RANDOX LABORATORIES LTD, UK, MUMBAI V. DDIT(IT) RG 2(1), MUMBAI

ITA 2376/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7410 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 04-03-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 15-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T T JACOB
• Assessee Lawyers: FARROKH IRANI SHRI DEVANG SHAH
• Keywords: Business income; Depreciation; Permanent establishment

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, MUMBAI BEFORE SHRI R.K. GUPTA, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 2376/MUM/2009 (ASSESSMENT YEAR: 2005-06) M/S. RANDOX LABORATORIES LTD., U.K. - DDIT (INTERNA TIONAL TAXATION) INDIA BRANCH OFFICE, 3RD FLOOR RANGE - 2(1), 1ST FL OOR, R. NO. 120 GODREJ COLISEUM, SOMAIYA HOSPITAL RD. VS. SCINDIA HOUSE, BALLARD ESTATE SION (E), MUMBAI 400022 MUMBAI 400038 PAN - AACCR 1301 G APPELLANT RESPONDENT APPELLANT BY: SHRI FARROKH IRANI/ SHRI DEVANG SHAH RESPONDENT BY: SHRI T.T. JACOB O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE CIT(A)- XXXI, MUMBAI DATED 16.01.2009. 2. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) XXXI, MUMBAI ( THE CIT(A) ) ERRED IN CONFIRMING THE ACTION OF THE DEPUTY DIRECT OR OF INCOME TAX (INTERNATIONAL TAXATION) RANGE-2(1) ( DDIT) IN COMPUTING THE INCOME OF THE INDIA BRANCH OFFICE BY APPLYING THE GLOBAL N ET LOSS RATIO OF 13.26% AS AGAINST REDUCING THE EXPENSES INCURRED IN INDIA FROM THE GLOBAL GROSS PROFIT RATIO OF 25%. THE APPELLANT PRAYS THAT THE CIT(A) /DDIT FAILED TO APPRECIATE THAT THE METHOD OF COMPUTING BUSINESS LOSS (EXCLUDING DE PRECIATION) BASED ON GLOBAL GROSS PROFIT LESS INDIA SPECIFIC EX PENSES REPRESENTED THE CORRECT METHOD /MORE APPROPRIATE ME THOD OF COMPUTING PROFITS OF THE INDIA BRANCH OFFICE AND BE DIRECTED TO ADOPT THE SAME. THE CIT(A) /DDT ERRED IN COMPUTING THE LOSS AT THE FOREIGN EXCHANGE RATE OF 1 GBP AT RS.85 AS AGAINST RS.83 ADOPTED IN THE COMPUTATION OF RETURN AND BE DIRECTED TO ADOPT THE SAME. ITA NO. 2376/MUM/2009 M/S. RANDOX LABORATORIES LTD., U.K. 2 3. THE ASSESSEE IS A BRANCH OFFICE IN INDIA OF THE FOR EIGN COMPANY, M/S. RANDOX LABORATORIES LTD., INCORPORATED IN U.K. FOR MARKETING MEDICAL DIAGNOSTIC EQUIPMENT AND REAGENTS. IT FILED RETURN OF INCOME WITH A LOSS OF RS.1,87,68,310/- WITH TAX AUDIT REPORT. THE ASSESSE E HAS SHOWN GROSS PROFIT OF RS.47,75,144/- FROM THE TOTAL SALE OF RS.6,19,26 ,655/- WHICH WAS 6.74%. AGAINST THIS THE ASSESSEE HAS CLAIMED EXPENSES OF R S.3,77,30,298/-. THE A.O. NOTED THAT THE ASSESSEE HAS ESTIMATED THE GROS S PROFIT AT 12.5% OF TOTAL SALES MADE BY THE FOREIGN COMPANY IN INDIA BOTH DIR ECTLY, FOR WHICH THE ASSESSEE PROVIDES SUPPORT, AND ALSO MADE THROUGH TH E ASSESSEE AND CLAIMED EXPENSES INCURRED IN INDIA AGAINST THE SAME. HE NOT ICED THAT THE WORKING WAS NOT REASONABLE. SINCE THE FOREIGN COMPANY INCUR RED LOSS GLOBALLY AT 13.26% FOR THE YEAR ENDING 31.03.2004, HE ADOPTED T HE LOGIC IN RESTRICTING THE LOSS CLAIMED TO 13.26% ON NET SALES IN INDIA AN D 50% THEREON WAS ATTRIBUTABLE TO INDIA BRANCH. THE CIT(A) CONFIRMED THE SAME AS UNDER: - 1.3 I HAVE CONSIDERED THE FACTS, AND PERUSED THE D ETAILS. IT IS SEEN THAT THE APPELLANT HAS EARNED GLOBAL PROFIT % 25% B EING AVERAGE OF A.Y. 2005-06 AND 2004-05. THEREFORE, TO ATTRIBUTE THE LO SS, IT HAS APPLIED THE RATE OF GLOBAL G.P. EARNED BY PARENT COMPANY AND AL SO CLAIMED EXPENSES THEREON STATING THE SAME AS INDIA SPECIFIC. ON THE OTHER HAND, THE A.O. HAS ADOPTED THE NET LOSS RATE ON THE BASIS OF GLOBA L ACCOUNTS WHICH WAS AT 13.26% AND SAME WAS APPLIED TO ESTIMATE THE LOSS ATTRIBUTABLE TO BRANCH. THE STATEMENT OF TOTAL INCOME GIVES THE DET AILS OF CARRIED FORWARD LOSS. ACCORDING TO WHICH THE APPELLANT HAS SHOWN LO SS AT RS.67,19,246/- IN A.Y. 2003-04 LOSS AT RS.73,83,222/- IN A.Y. 2004 -05 AND CLAIM OF LOSS AT RS.1,82,62,343/- IN A.Y. 2005-06. SIMILARLY THE CLAIM OF DEPRECIATION IS AT 2,34,142/- IN A.Y. 2003-04, RS.4,12,540/- IN A.Y. 2004-05 AND RS.5,05,966/- IN A.Y. 2005-06. THESE FIGURES SHOW T HAT THERE IS INCREASE IN LOSS AS WELL AS CLAIM OF DEPRECIATION WHEN THERE IS EXPANSION, IT IS NOT NECESSARILY THAT THERE WOULD BE INCREASE IN LOSS. I T IS ALSO NOTED BY THE AO THAT THE APPELLANT COULD NOT EXPLAIN FULLY THE E XPENSES CLAIMED UNDER SEMINAR AND CONFERENCES, SUNDRY EXPENSES. THIS SHOW S THAT METHOD ADOPTED BY THE APPELLANT IS NOT LOGICAL AND DOES NO T SEEM TO BE CORRECT AND REASONABLE. WHEN THERE IS LOSS ON GLOBAL ACCOUN T AT 13.26%. THE LOGIC FOLLOW THAT LOSS OF INDIA OPERATION OF BRANCH SHOULD ALSO BE APPORTIONED IN SAME PROPORTION, THEREFORE, IT WOULD BE MORE APPROPRIATE TO ADOPT THE SAID RATIO IN RESPECT OF PROFIT ATTRIB UTING TO BRANCH. IN VIEW OF THESE FACTS AND REASONING ADVANCED BY THE LD. A.O., I AM INCLINED TO AGREE WITH THE A.O. I THEREFORE, UP HOLD THE FINDIN G OF THE LD. A.O. ACCORDINGLY, LOSS COMPUTED AT RS.79,99,220/- TO THE INDIAN BRANCH BY THE A.O. IS CONFIRMED. THUS THE APPEAL ON GROUNDS N O. 1 AND 2 ARE DISMISSED. ITA NO. 2376/MUM/2009 M/S. RANDOX LABORATORIES LTD., U.K. 3 4. BEFORE US THE LEARNED COUNSEL SUBMITTED THAT THE AS SESSEE WAS CONSISTENTLY FOLLOWING THE METHOD OF OFFERING THE I NCOME OF ATTRIBUTING INCOME AT 12.5% OF THE TURNOVER MADE BY THE PARENT COMPANY IN INDIA AND THAT EXPENDITURE OF THE LOCAL BRANCH WAS CLAIMED ON ACTUAL BASIS. IT WAS FURTHER SUBMITTED THAT THE A.O. IN THE LATER ASSESS MENT YEAR FOUND THAT THE METHOD ADOPTED BY THE PREDECESSOR OFFICER IS NOT CO RRECT AND HE DEVIATED FROM THE METHOD ON THE BASIS OF THE WORKING GIVEN I N A.Y. 2006-07. IT WAS HIS REQUEST THAT THE MATTER MAY BE REMITTED BACK TO THE A.O. TO ACCEPT ASSESSEES METHODOLOGY. 5. THE LEARNED D.R., HOWEVER, RELIED ON THE ORDERS OF THE A.O. AND THE CIT(A). 6. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE ORDE RS PLACED ON RECORD, PARTICULARLY FOR A.Y. 2006-07 DATED 05.02.1 020, THE A.O. HAS CONSIDERED ASSESSEES GLOBAL TURNOVER, GLOBAL PROFI T AND NET PROFIT IN A COMPARABLE STATEMENT AND GIVEN THE FOLLOWING FINDIN GS IN PARA 4, 5 AND 8 (WRONGLY NUMBERED FOR 6): - 4. ASSESSEE HAS FILED AUDITED BRANCH ACCOUNTS ALON G WITH TAX AUDIT REPORT. AS PER THE ACCOUNTS THE ASSESSEE HAS SHOWN GROSS PROFIT OF RS.2,93,51,567/- (G.P. RATIO 17%) FROM TOTAL SALES OF RS.17,31,17,861/- AS COMPARED TO GROSS PROFIT OF RS.42,94,507/- (G.P. RA TIO 6.74%) ON SALES OF RS.6,19,26,655/- OF EARLIER YEAR. IT IS ALSO INFORM ED THAT THE PARENT COMPANY ALSO MAKES DIRECT SALES IN INDIA WHICH ARE NOT CONSIDERED AS PART TURNOVER OF THE BRANCH. IN THE EXPLANATORY STATEMEN T TO COMPUTATION OF INCOME FILED ALONG WITH RETURN OF INCOME ASSESSEE H AS STATED AS FOLLOWS: - RANDOX LABORATORIES LTD. IS A COMPANY REGISTERED I N UNITED KINGDOM. THE COMPANY HAS A BRANCH OFFICE IN INDIA. AS PER THE PR OVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT, THE ACTIVITIES OF THE BRANCH IN INDIA MAY CONSTITUTE A PERMANENT ESTABLISHMENT. THE TOTAL TUR NOVER MADE BY RANDOX LABORATORIES LTD. UK IN INDIA DURING THE FINANCIAL YEAR 2005-06 IS UK 2570199. BASED ON THE ACTIVITIES CARRIED OUT BY THE BRANCH A N AMOUNT OF 12.5% OF THE SALES IS CONSIDERED AS ATTRIBUTABLE TO ACTIVITIES OF THE BRANCH. ACCORDINGLY THE RETURN OF INCOME IS FILED AS UNDER: TURNOVER BY RANDOX LABORATORIES UK LTD. UK 2570 199 INCOME ATTRIBUTABLE TO BRANCH12.5% UK 321275 INCOME ATTRIBUTABLE TO BRANCH IN INDIA RS. @ 80/- R S. 25702000 DURING THE F.Y. 2005-06 RELEVANT TO A.Y. 2006-07, T HE OPERATION OF THE BRANCH HAS RESULTED IN HIGHER PROFIT OF RS.29345883/- EQUIVALE NT TO 17% OF SALES. HENCE RETURN OF INCOME IS FILED ON THE BASIS OF THE PROFI T & LOSS ACCOUNT OF THE BRANCH 5. FROM THE ABOVE, IT CAN BE SEEN THAT THE ASSESSEE HAD ADMITTED THAT 12.5% OF THE DIRECT SALES ARE ATTRIBUTABLE TO THE ACTIVITIES OF THE ITA NO. 2376/MUM/2009 M/S. RANDOX LABORATORIES LTD., U.K. 4 BRANCH IN INDIA. IN THE EARLIER ASSESSMENT YEAR 200 5-06, IT WAS HELD THAT 50% OF THE GLOBAL PROFITABILITY OF THE DIRECT SALES MADE BY THE HEAD OFFICE IN INDIA IS ATTRIBUTABLE TO THE PE IN INDIA. ACCORDINGLY, THE ASSESSEE WAS REQUIRED TO GIVE THE DETAILS THEREOF. THE ASSESSEE VIDE LETTER DATED 04/11/2009 HAS SUBMITTED DETAILS OF GL OBAL TURNOVER, GLOBAL GROSS PROFIT AND GLOBAL NET PROFIT OF RANDOX LABORATORIES LIMITED, UK AND ALSO TENTATIVE WORKING OF COMPUTATI ON OF ATTRIBUTION OF PROFITS TO THE INDIAN BRANCH, WHICH ARE REPRODUCED AS UNDER: DETAILS OF GLOBAL TURNOVER, GLOBAL GROSS PROFIT AND GLOBAL NET PROFIT CALENDAR YEARS (AMOUNT IN GBP) PARTICULARS 31/12/2004 31.12.2005 31/12/2006 GLOBAL SALES 31,725,886 39,641,987 42,210,704 GROSS PROFIT 8,441,316 21,396,719 21,802,282 GP RATIO 26.61% 43,97% 51,65% NET PROFIT (4,208,749) 2,099,795 4,771,294 NP RATIO -13.27% 5.30% 11.30% FINANCIAL YEAR WISE WORKINGS (BASED O N EXTRAPOLATION) PARTICULARS 2005-06 GLOBAL SALES 40,284,166 GROSS PROFIT 21,498,110 GP RATIO 53.37% NET PROFIT 2,767,670 NP RATIO 6.87% COMPUTATION OF ATTRIBUTION OF PROFITS TO THE INDIAN BRANCH AMOUNT S. NO. PARTICULARS GBP RS. (@80) A GLOBAL SALES I GLOBAL SALES (INCLUDING INDIA BRANCH OFFICE) SALES BY INDIA BRANCH OFFICE AS PER AUDITED FINANCIALS 40,284,166 3,222,733,300 II FINANCIALS 173,119,861 III GLOBAL SALES (EXCLUDING INDIA BRANCH OFFICER) A(I) A(II) 3,049,613,439 ITA NO. 2376/MUM/2009 M/S. RANDOX LABORATORIES LTD., U.K. 5 B GLOBAL NET PROFIT (NP) I GLOBAL NP (INCLUDING INDIA BRANCH OFFICE) 2,767,670 221,413,580 II ACTUAL NET LOSS OF INDIA BRANCH OFFICE AS PER AUDITED FINANCIALS 19,219,730 III GLOBAL NP (EXCLUDING INDIA BRANCH OFFICE) B(I) + B(II) [B(III) / A(III)]* 240,633,310 IV GLOBAL NP RATIO (EXCLUDING INDIA BRANCH OFFICE) 100 7.89% C SALES IN INDIA I TOTAL SALES IN INDIA (DIRECTOR SALES FROM UK + SALES THROUGH BRANCH) 2,570,199 205,615,920 II SALES THROUGH INDIA BRANCH OFFICE AS PER AUDITED FINANCIALS 173,119,861 III DIRECT SALES FROM UK IN INDIA C(I) C(II) 32, 496,059 D PROPOSED ATTRIBUTION TO INDIA BRANCH OFFICER I DIRECT SALES FROM UK C(III) 32,496,059 II GLOBAL NP RATIO ((EXCLUDING INDIA BRANCH OFFICE) B(IV) 7.89% III GLOBAL NET PROFIT RATIO APPLIED TO DIRECT SALES IN INDIA FROM UK D(I) * D(II) D(III) * 2,564,139 IV CONSIDERING THE RESPECTIVE ACTIVITIES IN UK AND IN INDIA, 50% ATTRIBUTED TO INDIA OPERATIONS 50% 1,282,070 NOTE: 1) NOTWITHSTANDING THE ABOVE WORKINGS, IT IS SUBMIT TED THAT AS PER ARTICLE 7 OF THE INDIA-UK TAX TREATY, ONLY PROFITS WHICH ARE ATT RIBUTABLE DIRECTLY OR INDIRECTLY TO A PERMANENT ESTABLISHMENT (PE) IN IND IA WOULD BE TAXABLE IN INDIA. 2) RANDOX LABORATORIES LIMITED, UK (RLL) CONSTITUTE S OF PE IN INDIA ONLY THROUGH ITS INDIA BRANCH OFFICE. THE INDIA BRANCH O FFICE IS NOT INVOLVED IN NEGOTIATING, CONCLUDING OR FULFILLING CONTRACTS ENT ERED/EXECUTED BY RLL OUTSIDE INDIA. ALSO, THERE IS NO FORCE OF ATTRACTIO N RULE UNDER ARTICLE 7 OF INDIA-UK TAX TREATY. 3. HENCE, IT IS SUBMITTED THAT NO PROFITS OUT OF TH E DIRECT SALES (FROM UK) BY RLL IN INDIA SHOULD BE ATTRIBUTED TO THE INDIA BRAN CH OFFICE. 6. THE ABOVE SUBMISSIONS MADE BY ASSESSEE HAVE BEEN CONSIDERED. IT CAN BE OBSERVED FROM THE LAST YEARS ASSESSMENT ORDER THAT INCOME WAS ATTRIBUTED TO THE INDIA BRANCH OFFICE APPLYING THE GLOBAL NET LOSS MARGIN TO THE TOTAL SALES MADE IN INDIA, IGNORING T HE ACTUAL PROFIT/LOSS MADE BY THE INDIA BRANCH OFFICE DURING THAT YEAR. S UCH BASIS OF ITA NO. 2376/MUM/2009 M/S. RANDOX LABORATORIES LTD., U.K. 6 DETERMINING THE INCOME OF THE INDIA BRANCH OFFICE I S NOT APPROPRIATE, AS IT DOES NOT CONSIDER THE ACTUAL PROFIT / LOSS OF IN DIA BRANCH OFFICE AND IS MERELY BASED ON APPROXIMATION. HENCE, THE AFORESAID WORKING APPEARS TO BE MORE SC IENTIFIC AND JUSTIFIABLE, FACTORING THE ACTUAL PROFIT / LOSS MAD E BY THE INDIAN BRANCH OFFICE. FROM THE ABOVE COMPUTATION, THE PROFITS OF THE PARENT COMPANY ATTRIBUTABLE TO THE PE IN INDIA WORKS OUT TO RS.12, 82,070/-. ACCORDINGLY, THE LOSS OF RS.1,83,47,400/- AS PER TH E RETURN IS REDUCED BY RS.12,82,070/-. 7. AS CAN BE SEEN FROM THE ABOVE, THE A.O. HIMSELF HAS GIVEN A FINDING THAT ASSESSMENT MADE ON THE BASIS OF APPROXIMATION WAS NOT APPROPRIATE AS IT HAS NOT CONSIDERED THE ACTUAL PROFIT OR LOSS OF THE INDIAN BRANCH OFFICE. IN VIEW OF THIS, WE ARE OF THE OPINION THAT THE MATTER SHOULD BE RESTORED BACK TO THE A.O. TO CONSIDER IT AFRESH IN VIEW OF HIS FINDI NGS GIVEN FOR A.Y. 2006-07 AS THE SAID ORDER HAS BEEN ACCEPTED BY THE ASSESSEE AS WELL. FOR THESE REASONS THE ORDERS OF THE A.O. AND THE CIT(A) ARE S ET ASIDE AND THE ISSUE IS RESTORED BACK TO THE FILE OF THE A.O. TO CONSIDER A FRESH IT IN THE LIGHT OF HIS DECISION FOR A.Y. 2006-07. 8. IN THE RESULT, APPEAL ALLOWED FOR STATISTICAL PURPO SE. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MARCH 2010. SD/- SD/- (R.K. GUPTA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 31 ST MARCH 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXXI, MUMBAI 4. DIT (INTERNATINAL TAXATION), RANGE 2, MUMBAI 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.