS. EPCOS AG ITA NO.249/PN/2015 14 DECEMBER, 2016 2010 - 11 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE APPEAL IS PENDING AGAINST THE ORDER OF TRIBUNAL BEFORE THE HONBLE BOMBAY HIGH COURT AND HENCE THE ADDITION . 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE IS A FOREIGN COMPANY HAVING ITS HEAD OFF ICE AT MUNICH, GERMANY. THE ASSESSEE WAS PROVIDING SERVICES TO ITS SUBSIDIARIES IN INDIA. THE ASSESSEE HAD RECEIVED CHARGES ON ACCOUNT OF ROYALTY / INFORMATION TECHNOLOGY SERVICES AND ALSO INTEREST ON ECB LOANS WHICH WERE OFFERED TO TAX BY THE ASSESSEE O N THE BASIS OF INDO - GERMAN TREATY @ 10%. THE ASSESSING OFFICER HOWEVER, CONCLUDED THAT THE ASSESSEES SUBSIDIARY IS ITS PE AND IS ACTING AS DEPENDENT AGENT OF ASSESSEE, HENCE THE RECEIPTS WERE TAXABLE UNDER SECTION 115A OF THE 7 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 ACT (IN CASE OF INTEREST) AN D UNDER SECTION 115A R.W.S. 44DA OF THE ACT IN THE CASE OF ROYALTY / SERVICE CHARGES @ 20% , WITHOUT ALLOWING ANY DEDUCTION UNDER ANY OF THE PROVISIONS UNDER SECTIONS 28 TO 44C OF THE ACT. IN THE YEAR RELATING TO ASSESSMENT YEAR 2011 - 12, THE DRP FOLLOWING THE ORDER OF TRIBUNAL IN EARLIER YEARS ALLOWED THE CLAIM OF ASSESSEE, AGAINST WHICH THE REVENUE IS IN APPEAL. HOWEVER, IN ASSESSMENT YEARS 2012 - 13 AND 2013 - 14, THE DRP/ASSESSING OFFICER DECIDED THE APPEAL AGAINST THE ASSESSEE, SINCE THE APPEAL AGAINST EAR LIER ORDERS OF TRIBUNAL IS PENDING BEFORE THE HONBLE BOMBAY HIGH COURT. THE REVENUE IS IN APPEAL IN ASSESSMENT YEAR 2011 - 12 AND THE ASSESSEE IS IN APPEAL IN ASSESSMENT YEARS 2012 - 13 AND 2013 - 14. 8. WE FIND THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIB UNAL IN ASSESSEES OWN CASE STARTING FROM ASSESSMENT YEAR 2003 - 04 (SUPRA) . THEREAFTER, THE TRIBUNAL HAS FOLLOWED THE SAID ORDER IN OTHER ASSESSMENT YEARS AND DECIDED THE SAME. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN ASSESSMENT YEAR 2010 - 11 IN ITA NO .249/PN/2015, VIDE ORDER DATED 14.12.2016 ARE AS UNDER: - 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDER OF THE ASSESSING OFFICER/DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND THE ISSUE RAISED BY THE REVENUE IN THE GROUNDS OF APPEAL HAS ALREADY BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2009 - 10. THE TRIBUNAL AFTER CONSIDERING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2003 - 04 WHICH HAS SUBSEQUENTLY BEEN FOLLOWED IN THE OTHER ASSESSMENT YEARS HAS DECIDED THE ISSUE AND THE GROUNDS RAISED BY THE REVENUE HAVE BEEN DISMISSED. THE RELEVANT OBSERVATION OF THE ORDER OF THE TRIBUNAL FROM PARA 5 ONWARDS READ AS UNDER : 5. BOTH SIDES HEARD. WE HAVE PERUSED THE ORDERS OF AUTHORITIE S BELOW AND HAVE ALSO CONSIDERED THE DECISION OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE IN EARLIER ASSESSMENT YEARS. WE FIND THAT THE ISSUE RAISED IN THE PRESENT APPEAL HAS BEEN ALREADY ADJUDICATED BY THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OW N CASE. THE RELEVANT EXTRACT OF THE ORDER OF TRIBUNAL FOR THE ASSESSMENT YEAR 2003 - 04 WHICH HAS BEEN SUBSEQUENTLY FOLLOWED IN THE OTHER ASSESSMENT YEARS READS AS UNDER: CONCLUSION ON THE FIRST ISSUE I.E. ON EXISTENCE OF PE: 41.1 IN THE LIGHT OF THESE DISCUSSIONS, IN OUR CONSIDERED VIEW, THE ASSESSEE COMPANY DID NOT HAVE ANY PE IN INDIA, MUCH LESS A PE 8 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 TO WHICH SUBJECT 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICES' CAN BE ATTRIBUTED. IN TERMS OF THE INDIA - GERMANY DTAA, INDIA DOES NOT HAVE RIGHT TO TAX TH ESE RECEIPTS AS BUSINESS PROFITS UNDER ART. 7. OF COURSE, IN THE LIGHT OF OUR FINDING THAT NO REVENUES EARNED BY THE ASSESSEE COMPANY COULD BE SAID TO BE ATTRIBUTABLE TO THE PE, EVEN IF ONE WAS TO COME TO THE CONCLUSION THAT A PE EXISTED, NO TAXABILITY COU LD ARISE UNDER ART. 7. THE ASSESSEE HAS OFFERED THE ROYALTIES AND FEES FOR TECHNICAL SERVICES FOR TAXABILITY IN INDIA UNDER ART. 12, AND, TO THAT EXTENT, ADMITTED TAX LIABILITY EXISTS. THE OVERZEALOUS APPROACH OF THE AO HAS BEEN RIGHTLY REJECTED BY THE CIT (A). WE APPROVE AND CONFIRM THE STAND OF THE CIT(A), AND DECLINE TO INTERFERE IN THE MATTER. OBSERVATIONS ON THE SECOND ISSUE I.E. ON TAXABILITY @ 20 PER CENT IN TERMS OF S. 44D R/W S. 115A IN CASE PE IS FOUND TO BE IN EXISTENCE: 42. WHILE DEALING WITH THE INTERPLAY BETWEEN EXISTENCE OF A PE AND TAXABILITY AS 'ROYALTIES AND FEES FOR TECHNICAL SERVICES', WE HAD TAKEN NOTE OF THE PROPOSITION ADVANCED BY THE REVENUE AUTHORITIES THAT ONCE ART. 12(5) IS INVOKED, ALL THE RECEIPTS AS 'ROYALTIES AND FEES FOR TE CHNICAL SERVICES' ARE TAXABLE IN INDIA ON GROSS BASIS UNDER S. 44D, THOUGH, AS PER THE PROVISIONS OF S. 115A, AT A LOWER RATE OF 20 PER CENT. 43. THIS PROPOSITION PROCEEDS ON THE FALLACY THAT ONCE THE FIRST CONDITIONS UNDER ART. 12(5) ARE SATISFIED, I.E. ONCE THE ASSESSEE COMPANY HAS A PE IN INDIA, THE 'ROYALTIES AND FEES FOR TECHNICAL SERVICES' ARE TO BE NECESSARILY TAXED IN INDIA UNDER ART. 7. THAT IS CLEARLY ERRONEOUS, BECAUSE, AS NOTED ABOVE, TWIN CONDITIONS OF EXISTENCE OF THE PE AS ALSO THE EFFECTIV E NEXUS BETWEEN THE PE AND THE SUBJECT 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICES' ARE TO BE SATISFIED. WE ARE OF THE VIEW THAT ON ACCOUNT OF EXISTENCE OF A PE IN INDIA, ONLY SUCH PROFITS OF THE ASSESSEE COMPANY CAN BE BROUGHT TO TAX IN INDIA AS ARE 'ATT RIBUTABLE TO THAT PE'. IT IS A TYPICAL CHICKEN AND EGG SITUATION OF CIRCULAR LOGIC. ON ONE HAND, THE WORDING OF ART. 12(5) IS SUCH THAT THIS EXCLUSION CLAUSE IS TRIGGERED ONLY WHEN 'ROYALTIES AND FEES FOR TECHNICAL SERVICES' HAVE A LIVE ECONOMIC NEXUS, REF LECTED BY EFFECTIVE CONNECTION WITH 'RIGHTS', 'PROPERTIES' AND 'CONTRACTS', IN RESPECT OF WHICH SUCH ROYALTIES AND FEES FOR TECHNICAL SERVICES ARE PAID, WITH PE, AND, ON THE OTHER HAND, THE SCHEME OF TAXABILITY UNDER ART. 7, WHICH IS COMPLEMENTARY TO THIS APPROACH, IS ALSO SUCH THAT THE TAXABILITY UNDER ART. 7 IS ATTRACTED ONLY IN RESPECT OF SUCH 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICER' AS ARE SO ATTRIBUTABLE TO THE PE. UNLESS AN AMOUNT IS SUCH THAT IT IS TAXABLE UNDER ART. 7, EVEN IF IT IS IN THE NATU RE OF 'ROYALTIES' OR 'FEES FOR TECHNICAL SERVICES', THE EXCLUSION CLAUSE UNDER ART. 12(5) WILL NOT COME INTO PLAY. AT THE SAME TIME, UNLESS AN AMOUNT REPRESENTING 'ROYALTIES' OR 'FEES FOR TECHNICAL SERVICES' IS SUCH THAT IT TRIGGERS EXCLUSION CLAUSE UNDER ART. 12(5), IT WOULD NOT BE TAXABLE UNDER ART. 7. 44. ART. 7(1) RESTRICTS THE SCOPE OF TAXABILITY OF BUSINESS PROFITS OF AN ENTERPRISE IN THE SOURCE COUNTRY TO ONLY SUCH PROFITS AS ARE ATTRIBUTABLE TO THE PE. THEREFORE, TO BRING ANY INCOME TO TAXABILITY UNDER ART. 7 IN THE SOURCE COUNTRY, THE FIRST THING TO BE SATISFIED 9 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 UNDER ART. 7(1) IS THAT THE INCOME BEING SOUGHT TO BE TAXED IS ONLY SUCH AS IS ATTRIBUTABLE TO THE PE. IN OTHER WORDS, UNLESS THE REVENUE AUTHORITIES CAN DEMONSTRATE THAT THE 'ROYALTIES AN D FEES FOR TECHNICAL SERVICES' EARNED BY THE FOREIGN COMPANY CONSTITUTES PROFIT ATTRIBUTABLE TO THE PE, IT CANNOT BE BROUGHT TO TAX IN INDIA. JUST BECAUSE THERE IS A PE IN THE SOURCE COUNTRY, ONE CANNOT INFER THAT ENTIRE INCOME FROM THE SOURCE COUNTRY IS A TTRIBUTABLE TO THE PE AND LIABLE TO BE TAXED IN THE SOURCE COUNTRY FOR THAT REASON. THERE IS NO JUSTIFICATION FOR THE REVENUE AUTHORITIES TO COME TO THE CONCISION THAT ENTIRE RECEIPTS OF THE ASSESSEE COMPANY ARE ATTRIBUTABLE TO 'PE' AND ARE, THEREFORE, TAX ABLE UNDER ART. 7 FOR THAT REASON. UNLESS THE CONDITIONS OF ART. 7(1) ARE NOT SATISFIED, THERE IS NO OCCASION TO INVOKE TAXABILITY AS PROFITS ATTRIBUTABLE TO PE. IT WOULD PERHAPS NEED A FORCE OF ATTRACTION RULE OF WIDEST AMPLITUDE TO DO SO. AS TO HOW SHOUL D THIS PROFIT ATTRIBUTION EXERCISE DONE, THE GUIDANCE IS AVAILABLE FROM ART. 7(2). 45. UNDER ART. 7(2), THESE PROFITS ARE TO BE SO ATTRIBUTED AS PE 'MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PE'. THE PE IS TO BE CONSIDERED AS HYPOTHETICAL INDEPENDENT BUT LET US NOT FORGET THAT THE SERVICES ARE RENDERED BY THE PE, I.E. INDIAN SU BSIDIARIES, AND THE SERVICES ARE ALSO AVAILED BY SAME INDIAN SUBSIDIARIES. THE FUNDAMENTAL QUESTION THAT WOULD ARISE IN SUCH A CASE S WHETHER SOMEONE CAN MAKE PROFIT OUT OF DEALINGS WITH ONESELF. THE ANSWER POSES NO DIFFICULTY. THE PROPOSITION IS WELL SETT LED THAT NOBODY CAN MAKE PROFIT OUT OF SELF OR TRADE DEAL WITH SELF OR EARN FROM SELF. IT IS SO HELD IT A SERIES OF CASES, INCLUDING SIR KIKABHAI PREMCHAND VS. CIT (1953) 24 ITR 506 (SC), BETTS HARTLEY HUETT & CO. LTD. VS. CIT (1979) 116 ITR 425 (CAL) AND ABN AMRO BANK NV VS. ASSTT. DIRECTOR OF IT (2005) 98 TTJ (KOL)(SB) 295 : (2005) 97 ITD 89 (KOL)(SB), IT IS THUS CLEAR THAT AN INCOME OF THE INDIAN SUBSIDIARIES, ON ACCOUNT OF HAVING RENDERED SERVICES TO THEMSELVES, CANNOT BE TAXED. THERE CANNOT BE ANY INCO ME IN THE HANDS OF THIS PE, EVEN IF THAT BE SO, WHICH CAN BE BROUGHT TO TAX. 46. THE LIMITATION ON DEDUCTIONS IN ACCORDANCE WITH THE DOMESTIC LAW, AS LAID DOWN BY ART. 7(3), CAN COME TO PLAY WHEN THERE IS AN INCOME ATTRIBUTABLE TO THE PE IN THE FIRST PLACE . WHEN THERE ARE NO RECEIPTS WHICH CAN BE ATTRIBUTED, TO THE PE, THERE IS NO QUESTION OF ALLOWING DEDUCTIONS THERE FROM. THAT ASPECT OF THE MATTER IS ENTIRELY INFRUCTUOUS. THE LIMITATION UNDER S. 44D IS, THEREFORE, NOT RELEVANT IN THE PRESENT CASE. THE SAM E IS THE POSITION WITH REGARD TO THE LOWER RATE PRESCRIBED UNDER S. 115A OF THE ACT. THERE IS NO WARRANT FOR APPLICATION OF S. 44D AND S. 115A UNLESS THERE IS A POSITIVE INCOME FROM 'ROYALTIES AND FEES FOR TECHNICAL SERVICES' WHICH CAN BE BROUGHT TO TAX UN DER ART. 7. CONCLUSION ON THE SECOND ISSUE I.E., TAXABILITY @ 20 PER CENT IN TERNS S. 44D R/W S.115A IN CASE PE IS FOUND TO BE IN EXISTENCE : 47. IN OUR CONSIDERED VIEW, IN TERMS OF THE INDO GERMAN TAX TREATY PROVISIONS, IT WILL HAVE TO BE DEMONSTRATED THAT SUCH ROYALTIES AND FEES FOR TECHNICAL SERVICES HAVE A LIVE ECONOMIC NEXUS WITH THE PE AND ONLY THEN EXCLUSION CLAUSE UNDER ART. 12(5) AS ALSO TAXABILITY 10 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 UNDER ARTS. 7(1) AND 7(2), WILL COME INTO PLAY. IT IS ONLY AFTER THESE ROYALTIES AND FEES FOR TEC HNICAL SERVICES ARE SO INCLUDED IN THE BUSINESS PROFITS ATTRIBUTABLE TO THE PE THAT THE PROVISIONS OF SS. 44D AND 115A CAN BE INVOKED. THEREFORE, EVEN IF WE ARE TO HOLD THAT THE TAXPAYER HAD A PE IN INDIA, UNLESS THERE IS A CATEGORICAL FINDING THAT ENTIRE RECEIPTS WERE ATTRIBUTABLE TO THAT PE, ENTIRE BUSINESS RECEIPTS OF THE TAXPAYER SOURCED FROM INDIA WOULD NOT HAVE BEEN TAXABLE IN INDIA UNDER ART. 7. THE PROVISIONS OF S. 44D AND S. 115A DO NOT, THEREFORE, COME INTO PLAY ONLY BECAUSE THERE IS A PE IN INDIA . 6. SINCE, THERE HAS BEEN NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE IMPUGNED ASSESSMENT YEAR, WE, THEREFORE, RESPECTFULLY FOLLOW THE ORDER OF CO - ORDINATE BENCH AND DISMISS THE APPEAL OF THE REVENUE. 10. SINCE THE FACTS OF THE PRESENT CASE ARE IDENTICAL TO THE FACTS OF THE CASE IN THE PRECEDING ASSESSMENT YEARS, THEREFORE, IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE DRP IN HOLDING THAT THE ASSESSEE COMPANY HAS NO PE IN IND IA AND THEREFORE INVOKING OF SECTION 115A R.W.S. 44DA WAS NOT NECESSARY. WE ACCORDINGLY UPHOLD THE ORDER OF THE DRP AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 9. THE FACTS IN THE PRESENT CASE ARE IDENTICAL TO THE FACTS IN PRECEDING ASSESSMENT YEAR S AND FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT THERE IS NO MERIT IN INVOKING PROVISIONS OF SECTION 115A OF THE ACT IN RESPECT OF INTEREST AND 115A R.W.S. 44DA OF THE ACT IN RESPECT OF SUPPORT / ROYALTY SERVICES , THE RECEIPTS ARE TO BE TAXED IN THE HANDS OF ASSESSEE UNDER INDO - GERMAN TREATY @ 10%. THE REVENUE EXCEPT FOR STRESSING THAT APPEAL IS PENDING BEFORE THE HONBLE BOMBAY HIGH COURT, HAS NOT BROUGHT ON RECORD ANY CHANGE IN FACTS. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE THUS, D ISMISSED AND THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN BOTH THE APPEALS ARE ALLOWED. SA NOS.123 & 124/PUN/2017 10. THE ASSESSEE HAS ALSO FILED STAY APPLICATIONS FOR STAY OF RECOVERY OF OUTSTANDING DEMAND RELATING TO ASSESSMENT YEARS 2012 - 13 & 2013 - 14 . HOWEVER, SINCE THE APPEALS HAVE BEEN DECIDED BEING COVERED ISSUE ON OUT OF TURN BASIS, THERE IS NO MERIT IN THE SAID APPLICATIONS AND THE SAME ARE DISMISSED. 11 ITA NO. 496 /PUN/20 16 ITA NOS.222 & 223/PUN/2017 SA NOS.123 & 124/PUN/2017 11. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HOWEVER, POINTED OUT THAT THE ASSE SSEE HAD FILED BANK GUARANTEE OF RS.25 LAKHS AGAINST OUTSTANDING DEMAND BEFORE THE ASSESSING OFFICER ON 08.12.2017. IN VIEW OF OUR DECIDING THE APPEALS IN FAVOUR OF ASSESSEE AND ALLOWING THE GROUNDS OF APPEAL RAISED IN ASSESSMENT YEARS 2012 - 13 AND 2013 - 14 , THE ASSESSING OFFICER IS DIRECTED TO RELEASE THE BANK GUARANTEE OF RS.2 5 LAKHS WITH IMMEDIATE EFFECT. 1 2 . IN THE RESULT, THE APPEAL OF REVENUE IN ASSESSMENT YEAR 2011 - 12 IS DISMISSED AND APPEALS OF ASSESSEE IN ASSESSMENT YEARS 2012 - 13 AND 2013 - 14 ARE ALLOWED. THE STAY APPLICATIONS FILED BY THE APPLICANT BECOME INFRUCTUOUS. ORDER PRONOUNCED ON THIS 15 TH DAY OF DECEM BER , 201 7 . SD/ - SD/ - (ANIL CHATURVEDI) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 15 TH DECEM BER , 201 7 . G G C C V V S S R R / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE DIT (INTL. TAXATION), PUNE ; 4. THE DRP, PUNE ; 5. THE DR B , ITAT, PUNE; 6. GUARD FILE. / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE