DDIT (IT) 4(2), MUMBAI V. NIPPON KAIJIA KYOKAI, MUMBAI

ITA 6240/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75705 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 26-02-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 09-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIVEK A PERAMPURNA
• Assessee Lawyers: NITESH JOSHI
• Keywords: Business income; Double taxation relief; Permanent establishment; Capital expenditure
• Section: 143(3)

Judgement Text

L IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER & SHRI VIVEK VARMA, JUDICIAL MEMBER ./ I.T.A. NO.6240 TO 6242 /MUM/2011 ( / ASSESSMENT YEARS: 2005-06, 2006-07 & 2008-09 DY. DIRECTOR OF INCOME TAX (IT)-4(2), R. NO. 11, GR. FLR, SCINDIA HOUSE, BALLARD PIER, MUMBAI 400 038. / VS. NIPPON KAIJI KYOKAI, 706-710, B-WING, SHRE NAND DHAM SECTOR -11, PLOT NO. 59, CBD BELAPUR, NAVI MUMBAI 400614. ./ PAN : AAAN 0124F ( / APPELLANT ) .. ( / RESPONDENT ) REVENUE BY SHRI VIVEK A. PERAMPURNA ASSESSEE BY : SHRI NITESH JOSHI / DATE OF HEARING : 26-2-2015 / DATE OF PRONOUNCEMENT : 04-03-2015 [ !' / O R D E R PER R.C. SHARMA, A.M . : THESE ARE THE APPEALS FILED BY THE REVENUE AGAINST THE ORDERS OF LD. CIT(A) -11, MUMBAI ALL DATED 27-06-2011 FOR THE ASS ESSMENT YEARS 2005-06, 2006-07 & 2008-09 IN THE MATTER OF ORDER PASSED U/S 143(3) R.W.S. 14 7 OF THE INCOME TAX ACT, 1961. 2. COMMON GROUNDS HAVE BEEN TAKEN IN ALL THESE APPE ALS. THE GROUND RAISED BY THE REVENUE IN A.Y. 2005-06 READS AS UNDE R:- 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID, CIT(A) ERRED IN HOLDING THAT ONLY 10% OF THE FEE RE CEIVED BY THE HEAD OFFICE FOR SERVICES RENDERED IN INDIA THROUGH INDEP ENDENT SURVEYORS AS ATTRIBUTABLE TO PROCEDURAL ROLE PLAYED BY THE PERMA NENT ESTABLISHMENT ITA 6240 TO 6242/M/11 2 (PE) IGNORING THE FACT THAT SUCH SERVICES ARE NOT E FFECTIVELY CONNECTED WITH THE PERMANENT ESTABLISHMENT (PE) AS REQUIRED U NDER PARA 5 OF THE ARTICLE 12 OF THE TREATY BETWEEN INDIA AND JAPAN AN D INSTEAD THE SAME IS TAXABLE AT 20% ON GROSS RECEIPT UNDER ARTICLE 12 (2) OF THE TREATY. 3. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE PLACED ON RECORD THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AS SESSMENT YEARS 2000-01, 2002-03 AND 2003-04 IN ITA NO. 6329, 6330 & 6331/MU M/2007, ITA NO. 7661/M/07 FOR A.Y. 2004-05, CO 191/M/03 & CO 129, 1 30, 39/M/08, 200/M/10, ITA NO. 5086/M/03 FOR AY 99-2000, ITA 637 0 TO 72/M/07 FOR AYS. 2000-01 TO 2003-04, ITA NO. 7511/M/07 FOR A.Y. 2004-05 & ITA NO. 2322/M/10 FOR AY 2007-08, WHEREIN ISSUE WITH REGARD TO TAXING THE FEES RECEIVED BY HEAD OFFICE FOR SERVICES RENDERED IN IN DIA AS ATTRIBUTABLE TO THE ROLE PLAYED BY PERMANENT ESTABLISHMENT HAVE BEEN DE CIDED IN FAVOUR OF ASSESSEE. HE LD. D.R. FAIRLY CONCEDED THAT THE ISS UE HAS BEEN DECIDED BY TRIBUNAL CONSISTENTLY IN ASSESSEES FAVOUR. 4. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PER USED THE RECORDS. WE FIND FROM THE RECORD THAT THE LD. CIT(A) HAS DECIDE D THIS ISSUE BY FOLLOWING THE ORDER OF HIS PREDECESSOR IN ASSESSEES OWN CASE FOR A.Y. 2007-08 AND ALLOWED THE APPEAL. WE ALSO FIND THAT THIS ISSUE HAS BEEN C ONSISTENTLY ALLOWED BY THE LD. CIT(A) SINCE A.Y. 2001-02 AND THE REVENUE HAS F ILED FURTHER APPEAL BEFORE THE TRIBUNAL CHALLENGING THE ORDER OF LD. CIT(A) AN D THE TRIBUNAL HAVE DISMISSED THE APPEALS OF REVENUE VIDE ORDER DATED 2 9-7-2011. 5. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF THE TRIBUNAL DATED 29-7- 2011 AS PLACED ON RECORD WHEREIN EXACTLY SIMILAR IS SUE HAS BEEN DEALT WITH BY THE TRIBUNAL AND DECIDED IN FAVOUR OF THE ASSESSEE AFTER HAVING FOLLOWING OBSERVATION:- RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATI ON OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAP ERS ON RECORD, WE HOLD AS FOLLOWS:- ON FACTS, THE LEARNED DEPARTMENTAL REPRESENTATIVE H AS NOT DISPUTED THE PROCEDURE STATED TO HAVE BEEN FOLLOWED BY THE A SSESSE AND ITS PE IN INDIA. THE PROCEDURE FOLLOWED BY THE ASSESSEE IS B ROUGHT OUT AT PAGE 5 ITA 6240 TO 6242/M/11 3 AND 6 OF THE COMMISSIONER (APPEALS), WHICH IS REPRO DUCED ABOVE, VIDE PARA 7 OF THIS ORDER. FROM THIS PROCEDURE OF BUSIN ESS, IT CAN BE OBSERVED THAT THE PE ON RECEIVING A COPY OF THE APP LICATION WHEREVER REQUIRED, DIRECTS THE ACTING SURVEYOR TO CARRY OUT THE SURVEY AND ALLOT THEM A JOB NUMBER. THE ACTING SURVEYOR FOLLOWS THE INSTRUCTIONS OF THE PE. THEREAFTER, THE INVOICE IS FORWARDED BY THE AC TING SURVEYOR TO THE PE WHICH IN TURN, ADDS ITS EXPENSES INCURRED FOR CO MMUNICATION ETC. AND FORWARDS BILL TO THE HEAD OFFICE. THE EXPENSES INCURRED BY THE P.E. ARE REIMBURSED. THUS IT CANNOT BE DENIED THAT THE P.E. HAS A FUNCTIONAL CONNECTION, THOUGH LIMITED, WHEREVER SUR VEY WORK IS ASSIGNED TO THE SAID TO HAVE EFFECTIVE CONNECTION W ITH THIS ACTIVITY FOR SURVEY. THE ASSESSEE ADMITS THAT THE BRANCH DOES N OT RENDER SERVICES TO THE CUSTOMERS WHEREVER INDEPENDENT SURVEYOR ARE APPOINTED. THE FACT REMAINS THAT EVEN BEFORE THE ASSESSING OFFICER IT IS NOT STATED BY THE ASSESSEE THAT NO SERVICE WAS RENDERED BY THE BR ANCH TO THE CUSTOMERS. THERE IS A DIFFERENCE BETWEEN THE WORDS 'SUBSTANTIAL SERVICES' USED BY THE ASSESSEE BY FILING A NOTE DAT ED 31ST MARCH 1999 AND THE WORDS 'EFFECTIVE CONNECTION' USED IN ARTICL E-12(5). THE NOTE, IN OUR CONSIDERED OPINION, HAS BEEN MIS-INTERPRETED BY THE ASSESSING OFFICER. 18. COMING TO THE ISSUE AS TO WHETHER THE FTS IS EF FECTIVELY CONNECTED WITH THE PE, WE FIND THAT THE COMMENTARIE S RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE DISCUSS THE ISSUE OF ROYALTIES AND NOT FTS AND THE ASSESTS TEST HAS BEEN SUGGESTED FOR ROYALTIES. AS FAR AS FTS IS CONCERNED, THE TEST TO BE APPLIED IS 'ACTIVITY TEST' OR 'FUNCTIONAL TEST'. IN THE PRESENT CASE, THE P.E., E ITHER CONDUCTS THE SURVEY WITH ITS EXCLUSIVE SURVEYOR OR IN THE ALTERN ATIVE, APPOINTS ACTING SURVEYORS. THE P.E. ALSO ADDS ITS EXPENSES AND SEND S THE BILLING SURVEY FEES TO THE HEAD OFFICE. IN SUCH CIRCUMSTANCES, FAC TUALLY, WE ARE OF THE CONSIDERED OPINION THAT THE FTS IN QUESTION IS EFFE CTIVELY CONNECTED WITH THE P.E. WHEN A SERVICE IS RENDERED THROUGH OW N STAFF, IT IS ACCEPTED AS SERVICE OF THE P. E. WHEN SO, IF SERVIC E IS RENDERED THROUGH AN ACTING SURVEYOR, WHO IS A FREE LANCER, DUE TO SH ORTAGE OF STAFF OR OTHERWISE, IT CANNOT BE HELD OTHERWISE. BOTH THE S ERVICES, ONE BY OWN STAFF AND ONE THROUGH OFF-LOADED SYSTEM, CANNOT, IN OUR VIEW, BE HELD DIFFERENTLY. AT THIS STAGE, WE MENTION THAT BOTH PA RTIES HAVE AGREED THAT THE FEE IN QUESTION IS IN THE NATURE OF FTS AND THE ISSUE IS LIMITED TO THE 45% SHARE RETAINED BY THE HEAD OFFICE. WITH THIS FA CTUAL FINDING, THAT THERE IS AN EFFECTIVE CONNECTION OF THE FTS WITH TH E P.E., WE EXAMINE THE ISSUE. 19. WE NOW EXTRACT ARTICLE-7(1) AND 12(1), 12(2), 1 2(4), 12(5), AS FOLLOWS:- '7(1) THE PROFITS OF AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT CONTRACTING STATE UNLESS THE E NTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ITA 6240 TO 6242/M/11 4 ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE C ARRIES ON BUSINESS AS AFORESAID, THE PROFITS OF THE ENTERPRIS E MAY BE TAXED IN THAT OTHER CONTRACTING STATE BUT ONLY SO MUCH OF THEM AS IS DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THAT PERMANE NT ESTABLISHMENT. 12(1) ROYALTIES AND FEES FOR TECHNICAL SERVICES ARI SING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTH ER CONTRACTING STATE BE TAXED THAT OTHER CONTRACTING STATE. 12(2) HOWEVER, SUCH ROYALTIES AND FEES FOR TECHNICA L SERVICES MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THE Y ARISE AND ACCORDING TO THE LAWS OF THAT CONTRACTING STATE, IF THE RECIPIENT. IS THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FO R TECHNICAL SERVICES' THE TAX SO CHARGED SHALL NOT EXCEED 20% O F THE GROSS AMOUNT OF THE ROYALTIES OR FEES FOR TECHNICAL SERVI CES. 12(4) THE TERM 'FEE FOR TECHNICAL SERVICES' AS USED IN THIS ARTICLE MEANS PAYMENT OF ANY AMOUNT TO ANY PERSON OTHER THA N PAYMENT TO AN EMPLOYEE OF A PERSON MAKING PAYMENTS AND TO ANY INDIVIDUAL FOR INDEPENDENT PERSONAL SERVICES RE FERRED TO IN ARTICLE 14, IN CONSIDERATION FOR THE SERVICES OF A MANAGERIAL, TECHNICAL OR OTHER PERSONNEL. 12(5) THE PROVISIONS OF PARAGRAPHS 1 AND 2 SHALL NO T APPLY IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHN ICAL SERVICES BEING RESIDENT OF A CONTRACTING STATE, CARRIES ON B USINESS IN THE OTHER CONTRACTING STATE IN WHICH THE ROYALTIES OR F EES FOR TECHNICAL SERVICES ARISE, THROUGH A PERMANENT ESTAB LISHMENT SITUATED THEREIN OR PERFORMS IN THAT OTHER CONTRACT ING STATE INDEPENDENT PERSONAL SERVICES FROM A FIXED BASE SIT UATED THEREIN, AND THE RIGHT, PROPERTY OR CONTRACT IN RESPECT OF W HICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PAID I S EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISHMENT OR FIXE D BASE. IN SUCH CASE, THE PROVISIONS OF ARTICLE 7 OR ARTICLE 1 4, AS THE CASE MAY BE, SHALL APPLY. 20. PERUSAL OF ARTICLE -12(5), TAKES US TO A CONCLU SION THAT, WHEN THE PAYMENT FOR FTS IS EFFECTIVELY CONNECTED WITH THE P .E., IN SUCH CASE, PROVISIONS OF ARTICLE -7 WILL APPLY. IN VIEW OF OU R FACTUAL FINDINGS, WE AGREE WITH THIS INTERPRETATION OF THE COMMISSIONER (APPEALS) IN ALL THE CASES. STUDY OF ARTICLE 7(1) SHOWS THAT, ONLY SUCH AMOUNT OF PROFITS OF AN ENTERPRISE BE DIRECTLY OR INDIRECTLY ATTRIBUTABL E TO THE P.E. IS TAXABLE IN OTHER CONTRACTING STATE WHERE THE P.E. IS SITUAT ED. THE COMMISSIONER (APPEALS) HAS ESTIMATED 10% AS BUSINES S PROFITS WHICH ARE DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THE P.E. THIS FIGURE IS NOT DISPUTED BY THE REVENUE. THUS, WE UPHOLD THE FINDI NG OF THE FIRST APPELLATE AUTHORITY. ITA 6240 TO 6242/M/11 5 21. COMING TO THE ARGUMENT OF THE LEARNED DEPARTMEN TAL REPRESENTATIVE THAT THE BALANCE AMOUNT OTHER THAN 1 0% SHOULD BE TAXED UNDER ARTICLE 12(2), WE FIND THAT ARTICLE 12( 5) OF THE OTAA, EXCLUDES THE SAID FROM ARTICLE-12(1) AND 12(2), IF THE RECEIPT HAS AN EFFECTIVE CONNECTION WITH THE P.E. THE ARGUMENT THA T WHEN A PART IS TO BE TAXED UNDER ARTICLE 7 AND BALANCE UNDER ARTICLE- 12, IS DEVOID OF MERIT. THE DTAA DOES NOT CONTEMPLATE THE SAME. SUCH AN INTERPRETATION SOUGHT TO BE PLACED BY LEARNED DEPAR TMENTAL REPRESENTATIVE IS INCORRECT AND, HENCE, WE REJECT T HE SAME. WHEN CERTAIN FTS IS EFFECTIVELY CONNECTED WITH THE P.E.; THEN SO MUCH OF THE FEES DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THE P.E . IS TO BE TAXED UNDER ARTICLE-7. IN VIEW OF THE ABOVE DISCUSSION, WE UPH OLD THE FINDINGS OF THE FIRST APPELLATE AUTHORITY AND DISMISS THIS GROUND O F THE REVENUE IN ALL THE APPEALS. 22. NOW, COMING TO GROUND NO.2, RAISED BY THE REVEN UE FOR ASSESSMENT YEAR 1999-2000, WE FIND THAT WHAT WAS PAID TO THE L ANDLADY IS ADVANCE OF 'LEAVE AND LICENCE FEE' FOR A PERIOD OF FIVE YEA RS. AS POINTED OUT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, IN THE AGREEME NT ENTERED, NEITHER THE ASSESSEE NOR THE LANDLADY HAD THE RIGHT TO UNIL ATERALLY TERMINATE THE AGREEMENT. IN THIS CASE, THE ASSESSEE UNILATER ALLY TERMINATED THE AGREEMENT LEADING TO A LITIGATION AND THIS LITIGATI ON WAS ULTIMATELY RESOLVED BY WAY OF CONSENT TERMS AGREED TO ON 7 TH OCTOBER, 2003, BEFORE THE HONBLE BOMBAY HIGH COURT. ON ENTERING ON THES E TERMS, THE ASSESSEE HAS, IN ITS RETURN OF INCOME FOR ASSESSMEN T YEAR 2004-05, OFFERED THE AMOUNT RECEIVED FROM THE LANDLADY TO TA X. THE REVENUE HAS ALSO TAXED THIS AMOUNT. ON THESE FACTS, WE ARE OF T HE CONSIDERED OPINION THAT THE SALE ISSUE IS THE YEAR OF TAXATION , AS WELL AS, WHETHER THE LOSS IN QUESTION IS IN THE REVENUE FIELD OR IN THE CAPITAL FIELD. WHAT IS PAID WAS ADVANCE OF LEAVE AND LICENCE FEE AND NO ENDURING BENEFIT ACCRUES TO THE ASSESSEE. ADVANCE RENT PAID, IN OUR OPINION, IS NOT CAPITAL EXPENDITURE. ON THE ISSUE AS TO WHETHER THE EXPENDITURE IS CONTINGENT IN NATURE, WE HOLD THAT THE LOSS IS REAL AND IT DOES NOT DEPEND ON THE HAPPENING OF ANY EVENT, AS IN THE CAS E OF CONTINGENCY. IN ANY EVENT, AS THE ASSESSEE HAS ALREADY OFFERED TO T AX THE AMOUNT ON SETTLEMENT OF DISPUTE AND AS THE REVENUE HAS ACCEPT ED THE SAME, WE ARE OF THE OPINION THAT AS THERE IS NO LOSS TO THE REVENUE. THUS, THE FINDINGS OF THE FIRST APPELLATE AUTHORITY ON THIS I SSUE HAS TO BE UPHELD. GROUND NO. 2 IS, THUS, DISMISSED. 23. IN THE RESULT, ALL GROUNDS OF REVENUE ARE DISMI SSED. 6. WE FIND THAT THE TRIBUNAL HAS DEALT WITH THE ISS UE IN DETAIL AND HELD THAT LD. CIT(A) WAS JUSTIFIED IN HOLDING THAT ONLY 10% OF THE FEE RECEIVED BY THE HEAD OFFICE WAS LIABLE TO TAX AS BUSINESS INCOME ATTRIBUTABLE TO INDIA. AS ITA 6240 TO 6242/M/11 6 THE FACTS AND CIRCUMSTANCES IN ALL THE YEARS UNDER CONSIDERATION ARE SAME, RESPECTFULLY FOLLOWING THE ORDER OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE AS CITED SUPRA, WE DISMISS ALL THE APPEALS FILED BY THE REVENUE. 7. IN THE RESULT, APPEALS OF THE REVENUE ARE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH MARCH, 2015. !' # $% &! ' 04-03-2015 ( ) SD/- SD/[ (VIVEK VARMA) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER $ 5 MUMBAI ; &! DATED 04-03-2015 [ .6../ RK , SR. PS ! '#$% &%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. 7 () / THE CIT(A) 8,, MUMBAI 4. 7 / CIT -4, MUMBAI 5. :;( 66<= , <= , $ 5 / DR, ITAT, MUMBAI H BENCH 6. (?@ A / GUARD FILE. ' / BY ORDER, : 6 //TRUE COPY// (/') * ( DY./ASSTT. REGISTRAR) , $ 5 / ITAT, MUMBAI