EPCOS AG, Nashik V. DDIT (Int. Tax)-I, Pune

ITA 2535/PUN/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76101 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 24-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VERMA
• Assessee Lawyers: PARAS S SAVLA; KEERTHIGA PADMANABHAN
• Keywords: Business income; Double taxation relief; Permanent establishment
• Section: 5(2); 234B; 12A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO.2535/PN/2012 A.Y. 2008-09 EPCOS AG C/O EPCOS INDIA PVT. LTD., E, 22-25, MIDC SATPUR NASHIK - 422007 PAN: AAACE9787H APPELLANT VS. DDIT (INTR. TAXN) I, PUNE RESPONDENT APPELLANT BY :SHRI PARAS S. SAVLA & KEERTHIGA PADMANABHAN RESPONDENT BY : SMT. M.S . VERMA DATE OF HEARING: 23.01.2014 DATE OF ORDER : 31.01.2014 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF DISPUTE RESOLUTION PANEL, PUNE, DATED 04.09.2012 FOR A.Y. 2008-09 ON THE FOLLOWING GROUNDS. ALL THE GROUNDS OF APPEAL ARE INDEPENDENT AND WITHO UT 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 DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATI ON) - I, PUNE, ('AO') ERRED IN PROPOSING AND THE DISPUTE RE SOLUTION PANEL ('DRP') FURTHER ERRED IN NOT INTERFERING WITH THE CONCLUSION OF THE AO THAT THE APPELLANT'S INDIAN SU BSIDIARY CONSTITUTE ITS 'BUSINESS CONNECTION' IN INDIA UNDER SECTION 9(1 )(I) OF THE INCOME-TAX ACT, 1961('THE ACT') OR A 'PERMANENT 2 ESTABLISHMENT' ('PE') IN INDIA UNDER VARIOUS PROVIS IONS OF ARTICLE 5 INCLUDING ARTICLES 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 SECTI ON 9(1 )(I) OF THE ACT OR ARTICLE 5(1) OR 5(2) OF THE TAX TREAT Y DIRECTLY OR IN THE FORM ITS INDIAN SUBSIDIARY AND FURTHER ARTIC LE 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 BUYIN G 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. GROUND NO. 2 - NO ATTRIBUTION OF INCOME DEEMED TO A CCRUE / ARISE IN INDIA POSSIBLE TO THE ALLEGED PE OF THE AP PELLANT IN INDIA 2.1 WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AO ERRED IN PROP OSING AND THE DRP FURTHER ERRED IN NOT INTERFERING WITH T HE AO'S CONCLUSION THAT THE APPELLANT'S INDIA SOURCE INCOME TAXABLE ON DEEMED ACCRUAL BASIS IS ATTRIBUTABLE TO THE ALLE GED PE IN INDIA UNDER ARTICLE 7 OF THE TAX TREATY. 2.2 THE AO AND THE DRP FAILED TO APPRECIATE THAT SI NCE THE APPELLANT OPERATES ENTIRELY FROM OUTSIDE INDIA (GER MANY) AND CARRIES OUT NO OPERATIONS IN INDIA, NO INCOME C AN BE ATTRIBUTED 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 HIGH ER RATES OF 20% ON GROSS BASIS UNDER SECTION 115A / 44D OF THE ACT IS UNWARRANTED AND THE TAXATION 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 ACCO RDINGLY. GROUND NO. 3 DENIAL OF RECOURSE TO NON-DISCRIMINA TION CLAUSE - ARTICLE 24 OF THE TAX TREATY DENIED 3.1. WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AO HAS ERRED IN PROPOSING AND THE DRP HAS FURTHER ERRED IN NOT INTE RFERING WITH THE AO'S CONCLUSION OF NOT GRANTING BENEFIT OF ARTICLE 24 OF THE TAX TREATY RELATING TO NON-DISCRIMINATION TO THE FACTS OF THE APPELLANT'S CASE. 3 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 SUB JECTED TO TAXATION REQUIREMENT WHICH IS MORE BURDENSOME THEN THE TAXATION OF RESIDENT IN INDIA FOR ITS ALLEGED PE AN D 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 O F THE ACT. 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 ER RED IN CHARGING INTEREST OF RS. 1,13,01,962 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 N OT 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 C ASE OF THE APPELLANT AND NOT THE ACTUAL TAX DEDUCTED OR COLLEC TED AT SOURCE AND THE AO BE DIRECTED TO DELETE THE INTERES T CHARGED UNDER SECTION 234B 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 ER RED IN NOT GRANTING SUFFICIENT OPPORTUNITY TO THE APPELLAN T 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 DIRECTION S UNDER SECTION 144C(5) OF THE ACT AND THE SAID ORDERS / DI RECTIONS BEING PASSED IN VIOLATION OF THE PRINCIPLES OF NATU RAL JUSTICE BE KINDLY QUASHED OR SET ASIDE. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR WITHDRAW ALL OR ANY OF THE GROUNDS OF APPEAL HEREIN AND TO S UBMIT SUCH STATEMENTS, DOCUMENTS AND PAPERS AS MAY BE CONSIDERED NECESSARY EITHER AT OR BEFORE THE APPEAL HEARING. 2. AT THE OUTSET OF HEARING, THE LEARNED AUTHORIZED REPRESENTATIVE DID NOT PRESS GROUNDS OF APPEAL NOS. 3 AND 5, SO 4 THEY ARE BEING DISMISSED AS NOT PRESSED. REGARDING GROUNDS OF APPEAL NO.1, THE ASSESSEE HAS RAISED AS UNDER: 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 CA SE, THE DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATI ON) - I, PUNE, ('AO') ERRED IN PROPOSING AND THE DISPUTE RE SOLUTION PANEL ('DRP') FURTHER ERRED IN NOT INTERFERING WITH THE CONCLUSION OF THE AO THAT THE APPELLANT'S INDIAN SU BSIDIARY CONSTITUTE ITS 'BUSINESS CONNECTION' IN INDIA UNDER SECTION 9(1 )(I) OF THE INCOME-TAX ACT, 1961('THE ACT') OR A 'PERMANENT ESTABLISHMENT' ('PE') IN INDIA UNDER VARIOUS PROVIS IONS OF ARTICLE 5 INCLUDING ARTICLES 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 TH E APPELLANT OPERATES ENTIRELY FROM OUTSIDE INDIA, HAS NO FIXED PLACE OF BUSINESS IN INDIA AS ENVISAGED UNDER SECTI ON 9(1 )(I) OF THE ACT OR ARTICLE 5(1) OR 5(2) OF THE TAX TREAT Y DIRECTLY OR IN THE FORM ITS INDIAN SUBSIDIARY AND FURTHER ARTIC LE 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 BUYIN G 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. 2.1 FIRST ISSUE IS WITH REGARD TO WHETHER ASSESSEE S INDIAN SUBSIDIARY CONSTITUTE ITS BUSINESS CONNECTION IN IN DIA U/S. 9(1)(I) OF I.T. ACT, 1961 ('THE ACT') OR A PERMANENT ESTABL ISHMENT ('PE') IN INDIA UNDER VARIOUS PROVISIONS OF ARTICLE 5 INCLUDI NG ARTICLES 5(1), 5(2), 5(5) AND 5(6) OF THE INDIA-GERMANY TAX TREATY ('TAX TREATY') AT THE OUTSET OF HEARING, THE LEARNED AUTHORIZED RE PRESENTATIVE HAS POINTED OUT THAT THIS ISSUE IS COVERED BY THE A SSESSEES OWN CASE IN ITA NO.1413/PN/2010 FOR A.Y. 2006-07 BY FOL LOWING SIMILAR ISSUE IN A.Y. 2003-04 OBSERVING AS UNDER: WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORD ERS OF THE REVENUE AS WELL AS THE DECISION RELIED UPON BY THE LEARNED COUNSEL. IT IS A FACT THAT THERE IS A DECIS ION BY THIS TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE ASSESS MENT YEAR 2003-04 IN THE BACKGROUND OF THE FACT THAT ORDER OF THE 5 CIT(A) WAS NOT ACCEPTED BY THE REVENUE. THERE IS NO DRP FOR THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2003 -04. THEREFORE, THE ORDER THEN CHALLENGED WAS PASSED BY TOE CIT (A) AND THE SAID ORDER WAS CONFIRMED BY THE TRIBUNA L UPHOLDING THE NON-EXISTENCE OF PE. IN THIS REGARD, WE FIND IT RELEVANT TO REPRODUCE PARAS 39 TO 41.1 OF THE TRIBU NAL'S ORDER AS UNDER: 'IS IT NECESSARY THAT THE FE CAN ONLY BE SAID TO EX IST, UNDER THE BASIC RULE, WHEN CORE BUSINESS ACTIVITY I S CARRIED OUT BY THE PE? 39. WE QUITE AGREE WITH THE STAND OF THE REVENUE AUTHORITIES TO THE EXTENT THAT AS LONG AS AN ECONOM IC ACTIVITY IS CARRIED OUT IN THE FIXED PLACE OF BUSIN ESS AVAILABLE TO FOREIGN ENTERPRISE, WHETHER SUCH AN ACTIVITY IS A CORE ACTIVITY OR A PERIPHERAL ACTIVIT Y, IT HAS TO BE CONCLUDED THAT THE FOREIGN ENTERPRISE HAS A P E IN THE SOURCE JURISDICTION. MODEL CONVENTION COMMENTARY STATES THAT THE ACTIVITY CARRIED OUT BY THE PE MAY NOT BE A PRODUCTIVE CHARACTER, THOUGH THE COMMENTARY DOES RECOGNIZE THAT IT COULD PERHAPS BE ARGUED THAT IN THE GENERAL DEFINITION, SOME MENTION SHOULD ALSO BE MADE TO THE OTHER CHARACTERISTIC OF THE PE, NAMELY THAT THE ESTABLISHMENT MUST HAVE A PRODUCTIVE CHARACTER - I.E. CONTRIBUTE TO THE PROFI TS OF THE ENTERPRISE. HOWEVER, IN THE PRESENT DEFINITION, THIS COURSE HAS NOT BEEN TAKEN, LATE PROF. VOGEL ALSO CONCURRED WITH THIS SCHOOL OF THOUGHT AND OBSERVED THAT '... THE PE NEED NOT BE A BRANCH IN THE NATURE OF FACILITY ENGAGED IN ACTIVITIES OF THE SAME TYPE AS THOSE OF THE HEAD OFFICE ORGANIZATION, NOR NEED THE PLACE OF BUSINESS DIRECTLY CONTRIBUTE TO ENTERPRISE'S PROFIT S' AND 'ALL THAT ITS BUSINESS MUST DO IS TO SERVE THE ENTERPRISES OVERALL PURPOSE, BUT IT MUST BE AN ACTIVITY'. THE QUESTION, HOWEVER, IS THAT THE ACTIV ITY MUST BE OF THE BUSINESS OF THE TAX PAYER COMPANY, A ND NOT OF THE INDEPENDENT SUBSIDIARIES OF SUCH A TAXPA YER COMPANY. ON THE FACTS OF THE CASE BEFORE US, NO PAR T OF THE WORK OF EPCOS AG WAS CARRIED OUT IN INDIA. THE E- MAILS AND LETTERS WERE SENT FROM OUTSIDE INDIA, AND AT BEST INDIAN SUBSIDIARIES ACTED UPON THE ADVICES SO GIVEN IN THE E-MAILS AND LETTERS IN INDIA. THA T ACTION OF THE SUBSIDIARIES CANNOT ALTER THE SITUS OF THE ACTIVITIES OF THE EPCOS AG / DOES MERE EXISTENCE OF PE LEADS TO TAXABILITY OF INCOME IN SOURCE COUNTRY? 40. IT IS ALSO IMPORTANT TO BEAR IN MIND THAT A NON - RESIDENT COMPANY HAVING A PE IN INDIA, BY ITSELF, D OES NOT LEAD TO TAXABILITY IN INDIA; THERE MUST BE SOME 6 PROFIT ATTRIBUTABLE TO SUCH A PE WHICH ALONE COULD BE TAXED IN INDIA BECAUSE OF THE EXISTENCE OF THE PE. WHEN THE PE CARRIES ON AN ACTIVITY WHICH DOES NOT SERVE OVERALL PURPOSE OF THE FOREIGN ENTERPRISE, OR WHICH DOES NOT CONTRIBUTE TO PROFITS OF THE ENTERPR ISE, THE EXISTENCE OF SUCH A PE IS WHOLLY ACADEMIC AND D OES NOT HAVE ANY TAX IMPLICATIONS IN THE SOURCE JURISDICTION. TO THAT LIMITED EXTENT, THERE IS AN I NHERENT CONTRADICTION IN THE OECD APPROACH INASMUCH AS ON ONE HAND PE PROVIDES THRESHOLD LIMITS FOR TRIGGERIN G TAXATION IN THE SOURCE COUNTRY, ON THE OTHER HAND, THE EXISTENCE OF THE PE IS DECIDED DE HORS THE ACTIVITY IN THE ABSENCE OF WHICH TAXABILITY OF PROFITS IN THE S OURCE COUNTRY CANNOT BE TRIGGERED AT ALL. ON THE FACE OF IT, WHEN A PE IS NOT ENGAGED IN A CRITICAL ACTIVITY H AVING SOME CONTRIBUTION TO OVERALL PROFITS OF THE ENTERPR ISE OR A REVENUE GENERATING ACTIVITY, THE EXERCISE TO ASCE RTAIN WHETHER OR NOT 8 PE IS IN EXISTENCE IS A MEANINGLES S RITUAL AND AN EMPTY FORMALITY. VIEWED IN THIS PERSPECTIVE, AND BEARING IN MIND THE FACT THAT BY N O STRETCH OF LOGIC IT COULD BE HELD THAT ANY SIGNIFIC ANT OR CRITICAL BUSINESS ACTIVITY BY THE EPCOS AG WAS CARR IED OUT IN INDIA, EVEN IF THERE IS A PE IN INDIA, THAT WILL BE WHOLLY ACADEMIC AND WILL NOT LEAD TO ANY TAXABILITY OF INCOME. NOT ONLY THE WORK DONE IN INDIA, IF AT ALL, DID NOT CONSTITUTE SIGNIFICANT OR ''CRITICAL BUSINESS A CTIVITY, THE ASSESSEE COMPANY DID NOT EARN ANY REVENUES AS A RESULT OF THE ACTIVITIES SO CARRIED OUT BY THE EMPL OYEES OF INDIAN SUBSIDIARIES AND, THEREFORE, NO PART OF T HE REVENUES ACTUALLY GENERATED BY THE ASSESSEE COMPANY COULD BE SAID TO BE ATTRIBUTABLE TO THE PE. THE QUE STION OF EXISTENCE OF PE OF THE ASSESSEE COMPANY, IN THES E CIRCUMSTANCES, HAS NO IMPACT OF TAXABILITY OF THE ASSESSEE COMPANY. 41. THE REQUIREMENTS OF EXCLUSION CLAUSE UNDER ART. 15(5) ALSO HIGHLIGHT THIS ASPECT OF PROFIT ATTRIBUT ION. WHILE WE WE'RE EXAMINING INTERPLAY BETWEEN ART. 12 AND ART. 7, WE HAD NOTICED THAT THIS EXCLUSION CLAU SE HAS TWIN REQUIREMENTS OF (A) EXISTENCE OF THE PE THROUGH WHICH BUSINESS IS CARRIED OUT; AND OF (B) EXISTENCE OF EFFECTIVE CONNECTION BETWEEN SUCH A PE AND THE RIGHTS, PROPERTIES AND CONTRACTS IN RESPECT OF WHICH 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICES' ARE PAID. THAT WOULD MEAN THAT ONLY SUCH 'ROYALTIES' AN D FEES FOR TECHNICAL SERVICES' ARE EXCLUDED FROM THE SCOPE OF ART. 12(1) AND (2) AS ARE ATTRIBUTABLE TO THE PE THROUGH WHICH BUSINESS IS CARRIED ON BY THE ENTERPRISE. IN OTHER WORDS, THE TAXABILITY UNDER AR T. 12 7 SHIFTS TO TAXABILITY UNDER ART. 7 ONLY IN RESPECT O F 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICES' WHICH ARE ATTRIBUTABLE TO THE PE IN QUESTION. IN CASE AN ASSE SSEE RECEIVES 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVIC ES' BUT THESE RECEIPTS DO NOT HAVE AN EFFECTIVE NEXUS WITH THE PF, AND ARE NOT, THEREFORE, ATTRIBUTABLE TO THE PE, THE EXCLUSION CLAUSE UNDER ART. 15(5) AS ALSO TAXABILIT Y UNDER ART. 7(1) AND (2), IS NOT TRIGGERED. 41.1IN THE LIGHT OF THESE DISCUSSIONS, IN OUR CONSI DERED VIEW, THE ASSESSEE COMPANY DID NOT HAVE ANY PE IN INDIA, MUCH LESS A PE TO WHICH SUBJECT 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICES' CAN BE ATTRIBUTED. IN TERMS OF THE INDIA-GERMANY DTAA, INDIA DOES NOT HAVE RIGH T TO TAX THESE RECEIPTS AS BUSINESS PROFITS UNDER ART . 7. OF COURSE, IN THE LIGHT OF OUR FINDING THAT NO REVE NUES 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 COULD A RISE UNDER ART. 7. THE ASSESSEE HAS OFFERED THE ROYALTIE S AND FEES FOR TECHNICAL SERVICES FOR TAXABILITY IN I NDIA UNDER ART. 12, AND, TO THAT EXTENT, ADMITTED TAX LI ABILITY EXISTS. THE OVERZEALOUS APPROACH OF THE AO HAS BEEN RIGHTLY REJECTED BY THE CIT (A). WE APPROVE AND CON FIRM THE STAND OF THE CIT(A), AND DECLINE TO INTERFERE I N THE MATTER.' 9. CONSIDERING THE ABOVE, WE HAVE ALSO EXAMINED THE COMPARABILITY OF THE FACTS OF THE CASE FOR THIS YEA R VIS-A-VIS THE ASSESSMENT YEAR 2003-04. IT IS A FACT THAT NEIT HER THE AO, NOR THE DRP, NOR THE PRESENT CIT-DR WERE ABLE T O DEMONSTRATE AS TO WHETHER THE FACTS OF THE CURRENT YEAR ARE DIFFERENT IN ANY FORM WITH THAT OF ASSESSMENT YEAR 2003-04. MERELY, THE DR MENTIONED THAT NOBODY HAS GONE INTO THAT ISSUE, THEREFORE, THE MATTER SHOULD BE SET ASIDE. W E ARE UNABLE TO APPRECIATE THIS LINE OF ARGUMENT OF THE C IT-DR FOR THE SIMPLE REASON THAT IT IS THE RESPONSIBILITY OF THE AO FIRST OF ALL TO FOLLOW THE JURISDICTIONAL DECISION OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE AY 2003-04. THE SAME WA S NOT FOLLOWED AND SURPRISINGLY, THEY HAVE NOT EVEN DISTI NGUISHED. THEY SIMPLY IGNORED STATING THAT THE SAID ORDER- IS NOT ACCEPTED BY THE REVENUE AND THE MATTER IS PENDING B EFORE THE HON'BLE HIGH COURT OF BOMBAY. CONSIDERING THE A BOVE, WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO C ASE FOR SENDING THE FILES TO THE REVENUE. IN FACT IT IS THE CASE OF THE ASSESSEE THAT THE FACTS ARE IDENTICAL VIS-A- L VIS THE FACTS OF THE ASSESSMENT YEAR 2003-04. IN THESE CIRCUMSTANCES , WE ARE OF THE OPINION THAT THE DECISION COMPRISED IN P ARA 41.2 IS EQUALLY RELEVANT FOR THE .YEAR UNDER CONSIDERATI ON IN 8 RESPECT OF GROUND NO. 1. ACCORDINGLY, GROUND NO. 1 RAISED BY THE ASSESSEE IS ALLOWED. 2.2 NOTHING CONTRARY WAS BROUGHT TO OUR KNOWLEDGE O N BEHALF OF REVENUE. FACTS BEING SIMILAR, SO FOLLOWING THE SAM E REASONING, WE ARE NOT INCLINED TO CONCUR WITH THE FINDING OF D RP. WE ARE OF THE VIEW THAT THE ASSESSEE DID NOT HAVE ANY PE IN I NDIA, MUCH LESS A PE TO WHICH SUBJECT ROYALTIES AND FEES FOR T ECHNICAL SERVICES COULD BE ATTRIBUTED. IN TERMS OF INDIA-GERMAN DTAA , INDIA DOES NOT HAVE RIGHT TO TAX THESE RECEIPTS AS BUSINESS PR OFIT UNDER ARTICLE 7. IN THE LIGHT OF ABOVE FINDING THAT NO R EVENUE EARNED BY THE ASSESSEE COULD BE SAID TO BE ATTRIBUTABLE TO PE , EVEN IF ONE WAS TO COME TO THE CONCLUSION THAT A PE EXISTED, NO TAXABILITY COULD ARISE UNDER ARTICLE 7. THE ASSESSEE HAS OFFE RED THE ROYALTIES AND FEES FOR TECHNICAL SERVICES FOR TAXAB ILITY IN INDIA UNDER ARTICLE 12A AND TO THAT EXTENT, ADMITTED TAX LIABILITY EXISTS. THIS APPROACH OF THE ASSESSING OFFICER WAS REJECTED BY THE CIT(A) IN A.Y. 2006-07 FOR THE REASONS DISCUSSED ABOVE. A CCORDINGLY, THE ISSUE IN GROUND NO.1 IS ALLOWED AS DISCUSSED AB OVE. 3. NEXT ISSUE IS WITH REGARD TO NON ATTRIBUTION OF INCOME DEEMED TO ACCRUE OR ARISES IN INDIA. IN THIS REGAR D AGAIN THE LEARNED AUTHORIZED REPRESENTATIVE HAS SUBMITTED THA T THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE (RELATING TO NON- ATTRIBUTION OF INCOME), THE TRIBUNAL HAS DECIDED TH E ISSUE VIDE PARA 10 OF ITS ORDER IN ASSESSEES OWN CASE FOR A.Y . 2006-07, WHEREIN THE ISSUE HAS BEEN DECIDED IN THE SIMILAR F ACTS AND CIRCUMSTANCES FOR A.Y. 2003-04, BY OBSERVING AS UND ER: 'CONCLUSION ON THE SECOND ISSUE I.E. TAXABILITY @ 2 0 PER CENT IN TERMS S. 44DS R/W S.115A IN CASE PE IS FOUND TO BE IN EXISTENCE: 47. IN OUR CONSIDERED VIEW, IN TERMS OF INDO GERMAN TAX TREATY PROVISIONS, IT WILL HAVE TO BE DEMONSTRATED THAT SUCH ROYALTIES AND FEES FOR TECHNICAL SERVICES HA E A LI VE ECONOMIC 9 NEXUS WITH THE PE AND ONLY THEN EXCLUSION CLAUSE UN DER ART. 12(5) AS ALSO TAXABILITY UNDER ARTS. 7(1) AND 7(2), WILL COME INTO PLAY. IT IS ONLY AFTER THESE ROYALTIES AN D FEES FOR TECHNICAL SERVICES ARE SO INCLUDED IN THE BUSINESS PROFITS ATTRIBUTABLE TO THE PE THAT THE PROVISIONS OF SEC. 44D AND USA CAN BE INVOKED. THEREFORE, EVEN IF WE ARE TO HO LD THAT THE TAXPAYER HAD A PE IN INDIA, UNLESS THERE IS A C ATEGORICAL FINDING THAT ENTIRE RECEIPTS WERE ATTRIBUTABLE TO T HAT PE, ENTIRE BUSINESS RECEIPTS OF THE TAXPAYER SOURCED FR OM 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. TAXABILI TY UNDER THE DOMESTIC LAW: 48. THE NEXT THING TO BE EXAMINED IS TAXABILITY OF ROYALTIES AND FEES FOR TECHNICAL SERVICES' EARNED BY THE ASSE SSEE COMPANY IN TERMS OF THE PROVISIONS OF THE INDIAN IT ACT, 1961. 49. THERE IS NO DISPUTE ON THE BASIC FACTS. THE AM OUNTS RECEIVED BY THE ASSESSEE COMPANY ON THIS ACCOUNT ME ET THE DEFINITION OF 'ROYALTIES' AND OF FEES FOR TECHNICAL SERVICES' UNDER S.44D WHICH, IN TURN, REFERS TO EXPLN.2 TO S. 9(L)(VI) RESPECTIVELY. ACCORDINGLY, THE LIMITATION ON DEDUCT IONS, AS SET OUT IN 5.'MD, DOES APPLY ON THE FACTS OF THE CA SE, AND ENTIRE AMOUNT IS TO BE TAXABLE ON GROSS BASIS. HOWE VER, IN VIEW OF THE PROVISIONS OF S.115A, THE RATE OF TAX O N SUCH INCOME WILL INDEED BE 20 PERCENT. 50. IN VIEW OF THE ABOVE DISCUSSIONS, THE TAXABILIT Y OF AMOUNTS RECEIVED BY THE ASSESSEE COMPANY ON ACCOUNT OF 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICES', ON T HE FACTS OF THIS CASE AND UNDER THE INDIAN IT ACT, WILL BE @ 20 PERCENT ON GROSS BASIS, THAT ASPECT OF THE MATTER IS, HOWEV ER, ACADEMIC SINCE WE HAVE ALREADY HELD THAT, ON THE FA CTS OF THIS CASE, SOURCE COUNTRY DOES NOT HAVE THE RIGHT T O TAX INCOME IN QUESTION, EXCEPT UNDER ART. 12(2) OF THE TAX TREATY AND AT A RATE NOT EXCEEDING 10 PER CENT. THE ASSESS EE HAS ALREADY ACCEPTED TAX LIABILITY TO THAT EXTENT, AND THERE IS NO DISPUTE SO FAR AS TAXABILITY UNDER ART. 12(2) IS CO NCERNED.' 11. CONSIDERING THE ABOVE, THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO 2 IS COVERED IN FAVOUR OF THE ASSESSEE AND THE TAXATION ON GROSS BASIS AT HIGHER RATE OF 2 0% 'UNDER SECTION 115A READ WITH 44D OF THE ACT ARE UNWARRANT ED-AND TAXATION IS OUGHT TO BE AT 10% ON GROSS BASIS UNDER ARTICLE 12(2) OF THE TAX TREATY AS OFFERED IN THE RETURN OF INCOME. ACCORDINGLY, GROUND NO. 2 IS ALLOWED. 10 3.1 NOTHING CONTRARY WAS BROUGHT TO OUR KNOWLEDGE O N BEHALF OF REVENUE. FACTS BEING SIMILAR, SO FOLLOWING THE SAM E REASONING, WE ARE NOT INCLINED TO CONCUR WITH THE FINDING OF D RP AND THE SAME IS SET ASIDE. ACCORDING TO US, TAXATION AT GR OSS BASIS AT HIGHER RATE OF 20% U/S.115A R.W.S. 44D OF ACT ARE U NWARRANTED AND TAXATION HAS TO BE AT 10% ON GROSS BASIS UNDER ARTICLE 12(2) OF THE TAX TREATY AS OFFERED IN THE RETURN OF INCOM E. ACCORDINGLY, THIS GROUND OF ASSESSEE IS ALLOWED. 4. NEXT ISSUE IS WITH REGARD TO CHARGING OF INTERES T UNDER THE PROVISIONS OF SECTION 234B OF I.T. ACT, WHICH IS CO NSEQUENTIAL. 5. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS P ARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE DAY 31 ST OF JANUARY, 2014. SD/- SD/- (G.S. PANNU) (SHAILENDRA KUMAR YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 31 ST JANUARY, 2014 GCVSR COPY TO:- 1) ASSESSEE 2) DEPARTMENT 3) THE DRP, PUNE 4) THE DDIT (INTL. TAXN)-I, PUNE 5) THE DR, A BENCH, I.T.A.T., PUNE. 6) GUARD FILE BY ORDER //TRUE COPY// SENIOR PRIVATE SECRETARY, I.T.A.T., PUNE