TaxTMI 
TaxTMI 
2010 (4) TMI 690
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntities directly sell/invoice and ship the machineries to the Indian customers. The assessee does not enter into a sales contract with the customers. The assessee also assists the customers in installation of the machineries at the client's site. The machineries supplied by the Staubli Group entities are sold by them under a warranty -twelve months from the date of manufacture. The assessee renders after sales and maintenance services under the warranty period to the customers in India for which it receives service fees at agreed rates over and above its commission on sales of machineries. Besides this, the assessee also renders services to local customers after the warranty period and bills them locally for the services rendered. For the Assessment Year in question the assessee filed its return of income declaring total income at Rs.17,32,730/-. However, after making certain additions/disallowances the A.O. passed the assessment order u/s.143(3) of the I.T. Act, 1961(the Act) dated 19th March, 2004, determining the taxable income at Rs.42,78,830/-. On appeal, the ld. CIT(A) deleted the addition and disallowance of depreciation made b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n placed on CBDT's Circular No.23 dated 23.07.1969 which lays down that "...If the agent's commission fully represents the value of the profit attributable to his services, it should prima facie extinguish the assessment." Since Staubli A.G., has made sales in India on principal-to-principal basis and has compensated the Indian Branch on an arm's length basis, it is fully covered by the said circular and, therefore, no further income of Staubli A.G. is taxable in India. - Reliance was further placed on the following judgments in respect of its submission that no further profits can be attributable to the India Branch a. Addl. CIT vs. Skoda Export, Praha 172 ITR 358(AP). b. CIT(A) vs. Tata Chemicals Ltd. 94 ITR 85 (Bom.) c. CIT(A) vs. Ahmedbhai Umarbhai & Co. 18 ITR 72 (SC) - Attention has been invited to the CBDT's circular No.1 dated 02.01.2004 which is in respect of the taxation of Business Process Outsourcing Units in India. - The rates of commission by the India Branch is much more than its counterparts in other countries. - The financial statements for the F.Y. 2001/2000 show that Staubli A.G. has earned less than 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... hence, the nature of business of assessee is something more than that of a 'Commission Agent'. He further observed that the assessee is rendering "after sales and maintenance services" under the warranty period. Obviously, for such services, the assessee is not getting anything from the customers. He further observed that in case of supply of faulty 'products' in India the cost is to be borne by the Indian Branch and not the HO, hence, the profit arising out of such risks taken by the Indian Branch, is the income of the Branch and not of the agent. In the light of the above, the AO concluded that he has no option but to estimate the income of the Indian Branch. Further no explanation has been offered by the assessee as to why there are varying rates for similar products and accordingly he estimated 10% of the total sales made by Staubli Group in India as the profits attributable to the PE in India i.e. the assessee and worked out the extra income at Rs.25,08,701/- and added the same to the income of the assessee. 6. On appeal, before the ld. CIT (A), the assessee submitted that the AO has grossly erred in concluding tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le are carried on from outside India and the sales are directly made between its Head Office/Group Entities and the Indian customers. As per Explanation (a) to section 9(1)(i) of the I.T. Act only such part of the income as is reasonably attributable to the operations carried out in India is deemed to accrue or arise in India. It was further submitted that a note on the over view of the textile industry in India was filed before the AO to show the commission derived by the Indian Commission Agents and the range of rates earned by these agents which were the same as those received by the assessee from its Head Office. It was further submitted that the transfer pricing study conducted for later years confirmed arm's-length nature of all transactions between the assessee and its Head Office during which the commission rates were same as in the previous year under consideration. It was further submitted that the CBDT Circular No.1 dated 2 January 2004, which reiterated the principles laid down in the earlier Circular No.23 (supra), that if the price charged in respect of such services by the PE is an arm's-length/fair market price then no income shall sepa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the assessee while reiterating the same submissions as submitted before the AO and the ld. CIT(A) further submits that the AO without considering the assessee's explanation appearing at page 1 to 31 and statement on oath recorded u/s.131 of Shri Somnath Ganguly, a Resident Director, appearing at page 54-61 of the assessee's paper book has made an adhoc addition of Rs.25,08,701/- on presumption basis and the ld. CIT(A) was fully justified in deleting the same. He further submits that the AO for the Assessment Years 2005-06 and 2007-08, after considering the nature of addition made in the impugned Assessment Year has made no addition in this regard vide assessment orders for the Assessment Years 2005-06 and 2007-08 dated 20.11.2007 and 21.01.2010 respectively passed u/s.143(3) of the Act. In support he also placed on record the copy of the said assessment orders. He, therefore, submits that the order passed by the ld. CIT(A) in deleting the addition be upheld. 10. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as the assessee has sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the work of installation and commissioning of the platforms in Bombay High, we are of the view that, for the reasons mentioned hereinafter, profits arising from the activities of installation and commissioning were taxable at 10 per cent. of the payments relating to the said services/facilities carried out in Bombay High. Firstly, in the present case it is important to note that the accounts submitted by the assessee were rejected and the Assessing Officer had to invoke the provisions of the Act by way of best judgment assessment. Secondly, in the present case, the assessee themselves contended in the assessment proceedings that the Assessing Officer should have computed the income relating to Indian operations under section 44BB or under Instruction No. 1767 issued by the Central Board of Direct Taxes dated July 1, 1987. Thirdly, it is important to note that Chapter IV of the Act contains provisions for presumptive taxation of business income in certain cases as prescribed in sections 44B, 44BB, 44BBA and 44BBB of the Act. In the scheme of presumptive taxation, the assessee is presumed to have earned income at the rate of a certain percentage of his total turnover or gross rece....
X X X X Extracts X X X X
X X X X Extracts X X X X
....article 12(5) of the Convention and fall within the ambit of article 7. In the Protocol to the Convention it was stated that the term "directly or indirectly attributable" indicated the income that should be regarded on the basis of the extent appropriate to the part played by the permanent establishment in those transactions. The permanent establishment in this case had no role to play in the transaction of offshore supply, sought to be taxed, since the transaction took place abroad. (iii) That the second sentence of article 7(1) which allowed the State of the permanent establishment to tax business profits, but only so much of them as was attributable to the permanent establishment excluded the applicability of the principle that where there was a permanent establishment, the State of the permanent establishment should be allowed to tax all income derived by the enterprise from sources in the State irrespective of whether or not such income was economically connected with the permanent establishment. The State of the permanent establishment was allowed to tax only those profits which were economically attributable to the permanent establishment, i.e., those which resulted from....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... permanent establishment should not be mixed up. Whereas business connection was relevant for the purpose of application of section 9, the concept of permanent establishment was relevant for assessing the income of a non-resident under the Convention. (vii) That in this case the entire transaction was completed on the high seas and, therefore, the profits on sale did not arise in India. Once excluded from the scope of taxation under the Income-tax Act application of the Double Taxation Avoidance Treaty would not arise. (viii) That, in relation to offshore services, section 9(1)(vii)(c) required two conditions to be met : to be taxable in India the services which were the source of the income sought to be taxed had to be rendered in India as well as utilized in India. In this case, both these conditions were not satisfied simultaneously, thereby excluding the income from the ambit of taxation in India. Thus for a non-resident to be taxed on income for services, such a service had to be rendered within India, and had to be part of a business or profession carried on by such person in India. The appellants had provided services to persons resident in India, and though they had b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dance Agreement." Whereas in the case before us the facts and issue are entirely different, inasmuch as the ld. DR has failed to show as to how the ratio of the above judgment is applicable to the facts of the present case, therefore, the decision relied on by the ld. DR is distinguishable and not applicable to the present case. 13. In this view of the matter and in the absence of any contrary material brought on record by the revenue against the finding of the ld. CIT(A) and keeping in view that the assessee has also shown, in its Profit and Loss Account, income from services and other income amounting to Rs.21,04,600/- and Rs.2,78,026/- respectively and also keeping in view that the AO has given no basis for making ad hoc addition we are of the view that the AO was not justified in making addition of Rs.25,08,701/- and hence we are inclined to uphold the order of the ld. CIT(A) in deleting the said addition made by the AO. The ground taken by the revenue is therefore rejected. 14. Ground No.2 reads as under : "2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the Assessing Officer was not justified i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecrease in liability arises on account of the fluctuation in the rate of exchange. Thus, the adjustments in the actual cost are to be made irrespective of the date of actual payment in foreign currency made by the assessee.This position also finds place in the clarification issued by the Ministry of Finance dated January 4, 1967, which, inter alia, reads as under : " 2. The Government agrees that for the purposes of the calculation of depreciation allowance, the cost of capital assets imported before the date of devaluation should be written off to the extent of the full amount of the additional rupee liability incurred on account of devaluation and not what is actually paid from year to year. The proposed legal provision in the matter is intended to be framed on this basis." (emphasis supplied) One more aspect needs to be mentioned. Section 43(1) defines actual cost for the purpose of grant of depreciation, etc., to mean "the actual cost of the assets to the assessee". Till the insertion of the unamended section 43A there was no provision in the Income-tax Act for adjustment of the actual cost which was fixed once and for all, at the time of acquisition of the asset. A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng cost of the fixed assets acquired in foreign currency. But for section 43A which corresponds to paragraph 10 of AS-11 such adjustment in the carrying amount of the fixed assets was not possible, particularly in the light of section 43(1). The unamended section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed asset that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the unamended section 43A were " for making payment" and not " on payment" which is now brought in by amendment to section 43A, vide the Finance Act, 2002." 19. Recently the Hon'ble Supreme Court in CIT vs. Maruti Udyog Ltd.(2010) 320 ITR 729(SC) following the above judgment held that the Tribunal was right in holding that the claim for depreciation on account of enhanced cost of depreciation due to fluctuation in foreign exchange rate was admissible for deduction u/s.37 of the Income tax Act, 1961. 20. In the light of the said authoritative pronouncement of the Hon'ble Supreme Court and keeping in view that the assessee is claiming depreciation o....