Renishaw Metrology Systems Private Limited, Pune V. Addl.CIT, Bangalore

ITA 636/BANG/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1626 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 06-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 07-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MEERA SRIVASTAVA
• Assessee Lawyers: K P KUMAR
• Keywords: Rectification of order; Double taxation relief; Permanent establishment; Non-deduction of tax
• Section: 143(3); 234B; 154

Judgement Text

PAGE 1 OF 10 ITA NO.636/BANG/2010 1 THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI GEORGE GEORGE K, J.M. AND SHRI A MOHAN ALANKAMONY, A.M. ITA NO. 636 /BANG/2010 (ASST. YEAR 200 6 - 0 7 ) RENISHAW METROLOGY SYSTEM P. LTD., S.NO.282, HISSA NO.3, S.NO.284, HISSA NO.2 & 3A, RAIS ONI ESTATE, VILLAGE MANN, TALUKA MULSHI, PUNE - 411 057, MAHARASHTRA. - APPELLANT VS THE ASST. COMM ISSIONER OF INCOME - TAX, CIRCLE - 12(4), BANGALORE. - RESPONDENT APPE LLANT BY : SHRI K P KUMAR, ADVOCATE RE SPONDENT BY : SMT. MEERA SRI VASTAVA, JCIT O R D E R PER GEORGE GEORGE K : TH I S APPEAL INSTITUTED BY THE ASSESSE E IS DIRECTED AGAINST THE ORDER OF THE CIT(A) - I II , B ANGAL ORE DATED 12 . 2 .2010 . THE RELEVANT ASS T. YEAR IS 200 6 - 0 7 . THIS APPEAL ARISE OUT OF THE ASSESSMENT COMP LETED U/S 143(3) OF THE ACT DATED 12/11/2008. 2. THE ISSUE THAT IS RAISED IN THIS APPEAL IS WHETHER THE CIT(A) IS JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF RS.48,74,711/ - PAID BY RENISHAW INDIA (ASSESSEE) TO RENISHAW INDIA PLC FOR NON DEDUCTION OF TAX A T SOURCE. PAGE 2 OF 10 ITA NO.636/BANG/2010 2 3. B RIEFLY STATED THE FACTS ARE AS FOLLOWS: - RENISHAW METROLOGY SYSTEMS PRIVATE LIMITED ( RENISHAW INDIA OR THE ASSESSEE COMPANY ) IS A WHOLLY OWNED SUBSDIARY OF RENISHAW INTERNATIONAL LIMITED. THE ASSESSEE FILED ITS RETURN OF INCOME FOR T HE ASST. YEAR 2006 - 07 ON 17 TH NOVEMBER, 2006 DECLARING A TOTAL LOSS OF RS.11,78,601/ - . THE ASSESSING OFFICER COMPLETED THE ASSESSMENT AND PASSED AN ORDER U/S 143(3) ON 12.11.2008. THE ASSESSING OFFICER, VIDE HIS ORDER, ASSESSED THE ASSESSEE AS HAVING A T AXABLE INCOME OF RS.1,69,05,983/ - AND RAISED A TAX DEMAND OF RS.74,43,062/ - , INCLUDING INTEREST U/S 234B OF THE ACT OF RS.17,50,513/ - AND U/S 234D OF THE ACT OF RS.1,961/ - . 3.1 THE AFORESAID ORDER WAS SUBSEQUENTLY RECTIFIED VIDE AN ORDER U/S 154 OF THE A CT DATED 18 TH FEBRUARY, 2009. THE ASSESSING OFFICER, VIDE THE RECTIFIED ORDER, ASSESSED THE ASSESSEE AS HAVING A TAXABLE INCOME OF RS.50,46,223/ - AND RAISED A TAX DEMAND OF RS.22,35,358/ - INCLUDING INTEREST U/S 234B OF THE ACT OF RS.5,29,532/ - AND U/S 234 D OF THE ACT OF RS.1,961/ - . 4. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A). THE ASSESSEE MADE DETAILED SUBMISSIONS BEFORE THE CIT(A) AND HEARINGS WERE HELD BEFORE THE CIT(A) ON VARIOUS DATES. THE CIT(A) PASSED AN O RDER U/S 250 OF THE ACT DATED 12 TH FEBRUARY, 2010. IN T HIS ORDER, THE CIT(A) HAS UPHELD A DISALLOWANCE OF RS.48,74,711/ - ON WHICH NO TAX WAS DEDUCTED BY THE PAGE 3 OF 10 ITA NO.636/BANG/2010 3 ASSESSEE U/S 195 OF THE ACT. THE BREAK UP OF RS.48,74,711/ - IS AS FOLLOWS: - SALARIES PAID TO DIV ISIONAL HEADS BY RENISHAW PLC CROSS CHARGED TO RENISHAW INDIA AT COST RS.10,08,243/ - LEGAL EXPENSES PAID BY RENISHAW PLC CROSS CHARGED TO RENISHAW INDIA RS.27,76,541/ - RENTAL DEPOSIT PAYABLE TO RENISHAW PLC BY RENISHAW INDIA (RECEIVED FROM A LANDLORD I N INDIA) RS.5,00,000/ - DIFFERENTIAL AMOUNT WHICH REPRESENTS EXCESS REMITTANCES FROM RENISHAW PLC TO RENISHAW INDIA RS.5,89,927/ - . 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS: - I) THE CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF RS.10,08,243/ - BEING REIMBURSEMENT OF SALARY COSTS BY RENISHAW INDIA TO RENISHAW PLC ON ACCOUNT OF NON DEDUCTION OF TAX AT SOURCE. II) THE CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF RS.27,76,541/ - BEING LEGAL CHARGES PAYABLE BY RENISHAW INDIA TO RENISHAW PLC ON ACCOUNT OF NON DEDUCTION OF TAX AT SOURCE. III) THE CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF RS.5,00,000/ - BEING RENTAL DEPOSIT PAYABLE BY RENISHAW INDIA TO RENISHAW PLC ON ACCOUNT OF NON DEDUCTION O F TAX AT SOURCE. IV) THE CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF RS.5,89,927/ - REPRESENTING DIFFERENTIAL AMOUNT WHICH REPRESENTS EXCESS REMITTANCES FROM RENISHAW PLC TO RENISHAW INDIA FOR NON DEDUCTION OF TAX AT SOURCE. PAGE 4 OF 10 ITA NO.636/BANG/2010 4 6. THE LEARNED AR FILED A PA PER BOOK CONTAINING 53 PAGES, INTER ALIA, CONSISTING OF DETAILS OF PAYMENTS MADE BY THE ASSESSEE TO RENISHAW PLC. IT IS SUBMITTED THAT THE AMOUNT OF RS.48,74,711/ - PAYABLE BY THE ASSESSEE TO RENISHAW PLC ARE COMPRISED OF THE FOLLOWING: - SL. NO. PARTICULARS AMOUNT (RS.) 1 SALARIES PAID TO DIVISIONAL HEADS DIRECTLY BY RENISHAW PLC CROSS CHARGED TO RENISHAW INDIA AT COST 1,0,08,243/ - 2 RENTAL DEPOSIT PAYABLE TO RENISHAW PLC BY RENISHAW INDIA (RECEIVED FROM A LANDLORD IN I NDIA) 5,00,000/ - 3 DIFFERENTIAL AMOUNT WHICH REPRESENTS EXCESS REMITTANCES FROM RENISHAW PLC TO RENISHAW INDIA 5,89,927/ - 4 LEGAL EXPENSES PAID BY RENISHAW PLC CROSS CHARGED TO RENISHAW INDIA 27,76,541/ - TOTAL 48,74,711/ - THE WRITTEN SUBMISSIONS WITH RESPECT TO EACH OF THE ABOVE AMOUNTS PAYABLE BY RENISHAW INDIA TO RENISHAW PLC ARE REPRODUCED BELOW FOR READY REFERENCE: - A) SALARIES PAID TO DIVISIONAL HEADS BY RENISHAW PLC CROSS CHARGED TO THE COMPANY AT COST AMOUNTING TO RS.10,08,243/ - RENISHAW INDIA WAS INITIALLY OPERATING AN OFFICE IN BANGALORE AND WAS ENGAGED IN PURE TRADING ACTIVITIES. DURING THE FINANCIAL YEAR ENDED MARCH, 2006, THE RENISHAW GROUP WAS EVALUATING THE OPTION OF SETTING UP A MANUFACTURING FACILITY IN PUNE. PAGE 5 OF 10 ITA NO.636/BANG/2010 5 AS THE OPERATION IN BANGALORE WERE THINLY STAFFED AND GIVEN THE PROPOSED INCREASE IN SCALE OF OPERATIONS, RENISHAW INDIA HIRED A FEW EMPLOYEES TO HANDLE THE PUNE OPERATIONS. THE SALARIES OF SUCH PERSONNEL WERE PAID BY A THIRD PARTY VIZ. DAKOTA CONSULTING AND RE IMBURSED BY RENISHAW PLC. THESE COSTS AMOUNTING TO RS.10,08,243/ - WERE THEN CROSS CHARGED TO RENISHAW INDIA. TAX HAS BEEN DEDUCTED ON SUCH SALARIES BY DAKOTA CONSULTING (ON BEHALF OF RENISHAW INDIA) PRIOR TO PAYMENT OF SALARIES TO THE EMPLOYEES. AN AC COUNT STATEMENT FROM DAKOTA CONSULTING HAS BEEN ATTACHED AS ANNEXURE 3 ALONG WITH COPIES OF CHALLANS EVIDENCING THE PAYMENTS ARE ATTACHED AS ANNEXURE 4 FOR YOUR REFERENCE. B) RENTAL DEPOSIT PAYABLE TO RENISHAW PLC BY RENISHAW INDIA (RECEIVED FROM A LANDLORD IN INDIA) RENISHAW PLC HAD DEPUTED AN EXPATRIATE, DANIEL NORI, TO INDIA DURING THE FINANCIAL YEAR MARCH 2002 AND MARCH 2003 TO OVERSEE THE OPERATIONS OF RENISHAW INDIA. AN ADVANCE RENTAL DEPOSIT OF RS.5,00,000/ - WAS PAID BY RENISHAW PLC TOWARDS ACCO MMODATION OF MR. DANIEL NORI. THIS ADVANCE WAS RETURNED BY THE LANDLORD TO RENISHAW INDIA WHICH IS APPEARING AS A PAYABLE IN THE BOOKS OF RENISHAW INDIA. THIS AMOUNT HAS NOT BEEN ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT OF THE COMPANY BUT IS A MERE B ALANCE SHEET ENTRY. PAGE 6 OF 10 ITA NO.636/BANG/2010 6 ACCORDINGLY, NO DEDUCTION HAS BEEN CLAIMED BY THE COMPANY ON SUCH ADVANCE AND HENCE, THE SAME CANNOT BE DISALLOWED IN THE HANDS OF THE APPELLANT. THE EXTRACT OF THE LEDGER OF RENISHAW PLC IN THE BOOKS OF RENISHAW INDIA HAS BEEN ATTACH ED FOR YOUR REFERENCE AS ANNEXURE 5. C) DIFFERENTIAL AMOUNT WHICH REPRESENTS EXCESS REMITTANCES FROM RENISHAW PLC TO RENISHAW INDIA THE SUM OF RS.5,89,927/ - REPRESENTS THE DIFFERENTIAL AMOUNT PAYABLE TO RENISHAW PLC ARISING ON ACCOUNT OF EXCESS REMITTANC ES BY RENISHAW PLC TO RENISHAW INDIA. THIS AMOUNT HAS NOT BEEN ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT OF THE COMPANY BUT IS A MERE BALANCE SHEET ENTRY. ACCORDINGLY, NO DEDUCTION HAS BEEN CLAIMED BY THE COMPANY ON SUCH SUM AND HENCE, THE SAME CANNOT BE DISALLOWED IN THE HANDS OF THE APPELLANT. D) LEGAL EXPENSES PAID BY RENISHAW PLC OF RS.27,76,541/ - CROSS CHARGED TO RENISHAW INDIA AT COST RENISHAW INDIA WAS INITIALLY OPERATING AN OFFICE IN BANGALORE AND WAS ENGAGED IN PURE TRADING ACTIVITIES. DURI NG THE FINANCIAL YEAR ENDED MARCH, 2006, RENISHAW PLC WAS EVALUATING THE OPTION OF SETTING UP A MANUFACTURING FACILITY IN PUNE. RENISHAW PLC HIRED LEGAL CONSULTANTS VIX. MAJMUDAR AND COMPANY, INTERNATIONAL LAWYERS, BOMBAY ( MAJMUDAR AND COMPANY ) TO PAGE 7 OF 10 ITA NO.636/BANG/2010 7 TA KE CARE OF THE SET UP OF OPERATIONS IN PUNE AND PAID MAJMUDAR AND COMPANY ON ACCOUNT OF LEGAL FEES DIRECTLY. AS THE LEGAL EXPENSES HAD BEEN INCURRED BY RENISHAW PLC FOR THE BENEFIT OF THE APPELLANT, RENISHAW PLC CROSS CHARGED THE SAME TO THE APPELLANT. I N OTHER WORDS, THE EVENTUAL PAYMENT BY THE APPELLANT TO RENISHAW PLC REPRESENTED A REIMBURSEMENT OF LEGAL EXPENSES INCURRED BY RENISHAW PLC ON THE APPELLANT S ACCOUNT. THE RECENT SUPREME COURT DECISION IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PRIVATE LIM ITED LAYS DOWN THE PRINCIPLE THAT A PERSON IS LIABLE TO DEDUCT TAX AT SOURCE ONLY IF THE SUM IS CHARGEABLE TO TAX IN INDIA. IN THE INSTANT CASE, AS THE SUM WAS NOT CHARGEABLE TO TAX, NO TAX WAS REQUIRED TO BE DEDUCTED ON THE SAID SUM. THE INVOICE RAISE D BY RENISHAW PLC ON RENISHAW INDIA HAS BEEN ATTACHED AS ANNEXURE 6 ALONG WITH COPIES OF SAMPLE BANK TO BACK INVOICES FROM MAJUMUDAR AND COMPANY AS ANNEXURE 7. THE APPELLANT DEBITED THE SAID SUM TO PROFIT AND LOSS ACCOUNT AND CREDITED TO THE ACCOUNT OF RENISHAW PLC AND SHOWED IT AS CURRENT LIABILITY IN THE BALANCE SHEET AS AT 31 ST MARCH, 2006, ON THE PREMISE THAT THE PAYMENT TO RENISHAW PLC WAS NOT IN THE NATURE OF INCOME OF THE LATTER MUCH LESS CHARGEABLE TO TAX IN INDIA, THERE WAS NO TAX DEDUCTION AT S OURCE. IN ANY CASE IT WAS NOT IN NATURE OF BUSINESS PROFITS, UNDER ARTICLE 7 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND UK ( DTAA ). IT WAS NOT LIABLE TO TAX IN INDIA AND AS SUCH THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE. IN PAGE 8 OF 10 ITA NO.636/BANG/2010 8 ANY CASE RENISHAW PLC HAD NO PERMANENT ESTABLISHMENT IN INDIA. NO OTHER PROVISIONS OF THE DTAA MUCH LESS ARTICLE 13 DEALING WITH ROYALTIES AND FEES FOR TECHNICAL SERVICES HAD ANY APPLICATION. THE AO DISALLOWED THE ABOVE SUM OF RS.27,76,541/ - U/S 40(A)(I) ON THE GROUND THAT THE APPELLANT OUGHT TO HAVE DEDUCTED TAX UNDER ARTICLE 195, BUT FAILED TO DEDUCT. THE CIT(A) JUSTIFIED THE AO S ACTION BY NOTING THAT NO TAX HAD BEEN DEDUCTED BY RENISHAW PLC OR THE APPELLANT AND THAT THE FACTS AND CIRCUMSTANCES INDICAT ED THAT RENISHAW PLC CIRCUMVENTED ITS LIABILITY TOWARDS TAX DEDUCTION AT SOURCE AND THEREBY TRIED TO EVADE PAYING TAX IN INDIA. 7. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE IMPUGNED ORDERS OF THE INCOME TAX AUTHORITIES. 8. WE HAVE HEARD THE RIVA L SUBMISSION AND PERUSED THE MATERIAL ON RECORD. ON READING THE ASSESSMENT ORDER AND THE CIT(A) S ORDER, WE FIND THAT NO FACTS ARE DISCUSSED WITH REGARD TO THE PAYMENTS MADE BY THE ASSESSEE TO RENISHAW PLC. IN RESPECT OF SALARIES PAID AMOUNTING TO RS.10, 08,243/ - MENTIONED ABOVE, IT IS CLAIMED BY THE ASSESSEE THAT THE TAX HAS BEEN DEDUCTED BY DAKOTA CONSULTING (ON BEHALF OF RENISHAW INDIA) PRIOR TO PAYMENT OF SALARIES TO THE EMPLOYEES. IN RESPECT OF AN AMOUNT OF RS.5,00,000/ - AND RS.5,89,927/ - , IT WAS SUBM ITTED BY THE LEARNED AR THAT THESE AMOUNTS ARE NOT ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT OF THE COMPANY BUT IS A MERE BALANCE SHEET ENTRY. IT WAS SUBMITTED THAT THERE WAS NO PAGE 9 OF 10 ITA NO.636/BANG/2010 9 DEDUCTION CLAIMED ON THE ABOVE AMOUNTS AND HENCE, CANNOT BE DISALLOWED IN TH E HANDS OF THE ASSESSEE. WITH REGARD TO THE FIGURE OF RS.27,76,541/ - , THE DETAILS ARE GIVEN FROM PAGE 39 TO 53 OF THE PAPER BOOK. IT IS A CASE OF THE ASSESSEE THAT IT IS NOTHING BUT REIMBURSEMENT OF LEGAL EXPENSES INCURRED BY RENISHAW PLC ON ASSESSEE S AC COUNT. 8.1 SINCE THERE IS NO DISCUSSION OF BASIC FACTS WITH REGARD TO THE PAYMENTS MENTIONED ABOVE, IN THE INTEREST OF JUSTICE, WE ARE OF THE VIEW THAT THE MATTER SHOULD BE RESTORED TO THE FILE OF THE CIT(A) FOR A PROPER FINDING ON THE ISSUES. THE RE CENT DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD. V CIT 327 ITR 456 HAS CATEGORICALLY HELD THAT THE EXPRESSION CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO B E OF A TRADING RECEIPT, THE WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. IF TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED . 8.3 IN THE LIGHT OF THE ABOVE REASONING, THE CIT(A) SHALL DISCUSS THE FACTS WITH REGARD TO THE EACH OF THE PAYMENTS MADE BY THE ASSESSEE TO RENISHAW PLC AND RENDER A FINDING ON THE SAME. THE ASSESSEE SHALL BE AFFORDED A REASONABLE OPPORTUNITY OF HEARING BEFORE FRESH ORDERS ARE PASSED. PAGE 10 OF 10 ITA NO.636/BANG/2010 10 9 . IN THE RESULT , THE APPEAL FILED BY THE ASSESSE E IS AL LOWED FOR STATISTICAL PURPOSE S. THE ORDER PRONOUNCED ON THURSDAY , THE 13 TH DAY OF JANUARY , 20 1 1 AT BANGALORE. SD/ - SD/ - (A MO HAN ALANKAMONY) (GEORGE GEORGE K) ACCOUNTANT MEMBER JU DICIAL MEMBER COPY TO : - 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT(A) CONCERNED. 4. THE CIT, CONCERNED. 5. THE DR 6. GF BY ORDER MSP/ 10 /1 . ASSISTANT REGISTRAR, ITAT, BANGALORE.