EPCOS AG, Germany, Nashik V. ACIT Cir- 2 Nashik., Nashik

ITA 812/PUN/2012

• Counselvise Citation: 81224514 RSA 2012
• Duration Of Justice: 1 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-03-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 18-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L PATHADE
• Assessee Lawyers: SUNIL M LALA; KEERTHIGA PADMANABHAN
• Keywords: Business income; Double taxation relief; Opportunity of being heard; Deemed to accrue or arise in india; Permanent establishment
• Section: 44AD; 143(3); 12A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER, AND SHRI R.K. PANDA, ACCOUNTANT MEMBER. ITA.NOS.786 TO 790/PN/2012 (ASSESSMENT YEARS : 2000-01 TO 2002-03 & 2004-05 TO 2005-06) DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)-I, PUNE .. APPELLANT VS. EPCOS AG, GERMANY, C/O. EPCOS INDIA PVT. LTD., E-22-25, MIDC, SATPUR, NASHIK-422007 PAN NO.AAACE9787H .. RESPONDENT ITA NO.812/PN/2012 (ASSESSMENT YEAR 2004-05) EPCOS AG, GERMANY, C/O. EPCOS INDIA PVT. LTD., E-22-25, MIDC, SATPUR, NASHIK-422007 PAN NO.AAACE9787H .. APPELLANT VS. ACIT, CIRCLE-2, NASHIK .. RESPONDENT CO NO.25 TO 28/PN/2013 (ASSESSMENT YEARS : 2000-01 TO 2002-03 & 2005-06) EPCOS AG, GERMANY, C/O. EPCOS INDIA PVT. LTD., E-22-25, MIDC, SATPUR, NASHIK-422007 PAN NO.AAACE9787H .. CROSS OBJECTOR VS. ASST. DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION)-I, PUNE .. APPELLANT IN THE APPEAL ASSESSEE BY : SHRI SUNIL M. LALA & SHRI KEERTHIGA PADMANABHAN REVENUE BY : SHRI P.L. PATHADE DATE OF HEARING : 10-03-2014 DATE OF PRONOUNCEMENT : 26-03-2014 2 ORDER PER BENCH : THE ABOVE APPEALS FILED BY THE REVENUE AND THE CRO SS OBJECTIONS FILED BY THE ASSESSEE FOR A.Y.2000-01 TO 2002-03 & 2005-06 AND CROSS APPEAL FOR A.Y. 2004-05 ARE DIRECTED AGAINST THE C OMMON ORDER DATED 20-10-2011 OF THE CIT(A)-I, PUNE RELATING TO ASSESS MENT YEARS 2000-01, 2001-02, 2002-03, 2004-05 & 2005-06. FOR THE SAKE OF CONVENIENCE, ALL THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DEC IDED BY THIS COMMON ORDER. ITA NO.786/PN/2012 (A.Y. 2000-01) : 2. GROUNDS OF APPEAL NO.1AND 2 BY THE REVENUE READ AS UNDER : 1) ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE, THE CIT (A)-L, PUNE ERRED IN HOLDING THAT ASSESSEE DOES NOT HAVE A PER MANENT ESTABLISHMENT (PE) IN INDIA DEHORS THE FINDING OF THE A.O. THAT THE FUNCTIONS OF EPCOS AG ARE PERFORMED THROUGH THE INDI AN SUBSIDIARIES BY ISSUANCE OF DIRECTIONS THROUGH EMAIL ETC. AND THE ENT IRE SPECTRUM OF ACTIVITIES OF THE INDIAN SUBSIDIARIES ARE MONITORED BY THE ASSESSEE, THUS HAVING CONTROL AND MANAGEMENT OF INDIAN SUBSIDIARIES AND THEREBY CONSTITUTING A PE IN INDIA. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT (A)-L, PUNE ERRED IN LAW BY CONCLUDING THAT A DOUBLE TAXAT ION AVOIDANCE AGREEMENT [DTAA) IS AN ALTERNATIVE TAXATION REGIME AND NOT AN EXEMPTION REGIME AND THAT DTAA IS FOR THE PURPOSE OF SHIFTING ONUS ON THE DEPARTMENT TO PROVE TO THE CONTRARY IN RESPECT O F THE EXEMPTION CLAIMED BY THE ASSESSEE. 2.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE COMPANY, EPCOS AG, GERMANY IS A FOREIGN, NON RESIDENT, MULTI-NATIO NAL COMPANY HAVING ITS HEADQUARTER AT MUNICH, ST. MARTIN STREET 53, GE RMANY. IT IS A TAX RESIDENT OF GERMANY. THE ASSESSEE IS ENGAGED IN DES IGNING, MANUFACTURING AND MARKETING OF ELECTRONIC COMPONENT S AND MODULES HAVING A FOCUS ON FAST GROWING LEADING EDGE TECHNOL OGY MARKETS. THIS 3 COMPANY IS KNOWN FOR ITS SUPERIOR PRODUCTS IN THE S EGMENT OF CAPACITORS, CERAMIC COMPONENTS, CAPACITORS AND INDUCTORS ETC. I T HAS MANUFACTURING PLANTS, RESEARCH AND DESIGN CENTERS, SALES OFFICES AND OTHER PROPERTIES IN DIFFERENT PARTS OF THE WORLD. IN INDIA, IT HAS ESTA BLISHED TWO SUBSIDIARIES VIZ. EPCOS INDIA PVT. LTD., NASIK (HEREAFTER KNOWN AS EIPL) AND EPCOS FERRITES PVT. LTD., KOLKATTA (EFPL). EFPL HAS NOW M ERGED WITH EIPL AND THEREFORE, PRESENTLY ONLY EIPL, NASHIK EXISTS A S A CORPORATE BODY IN INDIA. EIPL IS SEPARATELY ASSESSED TO TAX AS A RESI DENT INDIAN COMPANY FOR ITS OPERATIONS CARRIED OUT IN THIS COUNTRY. THE ASS ESSEE COMPANY FILED ITS RETURN OF INCOME ON 1.11.2004 DECLARING TAXABLE INC OME OF RS.18,32,15,432, COMPRISING OF ITEMS (A) TO (E) OF THE TABLE GIVEN BELOW AND OFFERED TAX @ 10% AS PER ARTICLE 11 AND 12 OF I NDIA-GERMANY DTAA, AS WITHHELD BY ITS INDIAN SUBSIDIARIES : RECEIVED FROM EPCOS INDIA PRIVATE LIMITED S.NO. PARTICULARS GROSS AMOUNT IN RS. (A) ROYALTY 99,55,167 (B) PRODUCT MARKETING SERVICES 6,57,33,995 (C) INFORMATION TECHNOLOGY SERVICES 4,94,37,968 (D) TECHNICAL SERVICES 2,65,75,812 (E) INTEREST RECEIVED ON ECB LOAN 3,15,12,490 TOTAL 18,32,15,432 2.2 IN RESPECT OF THE VARIOUS PAYMENTS MADE, IT WAS EXPLAINED BY THE ASSESSEE THAT THE SAME WERE BASICALLY FOR RENDERING SERVICES BY THE ASSESSEE COMPANY FROM OVERSEAS UNDER RESPECTIVE AGR EEMENTS ENTERED INTO BY THE ASSESSEE WITH THE INDIAN SUBSIDIARIES O R GROUP COMPANIES. THESE WERE SPECIFICALLY STATED TO BE AS UNDER: 4 I. INFORMATION TECHNOLOGY (IT) SUPPORT SERVICES FOR BOTH THE SUBSIDIARIES EFFECTIVE 01.04.2001 FOR EIPL AND 01.1 0.2002 FOR EFPL. II. PRODUCT MARKETING SERVICES FOR BOTH THE SUB SIDIARIES EFFECTIVE 01.04.2001 FOR EIPL AND 01.10.2002 FOR EF PL. III. SALES SUPPORT SERVICES FOR EFPL EFFECTIVE 01.10.2002. IV. THE ASSESSEE HAS ALSO ENTERED INTO TECHNICAL CO LLABORATION AGREEMENT WITH EIPL DATED 06.05.1996 AND EFPL DATED 13.10.1993, PURSUANT TO WHICH IT RECEIVED ROYALTY / FEES FOR TECHNICAL SERVICES AS A PERCENTAGE OF SALES. 2.3 THE ASSESSEE CLAIMED THAT IT HAS ALSO RECEIVED MONEY FROM ALL ITS SUBSIDIARIES SITUATED AROUND THE WORLD INCLUDING TH E INDIAN WHOLLY OWNED SUBSIDIARIES (WOS) UNDER AN AGREEMENT MADE RE LATING TO PROJECT MOVE EFFECTIVE FROM 1.4.2002. THEREFORE, IN ADDITIO N TO THE RECEIPTS MADE AS INDICATED IN THE TABLE ABOVE AMOUNTING TO R S.18,32,15,432, THE ASSESSEE COMPANY ALSO RECEIVED A SUM OF RS.24,38,72 ,088 CLAIMED AS REIMBURSEMENT OF COST FOR PROJECT MOVE. THE ASSESSE E CLAIMED THAT THIS INCOME WAS NOT OFFERED TO TAX IN THE RETURN AS IT W AS ONLY FOR REIMBURSEMENT OF THE EXPENSES INCURRED ON THEIR BEH ALF BY THE ASSESSEE COMPANY AS A TEAM LEADER. THEREFORE, IT CAN BE SEEN THAT THE ASSESSEE ACTUALLY RECEIVED THE FOLLOWING INDIA SOURCE INCOME DURING THE YEAR UNDER CONSIDERATION FROM ITS WOSS SITUATED IN INDIA . NATURE OF INCOME AMOUNT (INR) I. ROYALTY 99,55,167 II. IT, MARKETING AND SALES SUPPORT 11,51,71,963 III. TECHNICAL SERVICES 2,65,75,812 IV. INTEREST ON LOAN 3,15,12,490 V. REIMBURSEMENT OF COSTS PROJECT MOVE 24,38,72,088 TOTAL 42,70,87,520 5 2.4 THE ASSESSING OFFICER FOLLOWING HIS ORDER FOR A .Y.2003-04 AND DIRECTIONS RECEIVED U/S.144A COMPLETED THE ASSESSME NT U/S 143(3) OF THE IT. ACT ON 29.12.2006. IN THE DIRECTIONS ISSUED U/S .144A IT WAS HELD THAT THE ASSESSEE HAS A PE IN INDIA IN THE FORM OF ITS W OSS UNDER ARTICLE 5 OF THE INDIA-GERMANY DTAA AND THEREFORE, THE TAXABLE I NCOME OF THE ASSESSEE ARE ASSESSABLE AS BUSINESS PROFITS UNDER A RTICLE 7 OF THE DTAA AND NOT UNDER ARTICLE 11 AND 12 OF THE DTAA. THEREF ORE, THE INCOME WAS HELD TO BE TAXABLE @ 20% U/S 44D R.W.S. 115A OF THE IT. ACT WITHOUT ALLOWING ANY DEDUCTION IN RESPECT OF ANY EX PENDITURE OR ALLOWANCE. 2.5 THE ASSESSING OFFICER FOLLOWING HIS ORDER FOR A .Y. 2003-04 HELD THAT THE ASSESSEE HAS A PE IN INDIA AND THE ASSESSE E HAS A BUSINESS CONNECTION IN INDIA U/S.9(1)(I) OF THE INCOME TAX A CT, 1961. FURTHER, THE ASSESSEE IS IN THE RECEIPT OF INCOME FROM THIS BUSI NESS CONNECTION (IN THE FORM OF ROYALTY INCOME). HENCE, HE WAS OF THE OPINI ON THAT THIS INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA U/S.9(1)(I) OF T HE ACT AND IS INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE U/S.5(2) OF THE ACT. 2.6 BEFORE CIT(A) IT WAS ARGUED THAT THE FACTS OF T HE ASSESSEE'S CASE UNDER APPEAL ARE SIMILAR TO A.Y. 2003-04 AND A.Y. 2 006-07 WHEREIN THE PRIMARY ISSUE RAISED VIDE GROUND NO. 1 ABOVE HAS BE EN DECIDED BY THE HON'BLE ITAT, PUNE IN FAVOUR OF THE ASSESSEE. IT WA S ARGUED THAT EVEN CIT(A)-II, NASIK, WHO HAS DECIDED THE ASSESSEE'S AP PEAL FOR A.Y. 2003- 04 VIDE APPEAL NO. NSK/ACIT/CIR.2/179/06-07 DATED 2 2.12.2006 HAS ALSO DECIDED THIS GROUND IN FAVOUR OF THE ASSESSEE. THE FINDING OF THE 6 CIT(A) GIVEN IN A.Y. 2003-04 WAS UPHELD BY THE ITAT IN THE APPEAL FILED BY THE DEPARTMENT. IN A.Y. 2006-07, THE ASSES SING OFFICER AND THE DRP REFUSED TO FOLLOW THE FINDING GIVEN BY THE ITAT AND THE CIT(A) GIVEN IN A.Y. 2003-04 BUT THE HON'BLE ITAT, PUNE IN APPEAL FILED BY THE APPELLANT IN ITA NO. 1413/PN/2010 FOR A.Y. 2006-07 DATED 6.4.2011 HAS ONCE AGAIN FOLLOWED THE FINDING GIVEN IN A.Y. 2003- 04. IN VIEW OF THE ABOVE, IT WAS ARGUED THAT THE FINDING GIVEN BY THE ASSESSING OFFICER THAT THE WOSS OF THE ASSESSEE CONSTITUTE PES IN INDIA OF THE ASSESSEE COMPANY UNDER ARTICLE 5 OF THE DTAA, HAS TO BE REVE RSED. IT WAS FURTHER SUBMITTED IN THE ABOVE CONTEXT THAT THE ASSESSEE H AS NO OFFICE, BRANCH OR EMPLOYEES BASED IN INDIA AND ALL THE SERVICES RENDE RED BY IT TO THE WOSS ARE FROM OVERSEAS. THE INDIAN WOSS ARE MANUFACTURIN G ENTITIES HAVING THEIR OWN OPERATIONAL FRAMEWORK FOR MANUFACTURING, MANAGEMENT AND THE INDEPENDENT TAX ASSESSMENTS. 2.7 BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) ACCEPTED THE CLAIM OF THE ASSESSEE THAT THE ASSESSE E DOES NOT HAVE A PE IN INDIA. HE FURTHER HELD THAT DTAA IS AN ALTERNATE T AXATION REGIME AND NOT AN EXEMPTION REGIME AND THAT DTAA IS FOR THE PURPOS E OF SHIFTING ONUS ON THE DEPARTMENT TO PROVE THE CONTRARY IN RESPECT OF EXEMPTION CLAIMED BY THE ASSESSEE. THE RELEVANT OBSERVATIONS OF LD.C IT(A) ARE AS UNDER : 4.3. THE RELEVANT PORTION OF THE FINDING GIVEN BY CIT(A)-II, NASHIK IN APPEAL NO. NSK/ACIT/CIR.2/179/06-07 DATED 22.12.200 6 FOR A.Y. 2003- 04, RELATING TO THE ABOVE GROUND AND RELIED UPON BY APPELLANT WERE CONSIDERED AND IT WAS FOUND THAT THE LD. (A)-LL, NASI K HAS HELD THE FOLLOWING IN PARA 14 TO 23 OF HIS ORDER: I. THE INDIAN WOSS DO NOT CONSTITUTE PLACE OF MANAG EMENT PE OF THE APPELLANT UNDER ARTICLE 5(2)(A) OF THE INDIA -GERMANY DTAA: 7 IN PARA 14 AND 15 OF HIS APPELLATE ORDER, THE CIT(A) HAS HELD THAT PERFORMANCE OF BUSINESS ACTIVITIES OR OWNERSHIP DOES NOT QUALIFY AS PLACE OF MANAGEMENT AND THE AO SEEMS TO HAVE GOT CONFUSED WI TH CONSUMPTION OF SERVICES WITH CARRYING OUT OF BUSINESS. II. THE INDIAN WOSS ARE NOT BRANCH PE OF THE APPELL ANT UNDER ARTICLE 5(2)(B) OF THE INDIA-GERMANY DTAA: IN PARA 16 OF HIS APPELLATE ORDER, THE CIT(A) HAS HELD THAT THE SUBSIDIARIES ARE NO T BRANCH OF THE APPELLANT AS THEY ARE INDEPENDENTLY INCORPORATED AND MANAGED. III. THE EMAILS CORRESPONDENCES DO NOT INDICATE THA T EACH AND EVERY ACTIVITY OF THE INDIAN WOSS IS SUPERVISED BY THE APPELLANT RESULTING IN CONSTITUTION OF THE PE OF THE APPELLAN T: IN PARA 19, THE CIT(A) CONCLUDES, 'FROM THE ABOVE CORRESPONDENCE IT IS CLEAR THAT THERE IS NO ACTIVE SUPERVISION OF EPCOS AG IN INDIA. THESE ARE ROUTINE CO RRESPONDENCE AND EMAILS BETWEEN THE ASSESSEE AND THE SUBSIDIARIES IN INDIA REGARDING THE PRODUCT MARKETING. THIS CORRESPONDENCE DEALS WITH A VE RY LIMITED ASPECT OF BUSINESS OF INDIAN SUBSIDIARIES AND THEREFORE THE A.O. WRONGLY CONCLUDED THAT EACH AND EVERY ACTIVITY OF THE INDIA N SUBSIDIARIES IS DONE UNDER THE ACTIVE SUPERVISION OF EPCOS AG IN INDIA. IT IS ALSO TO BE MENTIONED HERE THIS CORRESPONDENCE HAS NO REFERENCE TO THE ACTIVITIES SUCH AS FINANCE. H.R, DESIGNING, TRAINING ETC., THEREF ORE, IT IS DIFFICULT TO UNDERSTAND HOW THE AO COULD COME TO THE CONCLUSION TH AT THE BUSINESS OF THE SUBSIDIARIES CONTROLLED BY THE EPCOS AG. THUS, THER E IS NO STRENGTH IN THE ARGUMENT OF THE A.O. THAT THE LETTERS AND EMAIL S RECEIVED SHOW THAT THE ACTIVITIES ARE DONE UNDER THE SUPERVISION OF CPCOS AG. IV. THE INDIAN SUBSIDIARIES ARE NOT PE OF THE APPELLANT : IN PARAGRAPH 21 AND 23, THE CIT(A) HAS HELD THAT NO SUBSI DIARY CAN BE PE OF THE HOLDING COMPANY SIMPLY BY VIRTUE OF THE FACT THA T IT IS BEING CONTROLLED BY THE FOREIGN COMPANY PURSUANT TO ARTICL E 5(7) OF THE INDIA- GERMANY DTAA. THE RELEVANT PORTION OF ARTICLE 5(7), OF THE AFORESAID DTAA WHICH WAS RELIED UPON BY THE LD. CIT(A) FOR MAK ING THE ABOVE CONCLUSION IS REPRODUCED BELOW: '5(7). THE FACT THAT A COMPANY WHICH IS A RESIDENT OF A CONTRACTING STATE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS A RESIDENT OF THE OTHER CONTRACTING STATE OR WHICH CARRIES ON BUSINESS IN THAT OTHER STATE (WHETHER THROUGH A PERMANENT ESTABLISHMENT OR O THERWISE), SHALL NOT OF ITSELF CONSTITUTE EITHER COMPANY A PERMAN ENT ESTABLISHMENT OF THE OTHER.' 4.4 IN ADDITION TO THE ABOVE, THE APPELLANT ALSO INV ITED MY ATTENTION TO THE KEY FINDINGS GIVEN BY THE HON'BLE ITAT IN APPELL ANT'S OWN CASE IN A.Y. 2003-04 ON AN APPEAL FILED BY THE DEPARTMENT IN ITA NO. 398/PN/07 DATED 30.6.2008, RELATING TO THE ABOVE ISSUE. FOR REA DY REFERENCE, THE RELEVANT PORTION OF THE SAID ORDER OF THE HON'BLE IT AT IS ALSO QUOTED BELOW : '35. THE CASE OF THE ASSESSING OFFICER, AS EVIDENT FROM HIS OBSERVATIONS AT PAGE 25 OF THE ASSESSMENT ORDER, IS THAT SINCE THE TAXPA YER HAS ACCEPTED THAT 'BASED ON GUIDANCE OF OUR PRODUCT MARKETING TEA M, ACTIVITIES RELATING TO DECISIONS OF SALE, PRODUCTION, DISPATCH, CO ST COMPUTATION AND OTHER RELEVANT ACTIVITIES FOR EFFECTING THE SALE ARE CARRIED OUT BY THE EL PL AND EFPL' AND THAT 'BASED ON GUIDANCE AND SUPPORT OF OUR CENTRAL IT TEAM, LOCAL ACTIVITIES SUCH AS SOLVING DAY-TO-DAY PROB LEMS, MONITORING THE 8 NETWORK, ETC. ARE CARRIED OUT BY THE EMPLOYEES OF EI PL AND EFPL. IT IS CLEAR THAT THE TAXPAYER COMPANY IS RENDERING SERVIC ES THROUGH THE EMPLOYEES OF EIPL AND EFPL. ON THIS BASIS, THE AO HAS INFERRED THAT THE TAXPAYER COMPANY HAS USED ITS INDIAN SUBSIDIARI ES, AND PARTICULARLY EMPLOYEES OF ITS INDIAN SUBSIDIARIES, TO EARN THE MONIES BY WAY OF FEES FOR PRODUCT MARKETING SERVICES, SALE S SUPPORT SERVICES AND INFORMATION TECHNOLOGY SERVICES. THE AO'S CASE THUS IS THAT THE ASSESSES HAS A FIXED PLACE OF BUSINESS, IN THE FORM OF INDIAN SUBSIDIARIES, THAT THE EMPLOYEES OF THESE INDIAN SUBSIDIA RIES HAVE RENDERED SERVICES FOR WHICH PAYMENT IS ACTUALLY MADE T O THE TAXPAYER COMPANY AND THAT, FOR THESE REASONS, THE SUBSIDIARIES SHO ULD BE TREATED AS PE OF THE TAXPAYER COMPANY. DID THE ASSESSEE COMPANY HAVE A PE IN INDIA? 36. THERE ARE SEVERAL FALLACIES IN THE LINE OF REASONIN G ADOPTED BY THE AO. THE TAXPAYER BEFORE US HAS RECEIVED PAYMENTS FOR SUPP ORT SERVICES AND NOT THE FUNCTIONS OF THE,, SUBSIDIARIES. IT IS NOT THE CASE THAT THE TAXPAYER COMPANY WAS SUPPOSED TO HANDLE ENTIRE MAR KETING FUNCTION OR ENTIRE INFORMATION TECHNOLOGY FUNCTION AND A PAR T OF THIS WORK WAS DELEGATED BY THE TAXPAYER COMPANY TO THE EMPLOYEES O F THE SUBSIDIARY. THE PAYMENT WHICH IS MADE TO THE TAXPAYER COMPANY I S ONLY FOR THE SERVICES RENDERED BY THE TAXPAYER COMPANYEITHER DIRE CTLY OR THROUGH THE INTERVENTION OF A THIRD PARTY. THIS PAYMENT HAS TWO ELEMENTSONE REIMBURSEMENT OF COSTS, PLUS, TWO, A MARK UP THERE ON FOR THE INDIRECT OVERHEADS. ADMITTEDLY, THERE IS NO REIMBURSEMENT O F COSTS INCURRED ON ANY OF THE EMPLOYEES IN INDIA AND AS SUCH THERE CANNO T BE ANY PAYMENT FOR, OR IN CONNECTION WITH THE SERVICES RENDERED BY A NY INDIA BASED EMPLOYEE. IT CANNOT, THEREFORE, BE, SAID THAT ANY IN COME IS EARNED BY WAY OF ANY EMPLOYEE IN INDIA. THE BUSINESS OF THE TAXPAYER , SO FAR AS IMPUGNED RECEIPTS ARE CONCERNED, IS RENDERING SERVI CES TO INDIAN SUBSIDIARIES, IN CONSIDERATION OF WHICH THE TAXPAYER GE TS COSTS REIMBURSEMENTS PLUS A MARK UP. NO PART OF THIS BUSINESS IS CARRIED OUT IN INDIA INASMUCH AS THERE ARE NO BILLING RAISED IN CONNECTION WITH ANY SERVICES RENDERED IN INDIA. NO DOUBT, SOME EMPL OYEES OF THE INDIAN SUBSIDIARIES WORK UNDER GUIDANCE OF THE TAXP AYER COMPANY, BUT THE WORK SO DONE IS FOR THE BUSINESS OF THE IND IAN SUBSIDIARIES AND NOT FOR THE FOREIGN COMPANY WHICH IS TAXPAYER B EFORE US. WE MUST, AT THIS STAGE, UNDERSTAND DISTINCTION BETWEEN BUSINESS O F THE FOREIGN COMPANY AND THAT OF ITS INDIAN SUBSIDIARIES. WHILE THE BUSINESS OF THE FOREIGN COMPANY, FOR OUR PURPOSES, IS RENDERING CER TAIN TYPES OF SERVICES TO ITS INDIAN SUBSIDIARIES, THE BUSINESS OF THE INDIAN COM PANY IS TO MANUFACTURE AND SELL ITS PRODUCTS. WHAT IS DONE BY THE EMPLOYEES OF THE INDIAN SUBSIDIARIES IS RUNNING BUSINESS OF THE INDIAN SU BSIDIARIES WHICH INCLUDES MARKETING OF ITS PRODUCTS WITH OR WITHOU T GUIDANCE OF THE FOREIGN PARENT COMPANY, AND ENSURING A SMOOTH FUNCTIO NING OF BUSINESS BY ENSURING AN EFFECTIVE INFORMATION TECHNOLOGY SUPP ORT SERVICE. JUST BECAUSE EMPLOYEES OF INDIAN SUBSIDIARIES ARE ALSO ENGAGED I N MARKETING ACTIVITIES AND INFORMATION TECHNOLOGY SUP PORT ACTIVITIES, IT WOULD NOT MEAN THAT THESE EMPLOYEES ARE DOING BUSIN ESS OF THE FOREIGN PRINCIPAL UNLESS THE WORK SO DONE BY THESE EMPLOYEES ENTITLES THE FOREIGN PARENT COMPANY FOR REWARDS OF THE WORK SO DONE. IT IS ALSO TO BE REMEMBERED THAT MERELY BECAUSE THE FOREIG N PARENT COMPANY IS ENGAGED IN RENDERING CERTAIN CENTRALIZED SERVICES, IT DOES NOT MEAN THAT ALL THE SERVICES ARE TO BE RENDERED BY THE FOREI GN PRINCIPAL ALONE OR THAT NO PART OF THAT WORK CAN BE DONE BY THE EMPLOY EES OF THE INDIAN SUBSIDIARIES. IF INDIAN SUBSIDIARY HAS ENGAGED THE FOREI GN PRINCIPAL FOR SOME PART OF THE MARKETING WORK, IT DOES NOT MEAN EMP LOYEES OF INDIAN 9 SUBSIDIARY WILL NOT TOUCH THE MARKETING FUNCTION AT A LL. IN ANY CASE, WHAT IS PAID TO THE FOREIGN PRINCIPAL IS THE ACTUAL COST IN CURRED BY THE FOREIGN PRINCIPAL ON RENDERING THE SERVICES PLUS A MARK UP. THE SERVICES NOT RENDERED BY THE FOREIGN PRINCIPAL, THEREFORE, CANNO T ENTITLE HIM TO ANY GAINS. THEREFORE, THE SITUS AND MANNER OF RENDERING OF SER VICES, BY ANYONE OTHER THAN THE EMPLOYEES OR SUB-CONTRACTEES OF THE FOREIGN PRINCIPAL, CANNOT GOVERN WHETHER OR NOT THE FOREIGN PRINCIPAL WILL HAVE A PE IN INDIA. THE ENTIRE DISCUSSION ABOUT THE WORK DONE BY THE EMPLOYEES OF INDIAN SUBSIDIARIES IS NOT AT ALL GERM ANE TO THE ISSUE OF FOREIGN COMPANY'S PE. 37. THE CONCEPT OF PERMANENT ESTABLISHMENT, AS EVID ENT FROM THE EARLIER DISCUSSIONS, IS A RESULT OF COMPROMISE BETWEEN RESIDENCE RU LE AND SOURCE RULE OF TAXATION, AND IT CONSTITUTES 'HOME' OF A FOREIGN ENTERPRISE ABROAD. THE CORE OF PERMANENT ESTABLISHMENT IN THE SOURCE COUNTRY CONSISTS OF (A) FIXED PLACE OF BUSINESS OF FOREIG N ENTERPRISE - ITS LOCATION, AS ALSO ITS PERMANENCE; AND (B) THE BUSINE SS ACTIVITY OF THE FOREIGN ENTERPRISE. THE EXPRESSION 'PERMANENT ESTAB LISHMENT' IN ARTICLE 5(1) OF THE INDO GERMAN TAX TREATY, AS INDEED IN UN AND OCED MODEL CONVENTIONS, IS BASICALLY DEFINED AS 'A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF THE ENTERPRISE IS WHOLLY OR P ARTLY CARRIED ON'. THE EXPRESSION 'ENTERPRISE' IN THIS DEFINITION OBVIOUSLY REFERS TO THE ENTERPRISE OF THE OTHER CONTRACTING STATE, BECAUSE THE EXPRESSION 'PERMANENT ESTABLISHMENT' HAS NO' RELEVANCE WHEN BUSINE SS OF ENTERPRISE OF ONE OF THE CONTRACTING STATES IS CARRIED ON IN THAT VERY CONTRACTING STATE. IN SUCH A SITUATION, THE RESIDENCE C OUNTRY AND THE SOURCE COUNTRY ARE THE SAME AND THERE IS NO CONFLICT I N RESIDENCE RULE AND SOURCE RULE, AND, THEREFORE, THERE IS NO NEED TO RESOLVE THE SAME THROUGH THE TAX TREATY PROVISIONS. WHAT FOLLOWS FROM THESE DISCUSSIONS IS (I) THAT THERE SHOULD BE A FIXED PLACE OF BUSINESS IN THE SOURCE JURISDICTION, AND (II) THAT THE BUSINESS OF THE FOREIGN ENTERPRISE SHOULD BE CARRIED ON THROUGH SUCH A FIXED PLACE OF BUSINES S IN THE SOURCE JURISDICTION. 38. THE EXPRESSION 'FIXED PLACE OF BUSINESS' IS NOT DEFI NED UNDER THE TAX TREATIES, BUT THERE ARE NEGATIVE AND POSITIVE L ISTS OF WHAT THE EXPRESSION 'PERMANENT ESTABLISHMENT' DOES NOT INCLUDE AND WHAT THE EXPRESSION 'PERMANENT ESTABLISHMENT' DOES INCLUDE, AND THESE LISTS CAN ALSO HELP US DRAW INFERENCES ON THIS ASPECT AS WELL . THE EXPRESSION 'FIXED PLACE OF BUSINESS' PRESUPPOSES THAT THERE IS A P LACE OF BUSINESS, I.E. A FACILITY SUCH AS PREMISES OR, IN CERTAIN INSTAN CES, EVEN MACHINERY OR EQUIPMENT, AND THAT SUCH A PLACE OF BUSINESS IS A 'FIXED' PLACE I.E. A DISTINCT PLACE WITH CERTAIN DEGREE OF PERMANENCE. W HILE IN TERMS OF THE PROVISIONS OF ARTICLE 5(7), EXISTENCE OF A SUBSIDIARY OR PARENT COMPANY IN THE SOURCE JURISDICTION BY ITSELF DOES NOT CONSTITUTE A PE, THERE IS NO BAR ON THE PARENT OR SUBSIDIARY BEING PE OF EACH OT HER. THE TRUE TEST, IN OUR CONSIDERED VIEW, IS WHETHER OR NOT BUSINESS OF THE F OREIGN ENTERPRISE IS CARRIED OUT BY THE PE. THEREFORE, WHE N BUSINESS OF ENTERPRISES OF ONE OF THE CONTRACTING STATES IS CARRIED OUT BY ITS SUBSIDIARIES IN THE OTHER CONTRACTING STATES, SUCH A SUBSIDIARY CAN INDEED BE ITS PERMANENT ESTABLISHMENT. IN PRINCIPLE, THEREFOR E, THERE CANNOT BE ANY BAR ON A SUBSIDIARY BEING A PERMANENT ESTABLIS HMENT OF THE PARENT COMPANY. HOWEVER, WHETHER OR NOT IS IT TO BE TREATED AS A 'PERMANENT ESTABLISHMENT OF THE PARENT COMPANY, MUST B E EXAMINED ON THE FACTS OF THE EACH CASE. LET US EXAMINE WHAT IS THE CASE OF THE REVENUE BEFORE US. THE ASSESSING OFFICER HAS, ON THE BASIS OF PERUSAL OF EMAILS EXCHANGED BETWEEN THE TAXPAYER COMPANY AND IT S SUBSIDIARIES IN 10 INDIA, HAS INFERRED THAT 'EACH AND EVERY ACTIVITY I S DONE UNDER THE ACTIVE SUPERVISION OF 'EPCOS AG IN INDIA'. IT IS CONTENDED TH AT A PE MEANS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF TH E ENTERPRISE IS WHOLLY OR PARTLY CARRIED OUT, AND SINCE BUSINESS IS BEING CARRIED OUT WHOLLY 'UNDER THE GUIDANCE AND ACTIVE SUPERVISION' AND SINCE THE TAXPAYER COMPANY HAS A PLACE OF MANAGEMENT BY WAY OF INDIAN SUBSIDIARIES, THE TAXPAYER COMPANY HAS A PE IN INDI A. HE HAS ALSO STATED THAT THE INDIAN SUBSIDIARIES ARE TO BE TREATED AS ' BRANCHES' BUT THEN THERE IS NO RATIONALE BASIS FOR SUCH AN AGGRESSIVE PRO POSITION. UNDOUBTEDLY, BUSINESS IS BEING CARRIED OUT IN INDIAN SU BSIDIARIES BUT THE CRUCIAL QUESTION WHOSE BUSINESS IS IT. THE EXPRESSION 'CARRYING ON OF THE BUSINESS' CAN ONLY REFER TO THE CONDUCT O F THE BUSINESS OF THE FOREIGN ENTERPRISE IN THE SOURCE JURISDICTION, BECAUSE THE QUESTION OF TRIGGERING TAX LIABILITY BY THE VIRTUE OF A PE IS RELEVANT ONLY FOR A FOREIGN ENTERPRISE; THE DOMESTIC ENTERPR ISE IS TAXABLE ANYWAY BY THE VIRTUE OF RESIDENCE RULE. WHAT IS BEI NG DONE BY THE INDIAN SUBSIDIARIES UNDER THE GUIDANCE AND SUPERVIS ION OF EPCOS AG IS BUSINESS OF THE INDIAN SUBSIDIARIES, AND THAT ASPECT OF THE MATTER, BY NO STRETCH OF LOGIC, IS RELEVANT FOR DEC IDING WHETHER OR NOT THE EPCOS AG HAS A PE IN INDIA. MERELY BECAUSE AN INDIAN COMPANY CONDUCTS ITS BUSINESS, WITH THE HELP AND GU IDANCE IT HAS RECEIVED FROM A FOREIGN COMPANY, IN INDIA, IT DOES NOT FOLLOW THAT THE FOREIGN COMPANY SO GIVING HELP AND GUIDANCE WIL L BE DEEMED TO HAVE A PE IN THE FORM OF THAT DOMESTIC COMPANY. IS IT NECESSARY THAT THE PE CAN ONLY BE SAID TO EXIST, UNDER THE BASIC RU LE, WHEN CORE BUSINESS ACTIVITY IS CARRIED OUT BY THE PE? 39. WE QUITE AGREE WITH THE STAND OF THE REVENUE AUTHORITIES TO THE EXTENT THAT AS LONG AS AN ECONOMIC ACTIVITY IS CARRIED OUT IN THE FIXED PLACE OF BUSINESS AVAILABLE TO FOREIGN ENTERPRISE, WHET HER SUCH AN ACTIVITY IS A CORE ACTIVITY OR A PERIPHERAL ACTIVIT Y, IT HAS TO BE CONCLUDED THAT THE FOREIGN ENTERPRISE HAS A PE IN THE SOURCE JURISDICTION. MODEL CONVENTION COMMENTARY STATES THAT THE ACTIVITY CAR RIED OUT BY THE PE MAY NOT BE A PRODUCTIVE CHARACTER, THOUGH THE COMME NTARY DOES RECOGNIZE THAT IT COULD PERHAPS BE ARGUED THAT IN TH E GENERAL DEFINITION, SOME MENTION SHOULD ALSO BE MADE OF THE OT HER CHARACTERISTIC OF THE 'PERMANENT ESTABLISHMENT, NAME LY THAT THE ESTABLISHMENT MUST HAVE A PRODUCTIVE CHARACTER- I.E. CONTRIBUTE TO THE PROFITS OF THE PROFITS OF THE ENTERPRISE. HOWEVER, IN THE PRESENT DEFINITION, THIS COURSE HAS NOT BEEN TAKEN. LATE PROF. VOGEL ALSO CONCURRED WITH THIS SCHOOLD OF THOUGHT AND OBSERVED T HAT '....THE 'PERMANENT ESTABLISHMENT NEED NOT BE A BRANCH IN TH E NATURE OF FACILITY ENGAGED IN ACTIVITIES OF THE SAME TYPE AS THOSE OF THE HEAD OFFICE ORGANIZATION, NOR NEED THE PLACE OF BUSINESS DIRECT LY CONTRIBUTE TO ENTERPRISE'S PROFITS' AND 'ALL THAT ITS BUSINESS MUST DO IS TO SERVE THE ENTERPRISE'S OVERALL PURPOSE, BUT IT MUST BE AN ACT IVITY'. THE QUESTION, HOWEVER, IS THAT THE ACTIVITY MUST BE OF THE BUSINESS OF THE TAXPAYER COMPANY, AND NOT OF THE INDEPENDENT SUBSIDIARIES OF SUCH A TAXPAYER COMPANY. ON THE FACTS OF THE CASE BEFORE US, NO PART 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 SUBSIDI ARIES ACTED UPON THE ADVICES SO GIVEN IN THE E-MAILS AND LETTER S IN INDIA. THAT ACTION OF THE SUBSIDIARIES CANNOT ALTER THE SITUS O F THE ACTIVITIES OF THE EPCOS AG. DOES MERE EXISTENCE OF PE LEADS TO TA XABILITY OF INCOME IN SOURCE COUNTRY? 11 40. IT IS ALSO IMPORTANT TO BEAR IN MIND THAT A NON R ESIDENT COMPANY HAVING A PE IN INDIA, BY ITSELF, DOES NOT LEAD TO TAX ABILITY IN INDIA; THERE MUST BE SOME PROFIT ATTRIBUTABLE TO SUCH A PE WHICH ALONE COULD BE TAXED IN INDIA BECAUSE OF THE EXISTENCE OF THE PE. W HEN 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 ENTERPRISE, THE EXISTENCE OF SUCH A PE IS WHOLLY ACADEMIC AND DOES NOT HAVE ANY TAX IMPLICATIONS IN THE SOURCE JURISDICTION. TO THAT LIMITED EXTENT, THERE IS AN INHERENT CONTRADICTION IN THE OECD APPROACH I N AS MUCH AS ONE ON HAND PE PROVIDES THRESHOLD LIMITS FOR TRIGGERING TAXA TION IN THE SOURCE COUNTRY, ON THE OTHER HAND THE EXISTENCE OF THE PE I S DECIDED DE HORS THE ACTIVITY IN THE ABSENCE OF WHICH TAXABILITY OF P ROFITS IN THE SOURCE COUNTRY CANNOT BE TRIGGERED AT ALL. ON THE FACE OF IT, WHEN A PE IS NOT ENGAGED IN A CRITICAL ACTIVITY HAVING SOME CONTRIBU TION TO OVERALL PROFITS OF THE ENTERPRISE OR A REVENUE GENERATING ACTIVITY T HE EXERCISE TO ASCERTAIN WHETHER OR NOT A PE IS IN EXISTENCE IS A MEAN INGLESS RITUAL AND AN EMPTY FORMALITY. VIEWED IN THIS PERSPECTIVE, A ND BEARING IN MIND THE FACT THAT BY NO STRETCH OF LOGIC IT COULD B E HELD THAT ANY SIGNIFICANT OR CRITICAL BUSINESS ACTIVITY BY THE EPCOS AG WAS CARRIED 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 ACTIVITY, THE ASSESSES COMPANY DID NOT EARN ANY REVENUES AS A RESU LT OF THE ACTIVITIES SO CARRIED OUT BY THE EMPLOYEES OF INDIAN SUBSIDIAR IES, AND, THEREFORE, NO PART OF THE REVENUES ACTUALLY GENERATED BY THE ASSESSEE COMPANY COULD BE SAID TO BE ATTRIBUTABLE TO THE PE. THE QUESTION OF EXISTENCE OF PE OF THE ASSESSEE COMPANY, IN THESE CIRCUMSTANCES, HAS NO IM PACT OF TAXABILITY OF THE ASSESSEE COMPANY. 41. THE REQUIREMENTS OF EXCLUSION CLAUSE UNDER ARTICLE 15( 5) ALSO HIGHLIGHT THIS ASPECT OF PROFIT ATTRIBUTION. WHILE WE WERE EXAMINING INTERPLAY BETWEEN ARTICLE 12 AND ARTICLE 7, WE HAD NOTICED THAT THIS EXCLUSION CLAUSE 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 CONT RACTS IN RESPECT OF WHICH 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICES' ARE PAID. THAT WOULD MEAN THAT ONLY SUCH 'ROYALTIES' AND 'FEES FOR TECHNICAL SERV ICES' ARE EXCLUDED FROM THE SCOPE OF ARTICLE 12(1) AND (2) AS ARE ATTRIB UTABLE TO THE PE THROUGH WHICH BUSINESS IS CARRIED ON BY THE ENTERPRISE. IN OTHER WORDS, THE TAXABILITY UNDER ARTICLE 12 SHIFTS TO TAXABILIT Y UNDER ARTICLE 7 ONLY IN RESPECT OF 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVIC ES' WHICH ARE ATTRIBUTABLE TO THE PE IN QUESTION. IN CASE AN ASSESSEE RECEIVES 'RO YALTIES' AND 'FEES FOR TECHNICAL SERVICES' BUT THESE RECEIPTS DO NOT HAVE AN EFFECTIVE NEXUS WITH THE PE AND ARE NOT, THEREFORE, ATTRIBUTABLE TO THE PE, THE EXCLUSION CLAUSE UNDER ARTICLE 15(5), AS ALSO TAXABILITY UNDER ARTICL E 7(1) AND (2) IS NOT TRIGGERED. CONCLUSION ON THE FIRST ISSUE I.E. ON EXISTENCE OF PE: 41.1 IN THE LIGHT OF THESE DISCUSSIONS, IN OUR CON SIDERED VIEW, THE ASSESSEE COMPANY DID NOT HAVE ANY PE IN INDIA, MUCH LESS A PE TO WHICH SUBJECT 'ROYALTIES' AND 'FEES FOR TECHNICAL SERVICE S' CAN BE ATTRIBUTED. IN TERMS OF THE INDIA-GERMANY DTAA, INDIA DOES NOT HAVE RIGHT TO TAX THESE RECEIPTS AS BUSINESS PROFITS UNDER ARTICLE 7. OF CO URSE, IN THE LIGHT OF OUR FINDING THAT NO REVENUES EARNED BY THE ASSESSEE COMP ANY 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 ARISE UNDER ARTICLE 7 . THE ASSESSEE HAS 12 OFFERED THE ROYALTIES AND FEES FOR TECHNICAL SERVICES FOR TAXABILITY IN INDIA UNDER ARTICLE 12, AND, TO THAT EXTENT, ADMITTED TAX LIABILITY EXISTS. THE OVERZEALOUS APPROACH OF THE AO HAS BEEN RIGHTLY REJ ECTED BY THE CIT (A). WE APPROVE AND CONFIRM THE STAND OF THE CIT(A), AND DECLINE TO INTERFERE IN THE MATTER.' 4.5. ON CAREFUL CONSIDERATION OF THE FACTS AND CIRCU MSTANCES AVAILABLE ON RECORD ALONG WITH THE APPLICABLE LAW, IT IS SEEN T HAT THE ASSESSING OFFICER, THOUGH HAS TRIED TO STRENGTHEN HIS ASSESSMENT OR DER IN THE REMAND REPORTS SUBMITTED DURING THE COURSE OF APPEAL T O COUNTER THE ARGUMENTS MADE BY THE APPELLANT THROUGH THEIR SUBMISSIO NS, BUT IN THE PROCESS THE FACTS OF THIS CASE HAS BECOME PAR/- MATER/A T O OTHER YEARS INCLUDING A.Y. 2006-07 WHEREIN THE ISSUE OF EXISTENCE OF PE WAS SO ELABORATELY DISCUSSED BY THE ASSESSING OFFICER IN THE DRAF T ASSESSMENT ORDER WHICH WAS APPROVED BY THE DRP. THE AUTHORISED R EPRESENTATIVE OF THE APPELLANT HAS ALSO AGREED TO THE SAID FACT OF THE CASE DURING THE COURSE OF APPEAL. HOWEVER, DURING THE COURSE OF APPEAL, IT WAS BROUGHT ON RECORD THAT THE HON'BLE ITAT VIDE ITS ORDER DATED 6.4.2011 HAS REVERSED THE FINDING OF THE ASSESSING OFFICER AS WELL AS THE DRP IN SAY ING THAT THE WOS IS THE PE OF THE APPELLANT COMPANY. THIS APPEAL WAS DE CIDED VIDE ITA NO. 1413/PN/2010 FOR A.Y. 2006-07 ON 6.4.2011. THE KEY FINDING GIVEN IN PARA 9 OF THE SAID ORDER OF THE HON'BLE ITAT IS QUOTE D BELOW FOR READY REFERENCE : '9. CONSIDERING THE ABOVE, WE HAVE ALSO EXAMINED T HE COMPARABILITY OF THE FACTS OF THE CASE FOR THIS YEAR VIS-A-VIS THE ASSE SSMENT YEAR 2003-04. IT IS A FACT THAT NEITHER THE AO, NOR THE DRP, NOR THE PRESENT CIT-DR WERE ABLE TO DEMONSTRATE AS TO WHETHER THE FACTS OF THE CU RRENT YEAR ARE DIFFERENT IN ANY FORM WITH THAT OF ASSESSMENT YEAR 2 003-04. MERELY, THE DR MENTIONED THAT NOBODY HAS GONE INTO THAT ISSUE, THE REFORE, THE MATTER SHOULD BE SET ASIDE. WE ARE UNABLE TO APPRECIATE THI S LINE OF ARGUMENT OF THE CIT-DR FOR THE SIMPLE REASON THAT IT IS THE RESPONSIBILI TY OF THE AO FIRST OF ALL TO FOLLOW THE JURISDICTIONAL DECISION OF THE TRIB UNAL IN ASSESSEE'S OWN CASE FOR THE AY 2003-04. THE SAME WAS NOT FOLLOWED AND SURPRISINGLY, THEY HAVE NOT EVEN DISTINGUISHED. THEY SIMPLY IGNORED STATING THAT THE SAID ORDER IS NOT ACCEPTED BY THE REVENUE AND THE MAT TER IS PENDING BEFORE THE HON'BLE HIGH COURT OF BOMBAY. CONSIDERING THE AB OVE, WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO CASE FOR SENDING T HE FILES TO THE REVENUE. IN FACT IT IS THE CASE OF THE ASSESSEE THAT THE FACTS ARE IDENTICAL VIS-A-VIS THE FACTS OF THE ASSESSMENT YEAR 2003-04. IN TH ESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE DECIS ION COMPRISED IN PARA 41.2 IS EQUALLY RELEVANT FOR THE YEAR UNDER CONSIDERA TION IN RESPECT OF GROUND NO. 1. ACCORDINGLY, GROUND NO. 1 RAISED BY TH E ASSESSEE IS ALLOWED.' 4. 6. AFTER CONSIDERING THE ARGUMENTS OF THE ASSESSING OFFIC ER GIVEN IN THE ASSESSMENT ORDER AS WELL AS IN THE SUBSEQUENT REPORTS AN D THAT OF THE APPELLANT, INCLUDING THE DOCUMENTS AND SUBMISSIONS AVAIL ABLE ON RECORD, IT CANNOT BE DENIED THAT THE FACTS AND CIRCUMSTANCES O F THIS CASE IS SIMILAR TO A.Y. 2006-07 AND A.Y. 2003-04. THE ASSESSING OFFICER HAS NOT DISTINGUISHED THE FACTS ON THOSE LINES EVEN DURING APPEA L. THEREFORE, THE FINDINGS GIVEN BY THE HON'BLE ITAT HAS TO BE FOLLOWED . GROUND NO. 1 OF THE APPELLANT IS ACCORDINGLY ALLOWED. 13 2.8 AGGRIEVED WITH SUCH ORDER OF CIT(A), THE REVENU E IS IN APPEAL BEFORE US. 3. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER & CIT(A ) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND FOLL OWING THE ORDER FOR A.Y. 2003-04 AND 2006-07, THE TRIBUNAL IN ASSESSEE S OWN CASE FOR A.Y. 2008-09 VIDE ORDER DATED 31-01-2014 HAS HELD AS UND ER : 2.2 NOTHING CONTRARY WAS BROUGHT TO OUR KNOWLEDGE ON BEHALF OF REVENUE. FACTS BEING SIMILAR, SO FOLLOWING THE SAME RE ASONING, WE ARE NOT INCLINED TO CONCUR WITH THE FINDING OF DRP. WE ARE OF THE VIEW THAT THE ASSESSEE DID NOT HAVE ANY PE IN INDIA, MUCH LESS A PE TO WHICH SUBJECT ROYALTIES AND FEES FOR TECHNICAL SERVICES COULD BE ATTR IBUTED. IN TERMS OF INDIAN-GERMAN DTAA, INDIA DOES NOT HAVE RIGHT TO TAX THESE RECEIPTS AS BUSINESS PROFIT UNDER ARTICLE 7. IN THE LIGHT OF ABOV E FINDING THAT NO REVENUE EARNED BY THE ASSESSEE COULD BE SAID TO BE ATTRI BUTABLE TO PE, EVEN IF ONE WAS TO COME TO THE CONCLUSION THAT A PE E XISTED, NO TAXABILITY COULD ARISE UNDER ARTICLE 7. THE ASSESSEE HAS OFFERED T HE ROYALTIES AND FEES FOR TECHNICAL SERVICES FOR TAXABILITY IN INDIA UN DER ARTICLE 12A AND TO THAT EXTENT, ADMITTED TAX LIABILITY EXISTS. THIS APPR OACH OF THE ASSESSING OFFICER WAS REJECTED BY THE CIT(A) IN A.Y. 2006-07 F OR THE REASONS DISCUSSED ABOVE. ACCORDINGLY, THE ISSUE IN GROUND NO.1 IS ALLOWED AS DISCUSSED ABOVE. 3.1 SINCE THE LD.CIT(A) WHILE DECIDING THE ISSUE HA S FOLLOWED THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2003-04 AND 2006-07 AND SINCE SIMILAR VIEW HAS BEEN UPHELD BY T HE TRIBUNAL IN A.Y. 2008-09, THEREFORE, RESPECTFULLY FOLLOWING THE CONS ISTENT DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE AND IN ABSENCE OF A NY CONTRARY MATERIAL BROUGHT TO OUR NOTICE, THE ORDER OF THE LD.CIT(A) O N THESE ISSUES IS UPHELD AND THE GROUNDS RAISED BY THE REVENUE ARE DI SMISSED. 4. GROUNDS OF APPEAL NO.3 BY THE REVENUE READS AS U NDER : 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT (A)-L, PUNE ERRED IN LAW BY HOLDING THAT EVEN IF A PE EXIST S, BUT IF THE RECEIPTS 14 SOURCED FROM INDIA ARE NOT ATTRIBUTABLE TO THE PE, T HEN THE CASE OF THE ASSESSEE WOULD STILL FALL UNDER ARTICLE 12(2) AND EXCLUSI ON CLAUSE PROVIDED IN ARTICLE 12(5) WOULD NOT BE INVOKED THER EBY NOT TRIGGERING ARTICLE 7 OF THE TREATY FOR THE RATE PURPOSES. 4.1 FACTS OF THE CASE IN BRIEF, ARE THAT THE ASSESS ING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT AS P ER 12(5) OF THE DTAA BETWEEN INDIA AND GERMANY, IF THE BENEFICIAL O WNER OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES, BEING A R ESIDENT OF A CONTRACTING STATE, CARRIED ON BUSINESS ON THE OTHER CONTRACTING STATE IN WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARISE, THR OUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN AND THE RIGHT, PROPE RTY OR CONTRACT IN RESPECT OF WHICH THE ROYALTIES OR FEES FOR TECHNICA L SERVICES ARE PAID IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISH MENT, THE PROVISION BY WHICH ROYALTY IS TAXED AT 10% WOULD NOT APPLY. IN SUCH CASE, THE PROVISIONS OF ARTICLE 7 SHALL APPLY. 4.2 HE NOTED THAT ARTICLE 7(1) OF DTAA BETWEEN INDI A AND GERMANY STIPULATES THAT : THE PROFITS OF AN ENTERPRISE OF A CONTRACTING STAT E SHALL BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTERPRISE CA RRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUS INESS AS AFORESAID, THE PROFITS OF THE ENTERPRISE MAY BE TAXED IN THE O THER STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE TO THAT PER MANENT ESTABLISHMENT. 4.3 HE OBSERVED THAT DURING THE YEAR UNDER CONSIDER ATION, THE ASSESSEE IS IN THE RECEIPT OF THE ROYALTY INCOME WHICH IS AT TRIBUTABLE TO PE IN INDIA. ACCORDINGLY, THE SAME INCOME HAS TO BE TAXE D U/S.115A R.W.S. 44AD OF THE ACT AT 20% WITHOUT ALLOWING ANY DEDUCTI ON IN RESPECT OF 15 ANY EXPENDITURE OR ALLOWANCE UNDER ANY OF THE SECTI ONS FROM SECTIONS 28 TO 44C. HE ACCORDINGLY TAXED THE SAME @20% WITHOUT ALLOWING ANY EXPENDITURE IS ALLOWANCE UNDER ANY OF THE PROVISION S OF SECTION 28 TO 44C. 4.4 IN APPEAL THE LD.CIT(A) DECIDED THE ISSUE IN FA VOUR OF THE ASSESSEE BY OBSERVING AS UNDER : 5.1 IN RESPECT OF THE ABOVE GROUND, MY ATTENTION WA S FURTHER DRAWN TO THE FINDING OF CIT(A)-II, NASIK GIVEN IN A.Y. 2003-0 4 WHEREIN IT WAS SHOWN THAT THE LD. CIT(A) HAS HELD IN PARA 24, 25 AND 29 THAT ALL ACTIVITIES RELATING TO THE INCOME STREAMS ARE CARRIED ON OUTSIDE INDIA AND THUS CANNOT BE ATTRIBUTED TO THE ALLEGED INDIAN PE. THE FINDING GIVEN IN PARA 29 IS QUOTED BELOW FOR READY REFERENCE : 'THUS, THERE IS NO BASIS ON THE A.O'S CONCLUSION THAT ROY ALTIES, FEE FOR THE TECHNICAL SERVICES INCLUDING MANAGERIAL; CONSULTANCY SE RVICES IN RELATION TO THE OUTSIDE ACTIVITIES OF THE ASSESSEE COMPANY ARE EFF ECTIVELY CONNECTED WITH THE PE OF THE ASSESSEE AND SUCH ACTIVITI ES ARE BEING MANAGED AND CONTROLLED BY THE ASSESSEE THROUGH THE EMPL OYEES OF THE SUBSIDIARY COMPANIES. IT IS ALSO WRONG ON THE PART OF TH E A.O. TO CONCLUDE THAT THE ASSESSEE HAS A PLACE OF MANAGEMENT I.E. SUBSIDIAR Y COMPANIES IN INDIA WHICH ARE MAKING PAYMENTS TO THE ASSESSEE COMPAN Y. THE BASIS ON WHICH A.O. CAME TO THE CONCLUSION I.E. VARIOUS EMAILS, CORRESPONDENCE WERE ALREADY DISCUSSED ELABORATELY AND PROVED TO BE WR ONG. THEREFORE, THE INCOME OF THE ASSESSEE CANNOT BE CHARGED TO TAX AS P ER ARTICLE 7 OF DTAA AND U/S. 44 AD. R.W.S. 115A OF THE I.T. ACT.' 5.2. MY ATTENTION WAS FURTHER DRAWN IN RESPECT OF THE ABOVE GROUND TO THE FINDING GIVEN BY THE HON'BLE ITAT ON THE ABOVE ISSUE IN A.Y. 2003-04 ON THE APPEAL FILED BY THE DEPARTMENT AND THE SAME IS ALSO QUOTED BELOW FOR READY REFERENCE : 'CONCLUSION ON THE SECOND ISSUE I.E., TAXABILITY @ 20 P ER CENT IN TERMS OF SECTION 44D R.W.S. 115A IN CASE PE IS FOUND TO BE IN E XISTENCE: 47. IN OUR CONSIDERED VIEW, IN TERMS OF THE INDO GE RMAN TAX TREATY PROVISIONS, IT WILL HAVE TO BE DEMONSTRATED THAT SU CH ROYALTIES AND FEES FOR TECHNICAL SERVICES HAVE A LIVE ECONOMIC NEXUS WITH TH E PE AND ONLY THEN EXCLUSION CLAUSE UNDER ARTICLE 12(5) AS A/SO TAXABILITY UNDER ARTICLES 7(1) AND 7(2), WILL COME INTO PLAY. IT IS ONLY AFTER THE SE ROYALTIES AND FEES FOR TECHNICAL SERVICES ARE SO INCLUDED IN THE BUSINESS PROFIT S ATTRIBUTABLE TO THE PE THAT THE PROVISIONS OF SECTIONS 44D AND 115A CAN BE INVOKED. THEREFORE, EVEN IF WE ARE TO HOLD THAT THE TAXPAYER HAD A PE I N INDIA, UNLESS THERE IS A CATEGORICAL FINDING THAT ENTIRE RECEIPTS WERE ATTRI BUTABLE TO THAT PE, ENTIRE BUSINESS RECEIPTS OF THE TAXPAYER SOURCED FROM INDI A WOULD NOT HAVE BEEN TAXABLE IN INDIA UNDER ARTICLE 7. THE PROVISIONS OF S ECTION 44D AND SECTION 115A DO NOT, THEREFORE, COME INTO PLAY ONLY BECAUSE THERE IS A PE IN INDIA. 16 TAXABILITY UNDER THE DOMESTIC LAW: 48. THE NEXT THING TO BE EXAMINED IS TAXABILITY OF ' ROYALTIES AND FEES FOR TECHNICAL SERVICES' EARNED BY THE ASSESSEE COMPANY IN TER MS OF THE PROVISIONS OF THE INDIAN INCOME TAX ACT, 1961. 49. THERE IS NO DISPUTE ON THE BASIC FACTS. THE AMO UNTS RECEIVED BY THE ASSESSEE COMPANY ON THIS ACCOUNT MEET THE DEFINITION OF 'ROYALTIES' AND OF FEES FOR TECHNICAL SERVICES' UNDER SECTION 44D WHICH, IN TURN, REFERS TO EXPLANATION. 2 TO SECTION 9(1)(VI) AND TO SECTION 9 (1)(VII) RESPECTIVELY. ACCORDINGLY, THE LIMITATION ON DEDUCTIONS, AS SET O UT IN SECTION 44D, DOES APPLY ON THE FACTS OF THE CASE, AND ENTIRE AMOUNT IS T O BE TAXABLE ON GROSS BASIS. HOWEVER, IN VIEW OF THE PROVISIONS OF SECTION 115A, THE RATE OF TAX ON SUCH INCOME WILL INDEED BE 20%. 50. IN VIEW OF THE ABOVE DISCUSSIONS, THE TAXABILITY OF AMOUNTS RECEIVED BY THE ASSESSEE COMPANY ON ACCOUNT OF 'ROYALTIES' AND 'F EES FOR TECHNICAL SERVICES', ON THE FACTS OF THIS CASE AND UNDER THE INDIA N INCOME TAX ACT, WILL BE @ 20 % ON GROSS BASIS, THAT ASPECT OF THE MATTE R IS, HOWEVER, ACADEMIC SINCE WE HAVE ALREADY HELD THAT, ON THE FA CTS OF THIS CASE, SOURCE COUNTRY DOES NOT HAVE THE RIGHT TO TAX INCOME IN QU ESTION, EXCEPT UNDER ARTICLE 12(2) OF THE TAX TREATY AND AT A RATE NOT E XCEEDING 10 PER CENT. THE ASSESSEE HAS ALREADY ACCEPTED TAX LIABILITY TO THAT EXT ENT, AND THERE IS NO DISPUTE SO FAR AS TAXABILITY UNDER ARTICLE 12(2) IS CON CERNED.' 5.3. IN THIS CONTEXT, THE AUTHORISED REPRESENTATIVE AL SO INVITED MY INTENTION TO PARA 10 OF THE TRIBUNAL'S ORDER PASSED IN APPELLANT'S OWN CASE FOR A.Y. 2006-07 WHEREIN IT WAS CONCLUDED THAT T HE INCOME EARNED BY THE APPELLANT CANNOT BE ATTRIBUTED TO ITS ALLEGED PE. THE RELEVANT PARA OF THE SAID ORDER IS ALSO REPRODUCED FOR READY REFEREN CE : '11. CONSIDERING THE ABOVE, THE ISSUE RAISED BY THE ASSESSE E IN GROUND NO 2 IS COVERED IN FAVOUR OF THE ASSESSEE AND THE TAXATION ON GROSS BASIS AT HIGHER RATE OF 20% UNDER SECTION 115A READ WITH 44D OF THE ACT ARE UNWARRANTED AND TAXATION IS OUGHT TO BE AT 10% ON GR OSS BASIS UNDER ARTICLE 12(2) OF THE TAX TREATY AS OFFERED IN THE R ETURN OF INCOME. ACCORDINGLY, GROUND NO. 2 IS ALLOWED.' 5.4. IN VIEW OF THE DISCUSSIONS MADE ABOVE AND CONSIDER ING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES AVAILABLE ON RECORD IN RESPECT OF THE ABOVE GROUND, I HAVE TO HOLD THAT THE ABOVE GRO UND IS COVERED IN FAVOUR OF THE APPELLANT BY THE ORDER OF THE ITAT GI VEN IN A.Y. 2006-07 AND A.Y. 2003-04. THEREFORE, GROUND NO.3 IS ALLOWED. 4.5 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIN D THE LD.CIT(A) HAS 17 DECIDED THE ISSUE FOLLOWING THE DECISION OF THE TRI BUNAL IN ASSESSEES OWN CASE FOR A.Y. 2003-04 AND 2006-07. WE FIND THE ABOVE DECISION OF THE TRIBUNAL HAS BEEN FOLLOWED BY THE TRIBUNAL IN A SSESSEES OWN CASE FOR A.Y. 2008-09 VIDE ITA NO.2535/PN/2012 ORDER DAT ED 31-01-2014 WHEREIN THE TRIBUNAL HAS HELD AS UNDER : 3. NEXT ISSUE IS WITH REGARD TO NON ATTRIBUTION OF IN COME DEEMED TO ACCRUE OR ARISES IN INDIA. IN THIS REGARD AGAIN THE LEARNED AUTHORIZED REPRESENTATIVE HAS SUBMITTED THAT THIS ISSUE IS ALSO COVE RED IN FAVOUR OF THE ASSESSEE (RELATING TO NON-ATTRIBUTION OF INCOME), T HE TRIBUNAL HAS DECIDED THE ISSUE VIDE PARA 10 OF ITS ORDER IN ASSESSEES O WN CASE FOR A.Y. 2006-07, WHEREIN THE ISSUE HAS BEEN DECIDED IN THE SIM ILAR FACTS AND CIRCUMSTANCES FOR A.Y. 2003-04, BY OBSERVING AS UNDER: 'CONCLUSION ON THE SECOND ISSUE I.E. TAXABILITY @ 20 PE R 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 T AX TREATY PROVISIONS, IT WILL HAVE TO BE DEMONSTRATED THAT SUCH R OYALTIES AND FEES FOR TECHNICAL SERVICES HA E A LIVE ECONOMIC NEXUS WITH THE PE AND ONLY THEN EXCLUSION CLAUSE UNDER ART. 12(5) AS ALSO TAXABILI TY UNDER ARTS. 7(1) AND 7(2), WILL COME INTO PLAY. IT IS ONLY AFTER THESE ROYALTIES AND FEES FOR TECHNICAL SERVICES ARE SO INCLUDED IN THE BUSINESS PROFI TS ATTRIBUTABLE TO THE PE THAT THE PROVISIONS OF SEC. 44D AND USA CAN BE INVOKED. THEREFORE, EVEN IF WE ARE TO HOLD THAT THE TAXPAYER HAD A PE I N INDIA, UNLESS THERE IS A CATEGORICAL FINDING THAT ENTIRE RECEIPTS WERE ATTR IBUTABLE TO THAT PE, ENTIRE BUSINESS RECEIPTS OF THE TAXPAYER SOURCED FROM IN DIA WOULD NOT HAVE BEEN TAXABLE IN INDIA UNDER ART. 7. THE PROVISI ONS OF S. 44D AND S.115A DO NOT, THEREFORE, COME INTO PLAY ONLY BECAUSE THERE IS A PE IN INDIA. TAXABILITY UNDER THE DOMESTIC LAW: 48. THE NEXT THING TO BE EXAMINED IS TAXABILITY OF R OYALTIES AND FEES FOR TECHNICAL SERVICES' EARNED BY THE ASSESSEE COMPANY IN TERMS OF THE PROVISIONS OF THE INDIAN IT ACT,1961. 49. THERE IS NO DISPUTE ON THE BASIC FACTS. THE AMOUN TS RECEIVED BY THE ASSESSEE COMPANY ON THIS ACCOUNT MEET THE DEFINITION OF 'ROYALTIES' AND OF FEES FOR TECHNICAL SERVICES' UNDER S.44D WHICH, IN TURN, REFERS TO EXPLN.2 TO S. 9(1)(VI) RESPECTIVELY. ACCORDINGLY, THE LIMITATION ON DEDUCTIONS, AS SET OUT IN 5.'MD, DOES APPLY ON THE FACT S OF THE CASE, AND ENTIRE AMOUNT IS TO BE TAXABLE ON GROSS BASIS. HOWEVER, IN VIEW OF THE PROVISIONS OF S.115A, THE RATE OF TAX ON SUCH INCOME WI LL INDEED BE 20 PERCENT. 50. IN VIEW OF THE ABOVE DISCUSSIONS, THE TAXABILITY OF AMOUNTS RECEIVED BY THE ASSESSEE COMPANY ON ACCOUNT OF 'ROYALTIES' AND 'F EES FOR TECHNICAL SERVICES', ON THE FACTS OF THIS CASE AND UNDER THE INDIA N IT ACT, WILL BE @ 20 PERCENT ON GROSS BASIS, THAT ASPECT OF THE MATTER IS, HOWEVER, ACADEMIC SINCE WE HAVE ALREADY HELD THAT, ON THE FAC TS OF THIS CASE, SOURCE COUNTRY DOES NOT HAVE THE RIGHT TO TAX INCOME IN QUE STION, EXCEPT UNDER ART. 12(2) OF THE TAX TREATY AND AT A RATE NOT EXCE EDING 10 PER CENT. THE 18 ASSESSEE HAS ALREADY ACCEPTED TAX LIABILITY TO THAT EXTE NT, AND THERE IS NO DISPUTE SO FAR AS TAXABILITY UNDER ART. 12(2) IS CONCER NED.' 11. CONSIDERING THE ABOVE, THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO 2 IS COVERED IN FAVOUR OF THE ASSESSEE AND THE TAXATI ON ON GROSS BASIS AT HIGHER RATE OF 20% 'UNDER SECTION 115A READ WITH 44D OF THE ACT ARE UNWARRANTED-AND TAXATION IS OUGHT TO BE AT 10% ON GR OSS BASIS UNDER ARTICLE 12(2) OF THE TAX TREATY AS OFFERED IN THE RE TURN OF INCOME. ACCORDINGLY, GROUND NO. 2 IS ALLOWED. 3.1 NOTHING CONTRARY WAS BROUGHT TO OUR KNOWLEDGE O N BEHALF OF REVENUE. FACTS BEING SIMILAR, SO FOLLOWING THE SAME RE ASONING, WE ARE NOT INCLINED TO CONCUR WITH THE FINDING OF DRP AND THE SAME IS SET ASIDE. ACCORDING TO US, TAXATION AT GROSS BASIS AT HIGHER RATE OF 20% U/S.115A R.W.S. 44D OF ACT ARE UNWARRANTED AND TAXATION HAS TO BE AT 10% ON GROSS BASIS UNDER ARTICLE 12(2) OF THE TAX TREATY AS OFFERED IN THE RETURN OF INCOME. ACCORDINGLY, THIS GROUND OF ASSESSEE IS ALLOWED . 5.1 NOTHING CONTRARY WAS BROUGHT TO OUR NOTICE AGA INST THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2003-0 4, 2006-07 AND 2008-09. SINCE THE ORDER OF THE CIT(A) IS BASED ON THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2003-04, 2 006-07 AND SINCE THE TRIBUNAL HAS TAKEN SIMILAR VIEW IN A.Y. 2008-09 IN ASSESSEES OWN CASE, THEREFORE, IN ABSENCE OF ANY CONTRARY MATERIA L BROUGHT TO OUR NOTICE WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). A CCORDINGLY, WE UPHOLD THE SAME. GROUND OF APPEAL NO.3 BY THE REVENUE IS ACCORDINGLY DISMISSED. ITA NO.787, 788, 789 AND 790/PN/2012 (A.Y.2001-02, 2003-04, 2004- 05 & 2005-06) : 6. AFTER HEARING BOTH THE SIDE, WE FIND THE GROUNDS BY THE REVENUE ARE IDENTICAL TO GROUNDS OF APPEAL IN ITA NO.786/PN /2012. WE HAVE ALREADY DECIDED THE ISSUES AND THE GROUNDS RAISED B Y THE REVENUE HAVE BEEN DISMISSED. FOLLOWING THE SAME RATIO, THE GROU NDS RAISED BY THE REVENUE IN THE ABOVE APPEALS ARE DISMISSED. 19 CO NOS. 25 TO 28/PN/2013 (BY ASSESSEE) (A.Y. 2000-0 1, 2001-02, 2002-03 & 2005-06) : 7. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE A SSESSEE SUBMITTED THAT GROUNDS OF APPEAL NO. 1.1 AND 1.3 ARE CONSEQUE NTIAL IN NATURE. SINCE THE ORDER OF LD.CIT(A) HAS BEEN UPHELD, THEREFORE, THESE GROUNDS BECOMES ACADEMIC IN NATURE. ACCORDINGLY, THESE ARE DISMISSED. 7.1 GROUND OF CROSS APPEAL NO.1.2 IS REGARDING AS T O WHETHER THE INTEREST U/S.234B IS APPLICABLE OR NOT. 7.2 SINCE THE APPEALS FILED BY THE REVENUE ARE DISM ISSED GROUNDS OF APPEAL NO. 1.2 OF THE CROSS OBJECTIONS AS TO WHETHE R INTEREST U/S.234B IS APPLICABLE FOR RESIDENTS BECOME ACADEMIC IN NATURE AND THEREFORE THE SAME IS NOT BEING ADJUDICATED. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE A ND ALL THE CROSS OBJECTIONS FILED BY THE ASSESSEE FOR THE ABOVE ASSE SSMENT YEARS ARE DISMISSED. ITA NO.812/PN/2012 (BY ASSESSEE) (A.Y. 2004-05 : 9. THE FIRST ISSUE RAISED BY THE ASSESSEE IN THE GR OUND OF APPEAL NO.1 RELATES TO TAXABILITY OF PAYMENT OF RS.24,38,72,088 RECEIVED BY THE ASSESSEE FROM EIPL ON ACCOUNT OF PROJECT MOVE. 9.1 FACTS OF THE CASE, IN BRIEF ARE THAT THE ASSESS EE CLAIMED THAT THE RECEIPT FROM EIPL ON ACCOUNT OF PROJECT MOVE IS T OWARDS 20 REIMBURSEMENT OF EXPENSES AND THEREFORE, IS NOT AN INCOME EVEN UNDER ARTICLE 11 AND 12 OF THE DTAA. HOWEVER, WOSS HAVE D EDUCTED WITHHOLDING TAX @ 10% ON THE ABOVE RECEIPT. IT WAS SUBMITTED THAT THE ASSESSEE HAVING BEEN THE PRINCIPAL COMPANY OF THE E PCOS GROUP, ON NOTING GROWING WORLDWIDE DEMAND ON INFORMATION MANA GEMENT, DECIDED TO INTRODUCE THE SAP R/3 + APO SOFTWARE PAC KAGE ON WORLDWIDE BASIS FOR ALL THE COMPANIES OF THE GROUP. THIS WAS FOR IMPROVING THE BUSINESS PROCESSES THROUGHOUT THE EPC OS GROUP. IN ORDER TO IMPLEMENT THIS OBJECTIVE, EPCOS ESTABLISHED A PR OJECT GROUP CALLED 'MOVE' (MOVING THE ORGANIZATION TO A VISIONARY ENTE RPRISE) WHEREIN EPCOS ENTITIES WERE POOL MEMBERS/PARTICIPANTS. THE PROJECT INVOLVED DEVELOPING A GLOBAL TEMPLATE THROUGH PILOT PHASE AN D THEN IMPLEMENTING THE SYSTEM (ROLL OUT) IN ALL THE COMPANIES WITHIN T HE GROUP. IMPLEMENTATION OF SUCH SYSTEM ENTAILED SUBSTANTIAL COSTS TO BE INCURRED BY EACH MEMBER OF THE POOL CONSISTING OF COST OF EM PLOYEES DEDICATED FOR THE PROJECT, SOFTWARE AND LICENSE COST, COSTS O F CONSULTANTS ENGAGED IN CUSTOMIZING THE SYSTEM, DATA MIGRATION, TRAINING ET C. AS PER THE ASSESSEE UNDER THIS PROJECT AGREEMENT, THE POOL MEMBERS INCU RRED COSTS FOR DEVELOPING GLOBAL TEMPLATE WHICH WAS THEN TO BE SHA RED BETWEEN ALL MEMBERS THROUGH RECEIVABLES / PAYABLES. THE ASSESSE E ALSO CLAIMED TO HAVE CONTRIBUTED ITS OWN COSTS TO THE POOL FOR PART ICIPATION ALONG WITH VARIOUS OTHER MEMBERS OF THE GROUP. THE ASSESSEE CL AIMED TO HAVE ACTED AS THE POOL LEADER FOR THE PURPOSE OF IMPLEMENTING THE ARRANGEMENT AND RECEIVED CONTRIBUTIONS FROM THE VARIOUS PARTICIPAN TS. ACCORDINGLY, THE ASSESSEE STATED THAT THE RECEIPTS FROM PROJECT MOV E ARE NOT IN THE 21 NATURE OF SERVICES RENDERED TO THE INDIAN COMPANIES FOR WHICH TAX IS TO BE PAID IN INDIA BY THE ASSESSEE COMPANY. 9.2 HOWEVER, THE AO WAS NOT SATISFIED WITH THE ARGU MENTS ADVANCED BY THE ASSESSEE. THE AO NOTED THAT THIS FACT WAS N OTICED ON PERUSAL OF ASSESSEE'S RETURN OF INCOME WHEREIN TDS CERTIFICATE S FOR THE TAXES WITHHOLD BY THE INDIAN WOS WAS ENCLOSED. THE ASSE SSING OFFICER CAME TO THE CONCLUSION THAT THE AGREEMENT PRODUCED BY THE ASSESSEE ITSELF IS NOT SUFFICIENT TO HOLD THAT THE RECEIPT W AS ONLY REIMBURSEMENT AND NOT FOR I T SERVICES PROVIDED TO THE INDIAN SUB SIDIARIES. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE, THE ASSESSING OFFICER CONCLUDED THAT THE RECEIPTS ON ACCOUNT OF PROJECT MOVE ARE FOR SERVICES RENDERED BY THE ASSESSEE TO ITS INDIAN SUB SIDIARIES, FOR WHICH EVEN THE INDIAN SUBSIDIARIES DEDUCTED THE TAX AT SO URCE TREATING THE SAID PAYMENT AS TAXABLE IN INDIA BEING THE INCOME-OF THE ASSESSEE AS PER SECTION 9(1) (VII)(B) OF THE IT. ACT. THE ASSESSING OFFICER THEREAFTER PROCEEDED TO HOLD THAT THE ABOVE RECEIPT IS TAXABLE UNDER ARTICLE 7 OF DTAA. 9.3 BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASS ESSEE HAS FILED THE AGREEMENT RELATING TO MOVE AS WELL AS A NOTE AND CERTAIN OTHER DOCUMENTS IN SUPPORT OF THE CLAIM THAT THE RECEIPT IS ONLY A REIMBURSEMENT OF EXPENSES WITHOUT ANY MARK UP AND T HEREFORE, CANNOT BE SUBJECTED TO ANY TAX IN INDIA. IT WAS SUBMITTED THAT UNDER THE I.T. ACT, A PAYMENT TO A NONRESIDENT BECOMES TAXABLE IN INDIA ONLY WHEN (I) THE PAYMENT IN QUESTION IS 'INCOME'; AND (II) SUCH 'INCOME' IS LIABLE TO INDIAN TAX. IN THE INSTANT CASE, THE PROPOSED PAYM ENTS WERE CLAIMED TO 22 BE FOR RECOVERING PROJECT COSTS AS POOL LEADER UNDE R THE ARRANGEMENT PUT IN PLACE WITHOUT CHARGING ANY MARK-UP THEREON. THEREFORE, THE PAYMENTS UNDER CONSIDERATION DO NOT CONSTITUTE INCO ME IN THE HANDS OF ASSESSEE, AND HENCE THE SAME IS NOT TAXABLE IN INDI A. THE ASSESSEE ALSO RELIED ON THE FOLLOWING DECISIONS : 1. CIT V. DUNLOP RUBBER CO. LTD, [1983] 142 ITR 49 3 (CAL). 2. ROLLS ROYCE INDIA LTD. V. ITO [1988] 25 ITD 137 (DEL) (TM), 3. CIT V. INDUSTRIAL ENGINEERING PROJECTS PVT. LTD [1 993] 202 ITR 1014 (DEL). 4. DECTA V. CIT [1999] 237 ITR 190 (AAR). 5. RAYMOND LTD. V. DCIT (2003) 86 ITD 791 (MUM) 6. ABB LIMITED (2010)322 ITR 564 (AAR). 9.4. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSE E THE LD.CIT(A) DISMISSED THE GROUNDS RAISED BEFORE HIM BY OBSERVIN G AS UNDER : 6.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND THE LAW AS ARE APPARENT ON THIS GROUND. FROM THE DETAILS SUBMITTE D INCLUDING THE AGREEMENT IT IS NOT POSSIBLE TO HOLD THAT THE IMPUGNE D PAYMENTS ARE OF THE NATURE OF REIMBURSEMENT ONLY. THE AGREEMENTS ARE BETWEEN THE APPELLANT AND ITS WOSS SPREAD ALL OVER THE WORLD, ALL OF WHICH ARE UNDISPUTEDLY UNDER THE ACTIVE CONTROL OF THE APPELLA NT. THERE IS NO DISPUTE TO THE FACT ALSO THAT THE APPELLANT HAS OTHER AGREEMENTS IN EXISTENCE FOR PROVIDING SERVICES AND KNOW-HOW ETC. FOR WHICH PAYMENTS AND ROYALTIES HAVE BEEN RECEIVED SUBJECT TO WITHHOLDI NG TAX. NOW THE ONLY QUESTION ARISES IS, WHETHER THE IMPUGNED RECEIPT IS OF THE NATURE OF TECHNICAL SERVICE OR NOT. UNDER TECHNICAL CONSIDERATI ON OF THE DTAA AND THE IT PROVISIONS AVAILABLE IN INCOME TAX ACT, THE IN DIAN SUBSIDIARIES HAVE BEEN HELD NOT TO BE A PE OF THE APPELLANT COMP ANY BY THE HIGHER COURTS DESPITE THE CLEAR-CUT DEMONSTRATION BY THE ASSESSIN G OFFICERS THAT THE APPELLANT COMPANY HOLDS HUGE AND CONSTANT CO NTROL ON DAY TO DAY MATTERS OF BUSINESS ALSO INCLUDING THE RECOVERY OF OUTSTANDINGS IN THE MARKET BUT THE AFORESAID FINDING REGARDING THE A CTIVE CONTROL HAS REMAINED ESTABLISHED. IN SUCH VIEW OF THE MATTER, ONL Y ON THE STRENGTH OF DOCUMENTS CREATED BY THE RELATED INTERESTED PARTIE S, IT CANNOT BE SAID THAT THE APPELLANT HAS DISCHARGED ITS ONUS OF CLAIM MA DE THAT THE RECEIPTS ARE OF THE NATURE OF REIMBURSEMENT HAVING NO ELEMENTS OF INCOME. IN FACT, FROM THE PERUSAL OF THE AGREEMENT, IT IS APPARENT THAT THE EXPENDITURE IS FOR ENHANCING THE OPERATIONS OF THE G ROUP AS A WHOLE WITH EMPHASIS ON THE APPELLANT COMPANY WHICH IS THE APEX CO MPANY. THEREFORE, IT IS DIFFICULT TO HOLD THAT IT IS NOT FOR THE TECHNICAL SERVICES PROVIDED BY THE APPELLANT COMPANY TO ITS ALL WOSS. FO R PROVIDING THIS SERVICE THE APPELLANT MIGHT HAVE TAKEN SERVICES FROM A THIRD PARTY AND WOULD HAVE PAID THE SAME ALSO BUT IN THAT CASE EVEN TH E SAID EXPENDITURE, IF SO HELD WOULD BECOME INELIGIBLE AS EX PENDITURE IN THE HANDS OF THE WOSS. SINCE THAT ASPECT IS NOT BEFORE TH E UNDERSIGNED, THE SAME IS IGNORED AND THE RECEIPTS FOR PROJECT MOVE IS HE LD TO BE OF THE 23 NATURE OF TECHNICAL SERVICES ON WHICH TAX @ 10% IS REQ UIRED TO BE PAID UNDER ARTICLE 11 AND 12 OF DTAA. THIS FURTHER GETS STR ENGTH FROM THE ACTION OF THE WOSS, FALLING IN THE SAME MANAGEMENT TO WITHHOLD TAX U/S 195 OF THE IT. ACT. THE CASE LAWS RELIED UPON BY THE APPELLANT WERE FOUND TO BE NOT RELEVANT TO THE FACTS OF THIS CASE. IN ALL T HESE CASES, RELIED UPON BY THE APPELLANT THERE WAS NO DISPUTE TO THE FACT THAT THE RECEIPT WAS OF THE NATURE OF REIMBURSEMENT, IN VIEW OF THE ABOVE GR OUND NO. 2 IS DISMISSED. 9.5 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PART IES. THE LD. COUNSEL ARGUES THAT THE ASSESSEE IS A MULTINATIONAL COMPANY HAVING THE SUBSIDIARIES ACROSS THE GLOBE. THE ASSESSEE HAS CE NTRAL UNIFORM POLICY FOR RENDERING THE SERVICES TO ITS SUBSIDIARIES AND THE COST INCURRED ON THE PROJECT IS RECOVERED UNIFORMLY WITH SMALL MARK UP A T 1% TO 3%. HE SUBMITS THAT DUE TO GROWING WORLDWIDE DEMANDS ON IN FORMATION MANAGEMENT, THE ASSESSEE COMPANY DECIDED TO INTRODU CE THE SAP- R/3+APO SOFTWARE PACKAGE ON COMPANY WISE BASIS. H E SUBMITS THAT THE SAID SOFTWARE IS TO PROVE A UNIFORM PLATFORM FO R PLANNING, MANAGING AND MONITORING THE BUSINESS PROCESSES THROUGHOUT TH E ASSESSEE GROUP COMPANIES. THE ASSESSEE HAS TAKEN A PROJECT FOR IT S GROUP MOVE (MOVING THE ORGANISATION OF VISIONARY ENTERPRISE). THE SAID PROJECT WAS TAKEN WITH AN AIM TO ANALYSE EXISTING PROCESSES, TO IDENTIFY POTENTIAL FOR OPTIMISATION AND RE-DESIGNING THE PROCESSED WITH TH E HELP OF SAP- R/3+APO I.T. INFRASTRUCTURE. HE SUBMITTED THAT IT IS A POOL ARRANGEMENT WITH ASSESSEE AS POOL LEADER AND OTHER GROUP COMPA NIES AND SUBSIDIES AS A POOL MEMBERS UNDER THE MOVE PROJECT. 24 10.1 HE SUBMITTED THAT AS PER THE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE COMPANY AS A POOL LEADER AND ITS SUBSIDIES /GROUP COMPANIES AS POOL MEMBERS THE PROJECT COST IS TO BE ALLOCATED TO THE MEMBERS TO THE AGREEMENT AND THE MEMBERS TO THE AGREEMENT ARE TO R EIMBURSE THE COST INCURRED BY THE ASSESSEE COMPANY. AS PER THE AGREE MENT CLAUSE 6(2) IT IS PROVIDED THAT THE PROJECT COST INCURRED BY THE POOL LEADER SHALL BE RECONCILED WITH THE ASSESSEE COMPANY AS A POOL LEAD ER ON MONTHLY BASIS. HE SUBMITS THAT THE BOTH THE AUTHORITIES BELOW HAVE NOT AT ALL EXAMINED THE AGREEMENT BETWEEN THE ASSESSEE COMPANY AND ITS SUBSIDIARY GROUP COMPANIES AS A POOL MEMBERS AND HAS ARRIVED ON AN E RRONEOUS CONCLUSION. HE SUBMITS THAT REIMBURSEMENT OF EXPEN DITURE CANNOT BE TREATED AS INCOME EARNED ON THE PROJECT MOVE AND CANNOT BE TREATED AS INCOME IN THE HANDS OF THE ASSESSEE AT ENTIRETY. PER CONTRA THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 10.2 THE ASSESSEE HAS FILED THE COMPILATION IN WHIC H THE COPY OF THE AGREEMENT IN RESPECT OF MOVE PROJECT IS PLACED AT PAGES 38 TO 55. THE ARGUMENT OF THE LD. COUNSEL IS BASED ON THE TER MS OF THE AGREEMENT BETWEEN THE ASSESSEE COMPANY AS A GROUP LEADER AND GROUP COMPANIES/SUBSIDIARIES BASED AT FRANCE, SPAIN, PORT UGAL, HUNGARY, CZEK REPUBLIC, BRAZIL, INDIA ETC. SO FAR AS INDIA IS CON CERNED, IT IS THE CLAIM OF THE ASSESSEE THAT ASSESSEE HAS REIMBURSED THE COST OF THE MOVE PROJECT FROM TWO OF ITS SUBSIDIARIES, I.E. INTERNA TIONAL FERRIDES LTD. AND EPCOS INDIA LTD.. 25 10.3 WE HAVE PERUSED THE TERMS OF THE AGREEMENT. W E HAVE ALSO PERUSED THE REASONS GIVEN BY BOTH THE AUTHORITIES F OR REJECTING THE CLAIM OF THE ASSESSEE. THE LD.CIT(A) HAS NOT GONE INTO T HE DETAILS OF THE TERMS OF THE AGREEMENT. IT IS TRUE THAT SOME MARK UP IS THERE WHICH HAS DESCRIBED AS ADMINISTRATIVE SURCHARGE TO THE EXTENT OF 3%. PRIMA-FACIE, IT APPEARS THAT THE PROJECT MOVE UNDERTAKEN BY TH E ASSESSEE COMPANY IS NOT AS A BUSINESS ACTIVITY BUT TO SUPPORT THE GR OUP COMPANIES WORLDWIDE TO IMPROVE THEIR EFFICIENCY. IN OUR OPIN ION, THIS ISSUE NEEDS FRESH ADJUDICATION. WE, THEREFORE, CONSIDER IT FIT TO RESTORE THE ISSUE TO THE FILE OF THE LD.CIT(A) FOR DENOVO ADJUDICATION W ITH DIRECTION THAT HE SHOULD EXAMINE THE CONTENTION OF THE ASSESSEE IN TH E LIGHT OF THE AGREEMENT BETWEEN THE ASSESSEE AS A POOL LEADER AND ITS OTHER GROUP COMPANIES AS POOL MEMBERS. NEEDLESS TO SAY HE SHOU LD GIVE AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND ALSO CONSIDER ALL THE CONTENTIONS RAISED BY THE ASSESSEE. ACCORDINGLY, G ROUND OF APPEAL NO.1.2 TO 1.3 ARE ALLOWED FOR STATISTICAL PURPOSES. 11. THE NEXT ISSUE RAISED BY THE ASSESSEE IN THE GR OUNDS RELATE TO INTEREST CHARGED U/S.234B OF THE ACT. 12. WE HAVE HEARD THE PARTIES. THE LD. COUNSEL SUB MITS THAT THIS ISSUE IS ONLY CONSEQUENTIAL. HE FURTHER SUBMITS TH AT AS THE PAYMENT RECEIVED BY THE ASSESSEE WAS SUBJECT TO THE TDS PRO VISIONS THERE WAS NO LIABILITY TO ADVANCE TAX IN INDIA AND HENCE THE INT EREST CHARGED U/S.234B IS TOTALLY ERRONEOUS. HE SUBMITS THAT THE ISSUE MA Y ALSO BE SENT BACK TO THE LD.CIT(A). WE ACCORDINGLY WITH THE CONSENT OF BOTH THE PARTIES 26 REMIT THE ISSUE OF CHARGING OF INTEREST U/S.234B TO THE FILE OF THE LD.CIT(A) FOR FRESH ADJUDICATION. ACCORDINGLY, GRO UND NOS. 2.1 TO 2.3 ARE ALLOWED FOR STATISTICAL PURPOSES. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 26-03-2014. SD/- SD/- (R.S.PADVEKAR ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER SATISH PUNE, DATED 26 TH MARCH, 2014 COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-I, PUNE 4. THE CIT-I, PUNE 5. THE DR A BENCH, PUNE. 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE