M/s. TOYO ENGINEERING CORPORATION, MUMBAI V. DDIT (I.T), MUMBAI

ITA 3520/MUM/2005

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2654 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 7 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-12-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: L
• Assessment Year: 1998-1999
• Appeal Filed On: 11-05-2005
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Keywords: Rejection of books of accounts; Double taxation relief; Deemed to accrue or arise in india; Permanent establishment; Advance ruling; Revised return; TDS
• Section: 143(3); 234B; 250; 12; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER A ND SHRI J.SUDHAKAR REDDY, ACCOUNTANT MEMBER. 1. I.T.A. NO . 4054/MUM/99 ASSESSMENT YE AR : 1996-97. DY. COMMISSIONER OF M/S TOY O ENGINEERING CORPORATION. INCOME TAX, SPL. RANGE-12, VS. C/O BILIMOORIA MEHTA & CO., MUMBAI. CHARTERED ACCOUNTANTS, 1 ST FLOOR, 216, SETHNA BUILDING, SHAMALDAS GANDHI MARG, MUMBAI 400 002. PAN /GIR : DC SPL. RG 12/ 3-T. 2. I.T.A. NO. 1326/MUM/2001 ASSESSMENT Y EAR : 1997-98. JT. COMMISSIONER OF M/S TOYO ENGINEERING CORPORATION INCOME TAX, SPL. RANGE-12, VS. MUMBAI. MUMBAI. 3. I.T.A. NO . 3520/MUM/2005 ASSESSMENT Y EAR : 1998-99. M/S TOYO ENGINEERING VS. DY. DIRECTOR OF INCOME TAX, CORPORATION, MUMBAI. (INT ERNATIONAL TAXATION), MUMBAI. 4. I.T.A. NO. 2 00/MUM/2003 ASSESSMENT YE AR : 1998-99. DY. DIRECTOR OF INCOME TAX, M/S TOYO ENGINEERING CORPORATION, (INTERNATIONAL TAXATION), VS. MUMBAI. MUMBAI. APPELLANT. RESPONDENT. DEPARTMENT BY : SHRI NARENDRA SINGH. ASSESSEE BY : SHRI PERCY PARDIWALLA. 2 O R D E R PER J. SUDHAKAR REDDY, A.M. : THE APPEALS FOR THE ASSESSMENT YEARS 1996-97 AND 1997- 98 ARE FILED BY THE REVENUE AND THE APPEALS FOR THE ASSESSMENT YEAR 1998-99 ARE CROSS APPEALS. AS ALL THESE APPEALS WER E HEARD TOGETHER AND AS THEY BELONG TO THE SAME ASSESSEE, FOR THE SA KE OF CONVENIENCE, WE DISPOSE OF THE SAME BY WAY OF THIS CONSOLIDATED ORDER. 2. ITA NO. 4054/MUM/99 (A.Y. 1996-97) . FACTS IN BRIEF : TOYO ENGINEERING CORPORATION IS A NON-RESIDENT CO MPANY, INCORPORATED IN JAPAN. DURING THE FINANCIAL YEAR RE LEVANT TO ASSESSMENT YEAR 1996-97, REVENUE ACCRUED TO THE ASSESSEE UNDER THE HAZIRA- BIJAIPUR-JAGDISHPUR CONTRACT (HBJ CONTRACT) EXECUTE D ALONG WITH NIPPON KK AND SPIE CAPAG SA, FOR GAS AUTHORITY OF INDIA LI MITED. FURTHER THE ASSESSEE COMPANY CONTINUED TO EXECUTE CONTRACTS WIT H MANGALORE REFINERY AND PETROCHEMICALS LIMITED (MRPL). 2.1 THE ASSESSEE COMPANY FILED ITS ORIGINAL RETURN OF INCOME FOR ASSESSMENT YEAR 1996-97 ON NOVEMBER 30, 1996, REPOR TING A NET TAXABLE LOSS OF RS.135,257,667/-, UNDER THE ABOVE C ONTRACTS, BASED ON THE PROVISIONS OF THE AGREEMENT FOR AVOIDANCE OF DO UBLE TAXATION ENTERED INTO BETWEEN INDIA AND JAPAN (THE TREATY). THE AUDIT OF THE FINANCIALS FOR THE HBJ CONTRACT WAS UNDER PROGRESS AT THE TIME OF FILING THE ORIGINAL RETURN OF INCOME AND A COPY OF THE UNA UDITED FINANCIAL STATEMENTS WAS FILED ALONG WITH THE RETURN. LATER, THE ASSESSEE FILED A REVISED RETURN ON FEBRUARY 18, 1997, ENCLOSING THE AUDITED FINANCIAL STATEMENTS AND THE TAX AUDIT REPORT IN RESPECT OF T HE HBJ CONTRACT. IN THE REVISED RETURN, THE TOTAL LOSS UNDER THE HEAD PROF ITS AND GAINS FROM BUSINESS AND PROFESSION WAS RECOMPUTED AT RS.45,85 1,657/-. 3 2.2 THE JOINT COMMISSIONER OF INCOME-TAX, SPECIAL RANGE-12 COMPLETED THE SUMMARY ASSESSMENT UNDER SECTION 143( 1)(A) OF THE INCOME-TAX ACT, 1961, ON THE ORIGINAL RETURN ACCEPT ING THE LOSS REPORTED. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY. T HE ASSESSING OFFICER COMPLETED THE ASSESSMENT AND PASSED AN ORDE R U/S 143(3) OF THE ACT, COMPUTING THE TOTAL INCOME OF THE ASSESSEE AT A PROFIT OF RS.43,128,772/-. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL AND T HE FIRST APPELLATE AUTHORITY GRANTED PART RELIEF. 4. THIS IS A REVENUES APPEAL WHICH HAS BEEN FILED ON THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE FOLLOWING ADDI TIONS BEING THE DISALLOWANCE OF EXPENSES MADE BY THE A.O. FOR WANT OF DETAILS : A) RS.9,53,664/- BEING 20% OF FOREIGN CURRENCY SPE NT WITH RUPEE VALUE RS.47,68,322/-. B) RS.8,53,316/- BEING ESTIMATED DISALLOWANCE UNDER RULE 6D IN RESPECT OF DOMESTIC TRAVELING EXPENSES OF RS.42,66, 577/-. C) RS.24,75,847/- BEING ESTIMATED DISALLOWANCE UNDE R RULE 6D OUT OF TRAVELING EXPENSES OUTSIDE INDIA AMOUNTING TO RS.1, 23,79,236/-. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT RESTRICTIONS C ONTEMPLATED IN RULE 6D(I) AND RULE 6D(II) OF INCOME-TAX RULES WILL NOT BE APPLICABLE IN THE CASE OF ASSESSEE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN DELETING ADDITION OF RS .1,80,77,991/- BEING THE AMOUNT DISALLOWED BY THE A.O. IN VIEW OF PROVISIONS OF SECTION 37(4) AND 37(5) OF THE INCOME-TAX ACT, 1961 . 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DELETING AN AMOUNT OF R S.63,86,848/- ADDED BY THE A.O. FOR WANT OF REQUISITE INVOICES RE LYING ON TDS CERTIFICATES AND FORM NO. 27 PRODUCED BY ASSESSEE W ITHOUT GIVING PROPER OPPORTUNITY TO A.O. TO EXAMINE THE SAME. 4 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT A.O. WAS N OT CORRECT IN INCLUDING AMOUNT OF RS.12,58,181/- AS INCOME OF THE ASSESSEE BEING THE AMOUNT REPRESENTING THE TAX PAID BY MRPL ON THE FOREIGN CURRENCY PORTION OF THE REVENUE REPORTED FOR THE YE AR ENDED MARCH 31, 1996; AS THE PROVISIONS OF SECTION 10(6A) ARE N OT APPLICABLE IN THE CASE OF THE ASSESSEE. 5. WE HAVE HEARD MR. NARENDER SINGH, LEARNED CIT-D R ON BEHALF OF THE REVENUE AND MR.PERCY PARDIWALLA, LEA RNED COUNSEL FOR THE ASSESSEE. 6. AFTER HEARING THE RIVAL CONTENTIONS AND PERUSIN G THE PAPERS ON RECORD AS WELL AS THE ORDERS OF THE AUTHORITIES BELOW AND THE CASE LAWS CITED, WE HOLD AS FOLLOWS. 7. BOTH THE PARTIES BEFORE US SUBMITTED THAT GROUN D NO. 1B RELATING TO DISALLOWANCE UNDER RULE 6D IN RESPECT O F DOMESTIC TRAVELING EXPENSES AND GROUND NO. 2 ARE MISCONCEIVED AND THE REVENUE SHOULD NOT HAVE TAKEN THESE GROUNDS, FOR THE REASON THAT T HE FIRST APPELLATE AUTHORITY HAD IN FACT DECIDED THESE ISSUES AGAINST THE ASSESSEE. IN VIEW OF THESE SUBMISSIONS, WE DISMISS GROUND NO. 1B AND GROUND NO.2 OF THE REVENUES APPEAL AS MISCONCEIVED. 8. WE NOW TAKE UP GROUND NO. 1A AND 1C. 8.1 COMING TO GROUND NO. 1A BEING 20% DISALLOWANCE OF FOREIGN CURRENCY SPENT AND GROUND NO.1C BEING ESTIM ATED DISALLOWANCE UNDER RULE 6D OUT OF TRAVELING EXPENSES INCURRED OU TSIDE INDIA, BOTH THE PARTIES SUBMITTED BEFORE US THAT THE ISSUE IS CLEAR LY COVERED IN ASSESSEES FAVOUR BY THE DECISION OF THE E BENCH OF ITAT, MUMBAI IN ITA NO. 4053/MUM/99 FOR THE ASSESSMENT YEAR 1994-95 ORDER DATED 8 TH JUNE, 2005. THE TRIBUNAL AT PARA 7 PAGE 3 OF THAT O RDER OBSERVED THAT THIS IS NOT A CASE WHERE THE ASSESSEE HAS NOT FURNI SHED THE PARTICULARS AND DETAILS OF EXPENSES AT ALL. LOOKING AT THE FACT S OF THE CASE, THE 5 TRIBUNAL OBSERVED THAT THE ASSESSEE WAS A NON RESID ENT COMPANY, MAINTAINING ITS HEAD OFFICE ACCOUNT IN JAPAN AND UN DER THE CIRCUMSTANCES THE ASSESSEE HAD FURNISHED REASONABLE PARTICULARS. THE TRIBUNAL FURTHER OBSERVED THAT THE EXPENSES IN QUES TION HAVE BEEN CERTIFIED BY THE JAPANESE AUDITORS AND APPROPRIATI ON OF THE EXPENDITURE ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT IN INDI A, HAVE ALSO BEEN DULY CERTIFIED BY THE AUDITORS. THESE ACCOUNTS HAVE ALSO FOUND TO BE FURTHER VETTED BY THE INDIAN AUDITORS. UNDER THESE CIRCUMSTANCES, THE FINDING OF THE CIT(APPEALS) WAS ACCEPTED. RESPECTFU LLY FOLLOWING THE SAME, WE DISMISS GROUND NO. 1A OF THE ASSESSEE. 8.2 SIMILARLY IN GROUND NO. 1C THE TRIBUNAL IN PAR A 8 UPHELD THE FINDINGS OF THE FIRST APPELLATE AUTHORITY THAT RULE 6D HAS NO APPLICATION FOR DECIDING THE EXPENDITURE INCURRED OUTSIDE INDIA , EVEN IF IT IS FOR TRAVELING EXPENSES. CONSISTENT WITH THE VIEW, WE DI SMISS THIS GROUND OF THE REVENUE. 9. GROUND NO. 3 IS ON THE ISSUE OF ALLOWABILITY OF EXPENDITURE INCURRED BY THE ASSESSEE BY WAY OF RENT FOR HOUSING PROVIDED TO EXPART EMPLOYEES WHO ARE ON DEPUTATION. THE AO WAS OF THE VIEW THAT SECTION 37(5) APPLIES TO THE FACTS OF THE CASE AS THE ACCOM MODATION IN QUESTION IS IN THE NATURE OF GUEST HOUSE. THE ASSESSEES CAS E IS THAT THE ACCOMMODATION PROVIDED FOR THE EMPLOYEES OF TOYO EN GINEERING CORPORATION, CANNOT BE CONSIDERED AS BEING ACCOMMOD ATION IN THE NATURE OF GUEST HOUSE ON ACCOUNT OF I) THE ACCOMMOD ATION AT THE HOTEL IS NOT USED FOR GENERAL ENTERTAINMENT OR REALIZATIO N BUT IS USED SOLELY FOR THE PURPOSE OF RESIDENTIAL ACCOMMODATION. II) THE P ROVISION OF PREMISES TO THE EMPLOYEES IS TAXED AS A PERQUISITE IN THE HA NDS OF THE EMPLOYEES. 10. MR. NARENDER SINGH, THE LEARNED DR EMPHASIZED ON THE WORDINGS USED IN SECTION 37(5) OF THE ACT AND SUBMI TS THAT THE 6 ACCOMMODATION PROVIDED TO THE EMPLOYEES WOULD BE IN THE NATURE OF GUEST HOUSE WITHIN THE MEANING OF SUB-SECTION (4). MR. PARDIWALLA, LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT FOR A TTRACTING SECTION 37(4), IT IS NECESSARY THAT THE ACCOMMODATION IN QU ESTION SHOULD BE USED FOR GUESTS. HE EMPHASIZED THAT IF IT IS USED F OR EMPLOYEES, THEN SECTION 37(4) IS NOT ATTRACTED. COMING TO SECTION 3 7(5) MR. PARDIWALLA EMPHASIZED THAT THIS IS ATTRACTED WHEN AN EMPLOYEE IS ON TOUR OR VISIT TO A PLACE AND IS NOT APPLICABLE WHEN A PERSON IS SENT ON DEPUTATION AND IS REQUIRED TO RESIDE THERE FOR A CONSIDERABLE PERIOD OF TIME, SPECIFICALLY WHEN THE ACCOMMODATION IS TREATED AS A PERQUISITE T O THE EMPLOYEE. MR. PARDIWALLA FURTHER SUPPORTED THE ORDER OF THE C IT(APPEALS) BY REFERRING TO ARTICLE 7(3) OF THE CONVENTION BETWEEN GOVERNMENT OF JAPAN FOR AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION PHYSICAL EVASION WITH RESPECT TO TAX ON INCOME AND SUBMITTED THAT TH IS ARTICLE ENTITLES THE ASSESSEE TO CLAIM DEDUCTION OF EXPENSES INCURRED FO R THE PURPOSE OF PERMANENT ESTABLISHMENT. HE FURTHER REFERRED TO PRO TOCOL TO THE DTAA WITH JAPAN DATED 7 TH MARCH, 1989 SPECIFICALLY TO PARAGRAPH 7, WHEREIN I T IS STATED THAT DEDUCTIONS IN RESPECT OF EXECUTIVE A ND GENERAL ADMINISTRATION AS REFERRED TO IN THE SAID PARAGRAPH ARE TO BE ALLOWED IN ACCORDANCE WITH THE DOMESTIC LAW OF INDIA AND SUBMI TTED THAT THE TERM EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES HAV E TO BE UNDERSTOOD AS IN SUB-CLAUSE (IV) TO SECTION 44C. HE POINTED OUT THAT THE HEAD OFFICE EXPENDITURE MEANS EXECUTIVE AND GENERAL ADMI NISTRATIVE EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA. 11. AFTER HEARING THE RIVAL CONTENTIONS, WE ARE UN ABLE TO PERSUADE OURSELVES TO ACCEPT THE CONTENTION OF MR. PARDIWALLA THAT THE DISALLOWANCE IN QUESTION U/S 37(5) COULD NOT HAVE B EEN MADE IN VIEW OF THE DOUBLE TAXATION AGREEMENT WITH JAPAN. ARTICLE 7 (3) OF THE DTAA WITH JAPAN READS AS FOLLOWS : 7 IN DETERMINING THE PROFITS OF THE PERMANENT ESTAB LISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE INCURRED FOR THE PURPOSE OF THE PERMANENT ESTABLISHMENT, INC LUDING EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES SO IN CURRED, WHETHER IN THE CONTRACTING STATE IN WHICH THE PERMA NENT ESTABLISHMENT IS SITUATED OR ELSEWHERE. 12. PARA 7 OF THE PROTOCAL DATED 7 TH MARCH, 1989 READS AS FOLLOWS : WITH REFERENCE TO PARA 3 OF ARTICLE 7 OF THE CONV ENTION, IT IS UNDERSTOOD THAT IN INDIA, THE DEDUCTION IN RESPECT OF THE EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES AS REFERRED TO IN THE SAID PARAGRAPH SHALL BE ALLOWED IN ACCORDANCE WITH THE D OMESTIC LAW OF INDIA, BUT SUCH DEDUCTION SHALL IN NO CASE BE LE SS THAN WHAT ARE ALLOWABLE UNDER THE INDIAN INCOME-TAX ACT AS E FFECTIVE ON THE DATE OF SIGNATURE OF THE CONVENTION. SECTION 44C EXPLANATION (IV) READS AS FOLLOWS : (IV) HEAD OFFICE EXPENDITURE MEANS EXECUTIVE A ND GENERAL ADMINISTRATION EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA, INCLUDING EXPENDITURE INCURRED IN RE SPECT OF (A) RENT, RATES, TAXES, REPAIRS OR INSURANCE OF ANY PREMISES OUTSIDE INDIA USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION; (B) SALARY. WAGES, ANNUITY, PENSION, FEES, BONUS, COMMISSION, GRATUITY, PERQUIS8TES OR PROFITS IN LIEU OF OR IN ADDITION TO SALARY, WHETHER PAID OR ALLOWED TO ANY EMPLOYEE OR OTHER PERSON EMPLOYED IN, OR MANAGING THE AFFAIRS OF, ANY OFFICE OUTSIDE INDIA; (C) TRAVELING BY ANY EMPLOYEE OR OTHER PERSON EMPLOYED IN, ANDM 8 (D) SUCH OTHER MATTERS CONNECTED WITH EXECUTIVE AND GENERAL ADMINISTRATION AS MAY BE PRESCRIBED. 13. THE EXECUTIVE AND GENERAL ADMINISTRATIVE EXPEN DITURE REFERRED TO UNDER SECTION 44C, INCLUDES RENT. THIS SECTION REFERS TO EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA. COMING TO DTAA AND PROTOCOL, THE EXPENDITURE IN QUESTION IS WHAT IS EXPENDITURE IN INDIA AS WELL AS ELSEWHERE. AS FAR AS EXECUTIVE AND GENER AL ADMINISTRATIVE EXPENSES INCURRED IN INDIA IS CONCERNED, THE PROTOC OL CLEARLY LAYS DOWN THAT IT SHALL BE ALLOWED IN ACCORDANCE WITH THE DOM ESTIC LAW OF INDIA. THE ARGUMENT OF MR. PADTIWALLA THAT EXPENDITURE ON RENT INCURRED BY THE ASSESSEE FOR THE PURPOSE OF PROVIDING ACCOMMODATION TO EXPART EMPLOYEES ON DEPUTATION DOES NOT FALL WITHIN PARA 7 OF THE PROTOCOL READ WITH CLAUSE 3 OF ARTICLE 7 OF THE CONVENTION WITH J APAN IS NOT CORRECT. IN OUR HUMBLE OPINION, RENTAL EXPENDITURE IN QUESTION FALLS WITHIN THE AMBIT OF EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES AN D TO THE EXTENT THEY ARE INCURRED WITHIN THE COUNTRY, THE ALLOWANCE OR OTHERWISE WILL BE GOVERNED TO THE DOMESTIC LAW. THUS, THIS ARGUMENT, IN OUR HUMBLE OPINION, HAS TO BE REJECTED. 14. COMING TO THE ARGUMENT THAT SECTION 37(4) APPL IES ONLY WHEN THE ACCOMMODATION IN QUESTION IS USED FOR THE PURPOSE OF HOUSING GUESTS, WE FIND THAT THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT, TAMIL NADU-III VS. ARUNA SUGARS LTD. 123 ITR 619 AT PAGE 623 HELD AS FOLLOWS: THUS, IN OUR OPINION, WHERE A GUEST HOUSE IS MAIN TAINED, EITHER IN THE PRINCIPAL PLACE OF BUSINESS OR IN A P LACE WHERE THE FACTORY IS LOCATED, FOR THE DIRECTORS AND OTHER EMP LOYEES OF THE COMPANY, WHO HAVE TO VISIT IT FOR THE PURPOSE OF CO MPANYS BUSINESS, THEN ANY EXPENDITURE INCURRED FOR THE MAI NTENANCE OF SUCH ACCOMMODATION CANNOT BE BROUGHT WITHIN THE SCO PE OF S. 37(3). FURTHER, IN SUCH A CASE, AN OCCASIONAL STAY BY A PERSON WHO VISITS THE FACTORY FOR THE PURPOSE OF ITS BUSIN ESS CANNOT ALSO 9 BE CALLED A GUEST. ANY OFFICIAL VISITING THE FACTOR Y FOR THE PURPOSE OF ENFORCING THE LAWS APPLICABLE TO THE FACTORY CAN NOT ALSO BE DESCRIBED AS AN OUTSIDER SO THAT ANY ACCOMMODATION USED BY HIM IN CONNECTION WITH THE COMPANYS WORK, CAN BE TREAT ED AS ACCOMMODATION IN THE NATURE OF A GUEST HOUSE. IT IS ONLY WITH REFERENCE TO THE OTHER CATEGORIES LIKE STRANGERS, T HAT THE ACCOMMODATION WHICH IS MAINTAINED CAN BE CORRECTLY CALLED A GUEST HOUSE. IN OTHER WORDS, THE MEANING OF THE TER M GUEST HOUSE AS A PLACE FOR THE RECEPTION OF STRANGERS AP PEARS TO HAVE BEEN ACCEPTED BY THE RULE-MAKING AUTHORITY AS THE R ULES ENVISAGE EMPLOYEES STAYING IN THESE PREMISES. IF EMPLOYEES W ERE CONSIDERED TO BE STRANGERS SUCH A PROVISION WOULD N OT HAVE BEEN MADE. IT IS NECESSARY TO BEAR IN MIND THE LEGAL POS ITION THAT THE RULE-MAKING AUTHORITY CANNOT EXPLAINED THE CONCEPT OF THE WORD GUEST SO AS TO INCLUDE EMPLOYEES IF THE WORD DID NOT COMPREHEND SUCH EMPLOYEES. THUS, EMPLOYEES ARE NOT STRANGERS SO AS TO BE GUESTS. THE RESULT IS THAT UNLESS THE GUEST HOUSE IS INTENDED, FOR USE BY A CO MPLETE STRANGER, IT CANNOT BE CALLED A GUEST HOUSE WHICH FALLS WITHIN THE SCOPE OF S. 37(3) . 15. COMING TO SECTION 37(5), WE FIND THAT THE ASSE SSEE HAS CLEARLY STATED THAT THE ACCOMMODATION IN QUESTION IS PROVIDED TO ITS EXPART EMPLOYEES ON DEPUTATION AND THAT THIS ACCOMM ODATION IS PROVIDED AS PER THE TERMS OF THE EMPLOYMENT AGREEME NT WITH THE EMPLOYEES. IN FACT, AT PARA 37 PAGE 18 THE AO HAS R ECORDED THE CLAIM OF THE ASSESSEE THAT THE PROVISION FOR THE RESIDENT IAL PREMISES TO THE EMPLOYEES IS TAXED AS A PERQUISITE IN THE HANDS OF THE EMPLOYEES. IT IS ALSO VERY CLEAR THAT THE EMPLOYEES IN QUESTION ARE NEITHER ON TOUR OR VISIT TO THE PLACE AT WHICH THE ACCOMMODATION IS SITUATED BUT WERE IN FACT POSTED AT THAT PARTICULAR PLACE. ONCE THE REVENUE D OES NOT CONTRADICT THE CLAIM OF THE ASSESSEE THAT THE ACCOMMODATION WA S TAXED AS A PERQUISITE IN THE HANDS OF THE COMPANY, IN OUR CONS IDERED OPINION, ON THE FACTS DISCUSSED ABOVE, IT WOULD BE WRONG TO DI SALLOW EXPENDITURE U/S 37(5) BY TREATING ACCOMMODATION AS A GUEST HOUS E. 10 16. FOR ALL THESE REASONS, WE AGREE WITH THIS LIMB OF ARGUMENT OF SHRI PARDIWALLA AND UPHOLD THE ORDERS OF THE CIT (APPEALS) AND DISMISS GROUND NO. 3 OF THE REVENUES APPEAL. 17. COMING TO GROUND NO. 4, THE ISSUE RELATES TO D ISALLOWANCE OF AN AMOUNT OF RS.63,86,848/- FOR WANT OF REQUISIT E INVOICES. 17.1 AFTER HEARING RIVAL CONTENTIONS, WE FIND THAT THE PAYMENT IN QUESTION WAS MADE TO ONE GENERAL ELECTRICAL TECHNIC AL SERVICES CO. THE PAYMENT PERTAINS TO TWO INVOICES. IN FACT, FOR THE SUBSEQUENT ASSESSMENT YEAR, AN AMOUNT OF US $ 4,38,299 WAS PAI D TO THE SAME PARTY AND WAS ALLOWED AS EXPENDITURE.. THE ASSESSEE HAD PROVIDED THE NOS. OF THE INVOICES RAISED BY GENERAL ELECTRICAL T ECHNICAL SERVICES CO., BUT FOR SOME REASONS COULD NOT PRODUCE THE COP Y OF THE INVOICES. THE FIRST APPELLATE AUTHORITY CONSIDERED THE FACT T HAT THE TOTAL SUB CONTRACTOR COST WAS RS.6,48,48,040/- AND THE ASSESS EE WAS SUCCESSFUL IN FURNISHING COPIES OF INVOICES OF 90% OF THE CASE S AND ONLY IN THE CASE OF 10% IT HAD EXPRESSED DIFFICULTY IN PRODUCING TH E SAME. HE FURTHER OBSERVED THAT THE ACCOUNTS WERE AUDITED AND THAT TH E PAYMENTS WERE MADE BY WAY OF CHEQUES, TAX DEDUCTED AT SOURCE AND DETAILED BREAK UP OF THE SUB CONTRACTORS COST, DETAILED SCOPE OF WORK WAS PROVIDED. ON THESE CIRCUMSTANCES, THE FIRST APPELLATE AUTHORITY WAS OF THE OPINION THAT IN VIEW OF THE CIRCUMSTANTIAL EVIDENCE THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED. WE FULLY AGREE WITH THESE FINDINGS AND UPHOLD THE SAME. 17.2 IN THE RESULT, GROUND NO. 4 OF THE REVENUES APPEAL IS DISMISSED. 18. COMING TO GROUND NO.5, THE SOLE ARGUMENT OF MR . NARENDER SINGH, LEARNED DR, IS THAT THE ASSESSEE HAS FILED L OSS RETURN AND HENCE HE WAS NOT LIABLE TO PAY ANY INCOME-TAX IN INDIA AN D UNDER THOSE CIRCUMSTANCES THE TAX PAID BY MRPL COULD NOT BE EXE MPT U/S 10(6A) 11 18.1 WE FIND THAT SECTION 10(6A) READS A FOLLOWS : (6A) WHERE IN THE CASE OF A FOREIGN COMPANY DERIV ING INCOME BY WAY OF ROYALTY OR FEES FOR TECHNICAL SERV ICES RECEIVED FROM GOVERNMENT OR AN INDIAN CONCERN IN PURSUANCE OF AN AGREEMENT MADE BY THE FOREIGN COMPA NY WITH GOVERNMENT OR THE INDIAN CONCERN AFTER THE 31 ST DAY OF MARCH, 1976 [BUT BEFORE THE 1 ST DAY OF JUNE, 2002] [AND. - (A) WHERE THE AGREEMENT RELATES TO A MATTER INCLUDE D IN THE INDUSTRIAL POLICY, FOR THE TIME BEING IN FORCE, OF THE GOVERNMENT OF INDIA SUCH AGREEMENT IS IN ACCORDANCE WITH THAT POLICY; AND (B) IN ANY OTHER CASE, THE AGREEMENT IS APPROVED BY THE CENTRAL GOVERNMENT, THE TAX ON SUCH INCOME IS PAYABLE, UNDER THE TERMS OF THE AGREEMENT, BY GOVERNMENT OR THE INDIAN CONCERN TO T HE CENTRAL GOVERNMENT, THE TAX SO PAID]. EXPLANATION FOR THE PURPOSES OF THIS CLAUSE- (A) FEES FOR TECHNICAL SERVICES SHALL HAVE THE SA ME MEANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB- SECTION (1) OF SECTION 9; (B)FOREIGN COMPANY SHALL HAVE THE SAME MEANING AS IN SECTION 80B. (C) ROYALTY SHALL HAVE THE SAME MEANING AS IN EXP LANATION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9;]. 18.2 THE UNDISPUTED FACT IS THAT THE AGREEMENT IN THIS CASE RELATES TO A MATTER INCLUDED IN THE INDUSTRIAL POLI CY FOR THE TIME BEING ENFORCED BY GOVERNMENT OF INDIA AND THAT THE AGREEM ENT IN QUESTION IS IN ACCORDANCE WITH THE POLICY. AS THIS CONDITION IS SATISFIED, THE TAX ON INCOME DERIVED BY THE FOREIGN COMPANY, IF IT IS PAY ABLE UNDER THE TERMS OF THE AGREEMENT BY THE GOVERNMENT OR THE INDIAN CO NCERN, THE TAX SO PAID CANNOT FORM PART OF TOTAL INCOME. SECTION 10(6 A) CLEARLY LAYS DOWN THE TAX PAID OR PAYABLE, UNDER SUCH CIRCUMSTANCES I S EXEMPT U/S 10(6A). WE ARE UNABLE TO APPRECIATE THE ARGUMENT OF THE REVENUE THAT AS THIS IS A CASE OF LOSS, THE QUESTION OF APPLICA TION OF SECTION 10(6A) 12 DOES NOT ARISE. ONCE AN AMOUNT HAS BEEN PAID AS TAX TO THE CENTRAL GOVERNMENT ON BEHALF OF A FOREIGN COMPANY, BY THE I NDIAN CONCERN IN TERMS OF AN AGREEMENT COVERED IN CLAUSE (A) AND CLA USE (B) OF SECTION 10(6A), SUCH PAYMENT CANNOT BE TREATED AS INCOME. T HUS, WE UPHOLD THIS FINDING OF THE FIRST APPELLATE AUTHORITY AND D ISMISS THIS GROUND OF THE REVENUE. 19. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. 20. ITA NO. 1326/MUM/2001.: (A.Y. : 1997-98) IN THIS APPEAL FILED BY THE REVENUE FOR ASSESSMEN T YEAR 1997-98, FOLLOWING GROUNDS HAVE BEEN RAISED: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT PROFIT IN RESPECT OF OFFSHORE SUPPLY CONTRACT TO MRPL CANNOT BE TAXED IN INDIA. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DECIDING THAT A.O. SHOULD HAVE COMPUTED PROFIT OR LOSS OF THE ASSESSEE IN RES PECT OF PROJECTS EXECUTED IN INDIA ON THE BASIS OF FINANCIA L RESULTS SHOWN BY ASSESSEE AND NOT BE RESORTING TO ESTIMATIO N BY APPLYING RULE 10 OF THE I.T. RULES. 21. MR. NARENDER SINGH, THE LEARNED DR VEHEMENTLY CONTENDS THAT THE INCOME EARNED BY THE ASSESSEE IN RESPECT O F OFFSHORE SUPPLY CONTRACT, IS INTRICATELY RELATED AND CONNECTED WIT H CONTRACT OF EXECUTION OF WORK IN RESPECT OF MANGALORE REFINERY & PETROCH EMICALS LTD. (MRPL) AND THE AO WAS RIGHT IN BRINGING THAT INCOME TO TAX. HE TOOK THIS BENCH TO PAGE 2 AND 3 OF THE ASSESSMENT ORDER AND EMPHASIZED ON THE FACT THAT THREE INTERRELATE CONTRACTS WERE EXE CUTED BY THE ASSESSEE COMPANY. HE ALSO POINTED OUT THAT THE ASSESSEE HAD NOT SUPPLIED THE DETAILS OF THE SUPPLIES MADE BY THE HEAD OFFICE AND SUBMITTED THAT UNDER THOSE CIRCUMSTANCES THE AO WAS RIGHT IN ESTIMATING THE PROFIT UNDER RULE 10. HE VEHEMENTLY CONTENDED THAT THE CIT(APPEA LS) HAS NOT 13 PROPERLY DEALT WITH THE MATTER AND HAS IN A SUMMARY MANNER ACCEPTED THE CONTENTIONS OF THE ASSESSEE AND ALLOWED THE APP EAL. 22. MR. PERCY PARDIWALLA, THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, POINTED OUT THAT THE ASSESSEE HA D ENTERED INTO THREE SEPARATE CONTRACTS. THE FIRST ONE RELATING TO OFFSH ORE DESIGN WHICH IS DATED 18 TH MARCH, 1993, THE SECOND RELATING TO OFFSHORE SUPPL Y DATED 18 TH AUGUST, 1999 AND THE THIRD AGREEMENT RELATED TO PR OJECT MANAGEMENT AND SUPERVISION DATED 18 TH MARCH, 1993. HE TOOK THIS BENCH TO THE VARIOUS CLAUSES OF THE AGREEMENT OF TH E CONTRACT FOR OFFSHORE SUPPLY. TO DERIVE HOME THE POINT THAT THE SAME CANNOT BE BROUGHT TO TAX IN INDIA, AS THERE IS NO ACCRUAL OF INCOME IN TERMS OF THE INCOME-TAX ACT, HE SUBMITTED THAT THE AO SHOULD FIR ST COME TO A CONCLUSION THAT A PARTICULAR RECEIPT IS CHARGEABLE TO TAX UNDER THE INDIAN INCOME TAX ACT AND THEREAFTER HE HAS TO EXAMINE WHE THER THE SAME CAN BE TAXED UNDER THE TREATY. IN THIS CASE, HE POI NTED OUT THAT THE AO HAS GONE ON A PRESUMPTION THAT THIS TRANSACTION IS CHARGEABLE TO TAX IN INDIA AND THEREAFTER WENT ON TO EXAMINE THE PROVISI ONS OF THE TREATY. HE SUBMITTED THAT IT IS NOT THE CASE OF THE REVENUE TH AT THERE IS A BUSINESS CONNECTION AND UNDER SUCH CIRCUMSTANCES EVEN UNDER THE TREATY, THIS OFFSHORE SUPPLY CONTRACT CANNOT BE TAXED. HE CONTE NDED THAT THE ISSUE IS SQUARELY COVERED IN HIS FAVOUR BY THE DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA-HARIMA HE AVY INDUSTRIES CO. LTD. VS. DIRECTOR OF INCOME TAX 288 ITR 408. HE SPECIFICALLY EMPHASIZED ON THE CONCLUSIONS OF THE HONBLE SUPREM E COURT IN THIS DECISION AND SUBMITTED THAT SECTION 9(1)(VII) IS NO T ATTRACTED TO THE CASE ON HAND. HE FURTHER POINTED OUT THAT THE EARLIER BE NCH OF THE TRIBUNAL IN THIS VERY CASE HAD EARLIER FOLLOWED THE DECISION OF THE AUTHORITY FOR ADVANCE RULINGS AND HAD DECIDED THE CASE IN FAVOUR OF THE REVENUE. SUBSEQUENTLY AS THIS DECISION OF THE AUTHORITY FOR ADVANCE RULINGS WHICH WAS REPORTED IN 271 ITR 193 (AAR) WAS REVERSE D BY THE HONBLE 14 SUPREME COURT, THE BENCH RECALLED THE MATTER FOR FR ESH CONSIDERATION. HE FURTHER RELIED ON THE FOLLOWING CASE LAWS : : MOTORALA INC. VS. CIT ITA NO. 1318/MUM/2001 ITA NO. 4107 & 4108/MUM/2002. HE SUPPORTED THE ORDER OF THE FIRST APPELLATE AUTHO RITY. 23. COMING TO THE SECOND GROUND OF REJECTION OF BO OKS, THE LEARNED COUNSEL FOR THE ASSESSEE TOOK THIS BENCH TO PARA 7 OF THE CIT(APPEALS) ORDER AND RELIED UPON THE SAME. HE PO INTED OUT THAT THE AO AGREES THAT THE ASSESSEE HAD PRODUCED THE CASH B OOK BUT WONDERED HOW HE COULD COME TO A CONCLUSION THAT LED GERS ARE NOT MAINTAINED. HE POINTED OUT THAT THE ASSESSEE WAS MA INTAINING THE BOOKS OF ACCOUNT IN A SIMILAR FASHION FOR MORE THA N A DECADE AND THAT THE SAME WERE AUDITED AND THE ASSESSEE HAD ALSO PRO DUCED ALL NECESSARY EVIDENCE BEFORE THE AO. MR. PARDIWALLA FU RTHER SUBMITTED THAT THERE IS NO BASIS FOR THE ASSESSEE TO ESTIMATE THE INCOME AT 20%. REFERRING TO RULE 10 HE POINTED OUT THAT THE AO HAS NOT APPLIED OR EVEN ADMITTED TO APPLY THIS RULE AND UNDER THESE CIRCUMS TANCES THE ORDER OF THE CIT(APPEALS) HAS TO BE UPHELD. 24. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDER ATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, ON A PERUSAL OF THE PAPERS ON RECORDS AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAW CITED, WE HOLD AS FOLLOWS . 25. THE ASSESSEE IN THIS CASE ENTERED INTO 3 DIFFE RENT CONTRACTS. I.E., A) CONTRACT FOR OFFSHORE DESIGN DATED 18 TH MARCH, 1993 B) CONTRACT FOR OFFSHORE SUPPLIED DATED 18 TH AUGUST, 1995, C) CONTRACT FOR PROJECT MANAGEMENT AND SUPERVISION DATED 18 TH MARCH, 1993. THE INCOME ACCRUING FROM THE THIRD CONTRACT I.E. PROJECT MANAG EMENT AND SUPERVISION WAS OFFERED TO TAX UNDER INCOME TAX ACT FOR THE REASON THAT 15 THE INCOME IS ATTRIBUTABLE TO THE PERMANENT ESTABLI SHMENT IN INDIA. THERE IS NO DISPUTE ON THIS FACT. THE ONLY ISSUE T HAT ARISES FOR OUR CONSIDERATION IS WHETHER THE INCOME ARISING FROM CO NTRACT FOR OFFSHORE SUPPLY CAN BE SAID TO HAVE ACCRUED AND ARISES IN IN DIA SO AS TO BRING THE SAME TO TAX. IN THIS CONTRACT THE ASSESSEE IS T ERMED AS A SUPPLIER AND MANGALORE REFINERY AND PETROCHEMICALS LTD. IS T ERMED AS AN OWNER. WE EXTRACT SOME OF THE CLAUSES IN AGREEMENT FOR READY REFERENCE : OFF-SHORE EQUIPMENT AND MATERIALS MEANS THE EQU IPMENT AND MATERIALS TO BE SUPPLIED UNDER THIS CONTRACT B Y SUPPLIER TO OWNER FROM SOURCES OUTSIDE INDIA ON CI F (INCOTERMS 1990) NEW MANGALORE OR BOMBAY PORT BASIS OR INDIA INTERNATIONAL AIRPORTS BASIS UNDER WHICH THE OWNERSHIP- THEREOF WILL PASS IN FAVOUR OF OWNER UPON DELIVERY ON FOB POINT. SUPPLIER SHALL PRODUCE THE OFF-SHORE EQUIPMENT AN D MATERIALS AS PER A LIST OF SUPPLY GIVEN IN EXHIBIT G ON THE BASIS OF THE DESIGN DATE AND SPECIFICATION FURNISHED BY OWNE R AND AS CONTAINED IN THE SAID EXHIBIT THE SUPPLY SHALL BE F ROM SOURCES OUTSIDE INDIA. SUPPLIER SHALL EXPEDITIOUSLY SHIP T HE SAME TO OWNER FOR DELIVERY ON CIF NEW MANGALORE, BOMBAY POR T BASIS OR INDIA INTERNATIONAL AIRPORTS (AS INTERPRETED UND ER INCOTERMS 1990 EDITION) IN ACCORDANCE WITH THE SCHEDULE AS SE T OUT IN EXHIBIT E IT BEING EXPRESSLY AGREED AND UNDERSTOOD BETWEEN THE PARTIES HERETO THAT OVER-DIMENSIONED CONSIGNMENTS O F THE OFFSHORE EQUIPMENT AND MATERIALS SHALL IN ALL CASES BE FOR DELIVERY ON CIF NEW MANGALORE PORT BASIS. OWNER SHALL PERFORM OR ARRANGE TO PERFORM IN A TI MELY MANNER THE FOLLOWING AMONG OTHERS : (1) OBTAINING THE IMPORT LICENSES AND APPROVALS, (2) OBTAINING ALL OTHER APPROVALS OF THE GOVERNMENT OF INDIA AND ITS AGENCIES AS REQUIRED, AND (3) CUSTOMS CLEARANCE. ARTICLE 7- DELIVERY OF OFF-SHORE EQUIPMENT AND MATERIALS: 16 A) SUPPLIER SHALL PROCURE OFF-SHORE EQUIPMENT AND MATERIALS FROM SOURCES OUTSIDE INDIA, BASED ON THE APPROVED LIST OF VENDORS INCLUDED IN EXHIBIT G. SUP PLIER HAS THE SOLE RIGHT OF SELECTION OF THE VENDORS TO T HE EXTENT THE SELECTION IS MADE FROM THE VENDORS IN THE LIST APPROVED BY THE PARTIES HERETO. OWNER SHALL HAVE THE RIGHT TO VISIT THE WORKS OF THE VENDORS SELECTED BY SUPPLIER DURIN G MANUFACTURE OF THE OFF-SHORE EQUIPMENT AND MATERIAL S FOR INSPECTION UNDER PARAGRAPH E. BELOW. SUPPLIER SHALL EXPEDITIOUSLY SHIP OFF-SHORE EQUIP MENT AND MATERIALS TO OWNER FOR DELIVERY ON CIF NEW MANGALORE PORT, BOMBAY PORT OR INDIAN INTERNATIONAL AIRPORT BASIS (AS INTERPRETED UNDER INCOTERMS 1990 EDITION) 1990 EDITION) IN ACCORDANCE WITH THE SCHEDULE AS SE T OUT IN EXHIBIT E. WITH RESPECT TO THE UNLOADING OF OFF-SH ORE EQUIPMENT AND MATERIALS, THE CONTRACT PRICE SET OUT IN ARTICLE 4 INCLUDES ANY COST FOR UNLOADING THE CARGO FROM THE VESSEL UP TO THE POINT WHERE IT IS PLACED ON THE GR OUND OF THE PORT OR ON A TRUCK BY MEANS OF A HOOK AND DERRI CK FIXED TO THAT VESSEL. ANY COST INCURRED SUBSEQUENTLY THER ETO; INCLUDING BUT NOT LIMITED TO UNHOOKING THE CARGO, O R ANY COST OF UNLOADING BY ANY OTHER MEANS SHALL BE PAID AND B ORNE BY OWNER. ARTICLE 15 TAXES A. SUPPLIER SHALL BE RESPONSIBLE FOR PROMPT PAYMENT OF ALL TAXES, ASSESSMENTS, EXCISE, IMPOSITIONS, AND LICENS ES LEVIED, ASSESSED, OR IMPOSED ON SUPPLIER ON ACCOUNT OF THE EXECUTION OF THIS CONTRACT UNDER ANY GOVERNMENTAL L AW AND LAWS OUTSIDE INDIA. B. OWNER SHALL BE RESPONSIBLE FOR PROMPT PAYMENT OF ALL TAXES, DUTIES, ASSESSMENT EXCISE, IMPOSITIONS, AND LICENSE S LEVIED, ASSESSED, OR IMPOSED ON ACCOUNT OF THE EXECUTION OF THIS CONTRACT UNDER ANY GOVERNMENTAL LAW INSIDE INDIA. A LL THE PAYMENTS BY OWNERS TO SUPPLIER HEREUNDER SHALL BE MADE WITHOUT DEDUCTION OF ANY OF INDIAN TAXES, DUTI ES, ASSESSMENTS, EXCISES, IMPOSITION AND LICENSES, AND THE CONTRACT PRICE SPECIFIED IN ARTICLE 4 THEREOF SHALL BE NET AMOUNT RECEIVABLE BY SUPPLIER. HOWEVER, IT IS THE INTERPRETATION OF OWNER THAT IN VIEW OF THE FACT TH AT THE CONTRACT INVOLVES SUPPLY OF OFF-SHORE EQUIPMENT AND MATERIALS TO OWNER OUTSIDE INDIA FOR WHICH PAYMENT IS BEING 17 MADE OUTSIDE INDIA NO INDIAN INCOME-TAX LIABILITY W ILL ARISE IN THE MATTER. 26. AN EXAMINATION OF THESE CLAUSES CLEARLY INDICA TE THAT THE SUPPLY OF EQUIPMENT AND MATERIALS WAS DONE OUTSIDE INDIA ON CIF BASIS AND IT WAS MRPL WHICH HAD IMPORTED THESE EQUIPMENT. 27. NOW WE EXAMINE THE LEGAL POSITION IN THE MATTE R. THE HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA-H ARIMA HEAVY INDUSTRIES CO. LTD. VS. DIRECTOR OF INCOME TAX 288 ITR 408 ON THE ISSUE OF OFFSHORE SUPPLY AT PAGE 446 PARA 99 HELD AS UN DER : 99. WE, THEREFORE, HOLD AS UNDER : RE : OFFSHORE SUPPLY : (1) THAT ONLY SUCH PART OF THE INCOME, AS IS ATTRIB UTABLE TO THE OPERATIONS CARRIED OUT IN INDIA CAN BE TAXED IN INDIA. (2) SINCE ALL PARTS OF THE TRANSACTION IN QUESTION, I.E. THE TRANSFER OF PROPERTY IN GOODS AS WELL AS THE PAYMEN T, WERE CARRIED ON OUTSIDE THE INDIAN SOIL, THE TRANSACTION COULD NOT HAVE BEEN TAXED IN INDIA. (3) THE PRINCIPLE OF APPORTIONMENT, WHEREIN THE TER RITORIAL JURISDICTION OF A PARTICULAR STATE DETERMINES ITS CAPACITY TO TAX AN EVENT, HAS TO BE FOLLOWED. (4) THE FACT THAT THE CONTRACT WAS SIGNED IN INDIA IS OF NO MATERIAL CONSEQUENCE, SINCE ALL ACTIVITIES IN CONNECTION WITH THE OFFSHORE SUPPLY WERE OUTSIDE INDIA, AND THEREFORE CANNOT BE DEEMED TO ACCRUE OR ARISE IN THE COUNTRY. (5) THERE EXISTS A DISTINCTION BETWEEN A BUSINESS CONNECTION AND A PERMANENT ESTABLISHMENT. AS THE PERMANENT ESTABLISHMENT CANNOT BE SAID TO BE INVOLVED IN THE TRANSACTION, THE AFOREMENTIONED PROVISION WILL HAVE NO APPLICATION. THE PERMANENT ESTABLISHMENT CANNOT BE EQUATED TO A BUSINESS CONNECTION, SINCE THE FORMER IS FOR THE PURPOSE OF ASSESSMENT OF INCOME OF A NON-RESIDENT UNDER A DOUBLE TAXATION AVOIDANCE AGREEMENT, AND THE LATTER IS FOR THE APPLICATION OF SECTION 9 OF THE I NCOME- TAX ACT. 18 (6) CLAUSE (A) OF EXPLANATION 1 TO SECTION 9(1)(I) STATES THAT ONLY SUCH PART OF THE INCOME AS IS ATTRIBUTABL E TO THE OPERATIONS CARRIED OUT IN INDIA ARE TAXABLE IN INDIA. (7) THE EXISTENCE OF A PERMANENT ESTABLISHMENT WOUL D NOT CONSTITUTE SUFFICIENT BUSINESS CONNECTION, AN D THE PERMANENT ESTABLISHMENT WOULD BE THE TAXABLE ENTITY. THE FISCAL JURISDICTION OF A COUNTRY WOULD NOT EXTEND TO THE TAXING ENTIRE INCOME ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT. (8) THERE EXISTS A DIFFERENCE BETWEEN THE EXISTENCE OF A BUSINESS CONNECTION AND THE INCOME ACCRUING OR ARISING OUT OF SUCH BUSINESS CONNECTION. (9) PARAGRAPH 6 OF THE PROTOCOL TO THE DTAA IS NOT APPLICABLE, BECAUSE, FOR THE PROFITS TO BE ATTRIBU TABLE DIRECTLY OR INDIRECTLY, THE PERMANENT ESTABLISHMEN T MUST BE INVOLVED IN THE ACTIVITY GIVING RISE TO THE PROFITS. 28. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MOTORALA INC. VS. DCIT REPORTED IN 95 ITD 269 AT PARA 123 HE LD AS FOLLOWS : 123. IN THE FINAL ANALYSIS, WE HOLD THAT : (A) THE THREE COMPANIES, VIZ., ERICSSON RADIO SYSTE M AB (ERA, THE ASSESSEE), ERICSSON TELEPHONE CORPORATION (INDI A) AB (EFC), THROUGH ITS BRANCH IN INDIA AND ERICSSON COMMUNICATION LTD. (ECI) ARE THREE INDEPENDENT ENTI TIES DOING BUSINESS INDEPENDENTLY, (B) THE THREE CONTRACTS, VIZ, THE SUPPLY CONTRACT, THE INSTALLATION CONTRACT AND THE MARKETING AND BUSINESS PROMOTION AGREEMENT ARE SEPARATE AND INDEPENDENT CONTRACTS AN D ARE NOT TO BE TREATED AS ONE INTEGRATED WORKS CONTRACT DESPITE THE OVERALL AGREEMENT; (C) THE ASSESSEE HAD NO BUSINESS CONNECTION IN INDI A. (D) THE SALE OF GSM MOBILE TELEPHONE SYSTEM BY THE ASSESSEE TO THE CELLULAR OPERATORS IN INDIA TOOK PLACE OUTSI DE INDIA, AND HENCE, (E) NO INCOME ACCRUED TO THE ASSESSEE IN INDIA FROM THE SALE OF GSM MOBILE TELEPHONE SYSTEM TO VARIOUS CELLULAR OPE RATORS IN INDIA. 29. IN THE CASE OF M/S SIEMENS AKTIEGESELLSCHAFT I N ITA NO. 1318/MUM/2001 DATED 30 TH JUNE, 2009 THE BENCH OF THE TRIBUNAL WAS CONSIDERING A SIMILAR ISSUE AND AFTER REFERRING TO THE DECISION OF THE 19 HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA-H ARIMA HEAVY INDUSTRIES CO. LTD. VS. DIRECTOR OF INCOME TAX (SUP RA), FOLLOWED THE SAME. IT OBSERVED THAT EVEN THOUGH IT WAS A COMPOSI TE CONTRACT, OFFSHORE SUPPLY OF EQUIPMENT AND OFFSHORE SERVICES RENDERED BY THE ASSESSEE DID NOT FALL WITHIN THE PURVIEW OF SECTION 9(1)(VII) SINCE THE ENTIRE SERVICES WAS RENDERED OUTSIDE INDIA. ON THE ISSUE OF DELIVERY ON CIF BASIS AT PARA 13, IT HELD AS FOLLOWS : AS OF THE ABOVE IT FOLLOWS THAT IN THE CASE OF CI F, THE PROPERTY IN GOODS PASSES ON TO THE BUYER AT THE POR T OF SHIPMENT. THOUGH THE COST OF INSURANCE AND FREIGHT ETC. IS ME T BY THE SELLER BUT THE PROPERTY IN THE GOODS GETS TRANSFERRED TO T HE BUYER AT THE PORT OF SHIPMENT. THE BUYER INCUR ALL RISKS OF LOSS OF OR DAMAGE TO THE GOODS FROM THE PORT OF SHIPMENT. THEREFORE, IT CAN BE PRECISELY SEEN THAT WHEN THE ASSESSEE MADE OFFSHORE SUPPLY OF EQUIPMENT TO BPL ON CIF BOMBAY BASIS AGAINST THE ST ATED CONSIDERATION, THE PROPERTY IN THE EQUIPMENT PASSED ON TO BPL ON THE PORT OF GERMANY ITSELF. IT IS TRITE LAW THAT IN COME ACCRUES AT THE PLACE WHERE THE TITLE TO GOODS PASSES TO THE BUYERS ON THE PAYMENT OF PRICE. OUR VIEW IS FORTIFIED BY THE JUDG MENT OF THE HONBLE SUPREME COURT IN SETH PUSHALAL MANSIGHKA (P ) LTD. VS. CIT (1967) 66 ITR 159 (SC). AS IT IS THE CASE OF OF FSHORE SUPPLY OF EQUIPMENT, IT IS AXIOMATIC THAT THIS TRANSACTION GOT COMPLETED OUTSIDE INDIA. THUS NO INCOME ACCRUED TO THE ASSESS EE IN INDIA TOWARDS THIS TRANSACTION. 30. SIMILAR DECISION HAS BEEN TAKEN BY THE L BEN CH OF THE TRIBUNAL IN ITA NO. 4107 & 4108/MUM/2002 IN THE CA SE OF M/S XELO PRY LIMITED, ORDER DATED 22 ND JUNE, 2009. IN THIS CASE, AFTER CONSIDERING THE CBDT CIRCULAR NO. 23 DATED 23-07-1969, CIRCULAR NO. 786 DATED 7- 2-2000 AND INSTRUCTION NO. 1829 DATED 21-9-1989 AT PARA 16 AND 17, IT IS HELD AS FOLLOWS : 16. ON GOING THROUGH THE CBDTS VIEW IN THE ABOVE INSTRUCTION, IT IS ABUNDANTLY CLEAR THAT NO PART OF INCOME CAN B E DEEMED TO ACCRUE OR ARISE IN INDIA DUE TO SALE OF EQUIPMENT O N FOB BASIS. THE CONTRACT OF THE ASSESSEE WITH METRO RAILWAY CLE ARLY STIPULATES IN CLAUSE 1.1 THAT THE TOTAL VALUE OF TH E CONTRACT WILL BE ON FOB BASIS FOR SUPPLY AND SERVICES. THERE IS NO R EASON WHY 20 THE MANDATE OF THIS INSTRUCTION RENDERED IN THE CON TEXT OF POWER PROJECTS SHOULD NOT BE APPLIED TO OTHER SIMILAR PR OJECTS. 17. ON GOING THROUGH THE ABOVE CIRCULARS AND THE LE GAL POSITION IT IS CLEARLY BORNE OUT THAT A SUM OF RS.3.17 CRORE S REPRESENTS THE CONSIDERATION FOR THE EXCLUSIVE SUPPLY OF OFFSHORE EQUIPMENTS. THE PROVISIONS OF SECTION 9(1)(I) DO NOT APPLY TO T HE INSTANT CASE. SINCE NO INCOME ON THIS SCORE IS RECEIVED OR IS DEE MED TO BE RECEIVED OR ACCRUES OR ARISES OR IS DEEMED TO ACCRU E OR ARISE IN INDIA, THERE CANNOT FASTENED ANY TAX LIABILITY ON T HE ASSESSEE AS IT IS OUTSIDE THE SCOPE OF TOTAL INCOME AS PER SECTION 5(2). WE, THEREFORE, HOLD THAT THE LD. CIT(A) WAS CORRECT IN HOLDING THAT NO ADDITION WAS SUSTAINABLE ON ACCOUNT OF OFFSHORE SUP PLY TO METRO RAILWAYS. 31. APPLYING THE PROPOSITIONS TO THE FACTS OF THE CASE, AS IT IS AMPLY CLEAR FROM THE CONTRACT THAT THIS IS A OFFSHO RE SUPPLY OF EQUIPMENT ON CIF BASIS OUTSIDE INDIA, FOR WHICH PAYMENT IS AL SO BEING MADE OUTSIDE INDIA, NO INCOME ACCRUES OR ARISES IN INDIA . THE FACT THAT THIS IS A COMPOSITE CONTRACT OR TERM FEE CONTRACT DOES NOT MAKE ANY DIFFERENCE. THUS WE UPHOLD THE ORDER OF THE FIRST APPELLATE AUT HORITY, THOUGH ON A DIFFERENT GROUND. 32. IN THE RESULT, GROUND NO. 1 OF THE REVENUE IS DISMISSED. 33. COMING TO GROUND NO. 2, THE FIRST APPELLATE AU THORITY HAS OBSERVED THAT THE ASSESSEE IS MAINTAINING BOOKS OF ACCOUNT AND IS PROVIDING FINANCIAL STATEMENT IN THE SAME MANNER FO R MORE THAN A DECADE. HE ALSO POINTED OUT THAT THE AO HAS NOT FOU ND ANYTHING TO SHOW THAT THE ASSESSEE IS NOT FOLLOWING REGULAR METHOD O F ACCOUNTING. IN THE EARLIER YEARS, SIMILAR SETS OF FINANCIAL STATEMENTS AND SUPPORTING DOCUMENTS WERE ACCEPTED BY THE AO. IT IS ALSO FOUND THAT THE ASSESSEE HAD SUBMITTED 10 ORIGINAL GENERAL LEDGER BOOKS FOR INSPECTION AND ALSO FURNISHED DETAILED BREAKUP OF INDIAN RUPEE AS WELL AS FOREIGN CURRENCY EXPENSES INCURRED AND THAT THE SAME WERE CROSS VERI FIED BY THE AO. THE ASSESSEE ALSO PROVIDED DETAILS OF ALL EXPENSES ABOVE RS.5 LAKHS INCURRED IN RESPECT OF OFFSHORE CONTRACTS. UNDER TH ESE CIRCUMSTANCES, 21 WE AGREE WITH THE FINDING OF THE FIRST APPELLATE AU THORITY THAT THE REJECTION OF BOOKS OF ACCOUNTS WAS ARBITRARY AND UNCALLED FOR . THE FIRST APPELLATE AUTHORITY RIGHTLY OBSERVED THAT THE AO HAS NOT EXPL AINED WHY THE CORRECTNESS AND COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE ARE SUSPECT. WE UPHOLD THESE FINDINGS. 34. COMING TO APPLICATION OF RULE 10, THE SAME DOE S NOT ARISE AS WE HAVE ALREADY HELD THAT THE REJECTION OF BOOKS OF ACCOUNT WAS BAD IN LAW. IN ANY EVENT, THE REQUIREMENTS OF RULE 10 H AVE NOT BEEN APPLIED BY THE AO. BE IT AS MAY, THE AO HAS NO BASIS FOR ES TIMATING THE PROFIT AT 20%. FOR ALL THESE REASONS, WE DISMISS THIS GROUND OF THE REVENUE. 35. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. 36. ITA NO. 3520/MUM/2005 & ITA NO.200/MUM/2003 (CROSS APPEAL FOR ASSESSMENT YEAR 1998-99) THE ASSESSEES APPEAL IS ON THE SOLE ISSUE OF TAX RATE. THE GROUND READS AS FOLLOWS : BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT RESPECTFULLY SUBMITS THAT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-XXXI HAS ERRED IN DISPOSING THE APPEAL FILED BY THE APPELLANT VIDE AN ORDER UNDER SECTION 250 OF THE INCOME-TAX ACT, 1961 (ACT ), ON THE FOLLOWING GROUNDS. IN CONFIRMING THE TAX RATE OF 48 PERCENT FOR COMPUT ING THE APPELLANTS TAX LIABILITY, INSTEAD OF 35 PERCENT, T HEREBY NOT APPLYING THE PROVISIONS OF ARTICLE 24 OF THE INDIA- JAPAN TREATY. 22 37. MR. PERCY PARDIWALLA WAS FAIR IN SUBMITTING TH AT THIS ISSUE IS COVERED AGAINST THE ASSESSEE AND IN FAVOUR OF THE R EVENUE BY THE DECISION IN THE CASE OF CHOHUNG BANK VS. DCIT (INT . TAXATION) 102 ITD 45. RESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT THE AO WAS RIGHT IN APPLYING TAX RATE OF 48% AS PER THE ACT INSTEAD OF 35% AS CLAIMED BY THE ASSESSEE INVOKING PROVISIONS OF ARTICLE 24 OF I NDIA JAPAN TREATY. 38. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS D ISMISSED. 39. COMING TO THE REVENUES APPEAL, THE FIRST GROU ND IS IN RESPECT OF TAXABILITY OF PROFITS RELATING TO OFFSHO RE SUPPLY CONTRACT WHICH WAS DISCUSSED AS GROUND NO.1 FOR ASSESSMENT YEAR 19 97-98. IN VIEW OF OUR DETAILED DISCUSSION ON THE ISSUE IN ITA NO. 132 6/MUM/2001, WE DISMISS THIS GROUND OF THE REVENUE. 40. COMING TO GROUND NO. 2, IT IS ON LEVY OF INTER EST U/S 234B. BOTH THE PARTIES SUBMITTED THAT THE ISSUE IS COVERE D IN FAVOUR OF THE ASSESSEE. IT IS OBSERVED THAT THE LEARNED CIT(APPE ALS) AT PARA 13 AND 14 HELD AS FOLLOWS : 13. THE LAST GROUND IS THAT THE AO ERRED IN ERRONE OUSLY IN LEVYING INTEREST U/S 234B OF THE I.T. ACT, 61. IN T HIS CONNECTION, THE AR STATED THAT APPELLANTS WHOLE INCOME IS SUBJECT TO TDS U/S 195(1) OF THE I.T. ACT, 61. NOT ONLY THIS THE APPEL LANT HAS OBTAINED A CERTIFICATE U/S 197 DT. 24 TH APRIL, 97 FOR DEDUCTION OF TAX AT A LOWER RATE BY DCIT SPL. RANGE-12 MUMBAI. RELYING ON THE DECISIONS IN THE CASE OF CIT V. DAIMLER BENZ (108 I TR 961)(BOM,HC), CIT V. MADRAS FERTILIZERS LTD. (149 I TR 703 (MADRAS HC); CIT VS. RHEINBRAUM ENGINEERING AND WAS SER GMBH (MUMBAI ITAT) AND THE ORDER U/S 197, HE REQUES TED THAT THE INTEREST CHARGED BY THE AO BE DELETED. 14. I HAVE CONSIDERED SUBMISSIONS OF THE APPELLANT COUNSEL AND FOLLOWING ITATS DECISION AND VARIOUS OTHER HIG H COURT DECISIONS, I HOLD THAT NO INTEREST U/S 234B IS CHAR GEABLE IN THE CASE OF THE APPELLANT. THUS THIS GROUND OF APPEAL I S ALLOWED. 23 41. AS THE LEARNED CIT(APPEALS) HAS FOLLOWED THE O RDER OF THE TRIBUNAL, WE FIND NO INFIRMITY IN THE SAME. 42. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED ON THIS 24 TH DAY OF DECEMBER, 2009. SD/- SD/- (N.V. VASUDEVAN)) (J. SUDHAKAR R EDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT: 24 TH DECEMBER, , 2009 WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, L-BENCH (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES